Alternative Minimum Tax (AMT)
A parallel federal tax system that ensures high-income taxpayers pay a minimum amount of tax by limiting certain deductions and preferential treatments.
Detailed Explanation
AMT is a parallel tax system, computed on Form 6251, that runs alongside the regular tax calculation. Taxpayers pay whichever is higher. The system was created in 1969 to prevent very-high-income filers from eliminating tax via deductions and preference items. AMT starts with taxable income, then adds back specific items: the entire State and Local Tax (SALT) deduction, the bargain element on Incentive Stock Options exercised and held past December 31, certain accelerated depreciation, private activity bond interest, and the standard deduction (when claimed instead of itemizing). The result is Alternative Minimum Taxable Income (AMTI). AMTI is reduced by an exemption amount that phases out at higher incomes (2026: $88,100 single / $137,000 MFJ exemption; phaseout begins at $626,350 / $1,252,700 at 25 cents per dollar). The AMT base is taxed at 26% up to $239,100 and 28% above that. AMT owed is the excess of tentative AMT over regular tax. The 2017 TCJA raised the exemption and phaseout dramatically, reducing AMT exposure for most middle-income taxpayers. Today AMT primarily hits ISO holders who exercise and hold and very-high-income earners in high-tax states with significant preference items. AMT paid on ISO exercises generally becomes a Minimum Tax Credit (Form 8801) recoverable against regular tax in future years.
Key Points
- 2026 exemption: $88,100 single / $137,000 MFJ. Phaseout starts at $626,350 / $1,252,700 (25 cents per dollar).
- AMT rate: 26% up to $239,100 of AMT base, 28% above.
- Most common triggers: large ISO bargain element (exercised and held), large SALT deduction, large state tax refund recovery.
- AMT paid on ISOs generally becomes a Minimum Tax Credit (Form 8801) usable against regular tax in later years.
- Computed on Form 6251 and reported on Schedule 2 of Form 1040.
Practical Example
A California single filer with $400K AGI claims a $40K SALT deduction. Adding back SALT pushes AMTI to $440K. Exemption is fully available (under phaseout start). AMT base is roughly $352K. Tentative AMT is about $92K. Regular tax on $360K taxable income is roughly $93K, so no AMT owed. If the same filer exercises ISOs with a $200K bargain element and holds them, AMTI rises to $640K, the exemption phases down significantly, AMT base climbs, and AMT owed could exceed $40K, recoverable as Minimum Tax Credit in later years.
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