The Alternative Minimum Tax (AMT) is a separate tax system that requires some individual taxpayers to calculate their tax liability twice—first, under ordinary income tax rules, then under the AMT—and pay whichever amount is highest. The AMT has fewer preferences and different exemptions and rates than the ordinary system.
How Is the Alternative Minimum Tax (AMT) Calculated?
The AMT eliminates or reduces the value of tax preferences taken under the ordinary system. Taxpayers add certain deductions back into their income to figure out their Alternative Minimum Taxable Income (AMTI).
Next, the AMT allows taxpayers to subtract an exemption from their AMTI of $85,700 for single filers and $133,300 for joint filers (for tax year 2024). However, exemptions phase out once AMTI hits $609,350 for single filers and $1,218,700 for joint filers in 2024.
After calculating their AMTI and applying the exemption, the resulting income of up to $232,600 (for tax year 2024) faces a 26 percent rate, while income above that threshold faces a 28 percent rate. After addressing foreign tax provisions, taxpayers calculate their tentative tax amount under the AMT. Taxpayers then pay either their ordinary individual income tax liability or their AMT liability, whichever is greater.
In tax year 2017, the last year before the Tax Cuts and Jobs Act (TCJA) took effect, approximately five million taxpayers had to pay under the AMT. The TCJA increased the AMT’s exemption and exemption phaseout through 2025, greatly reducing the number of taxpayers subject to the AMT, to an estimated 200,000.
Why Was the Alternative Minimum Tax (AMT) Created?
The AMT was enacted in 1969 to keep wealthy taxpayers from using what was viewed as too many tax preferences. In 1969, US Treasury Secretary Joseph Barr testified that in 1966, 155 high-income people paid zero income tax. Instead of eliminating the tax preferences that enabled wealthy taxpayers to reduce their taxable income, Congress created a minimum tax.
The progressive structure of the income tax means tax preferences are more valuable for higher-income taxpayers as they face higher marginal tax rates. In some cases, taxpayers may be able to avoid the income tax altogether or greatly reduce their level of tax by structuring their income and adjustments to take advantage of tax preferences. The AMT limits this by reducing the number of preferences taxpayers can claim, thus increasing the amount of income subject to tax under the AMT rate structure.
Visualizing the Alternative Minimum Tax (AMT):
| Individual Income Tax Returns (Form 1040) | Alternative Minimum Tax (Form 6251) 2024 Thresholds |
|---|---|
| Input all income, including wages, salaries, tips, taxable interest, capital gains, IRA distributions, pension and annuity income, Social Security benefits, other income, etc. | Enter taxable income (if zero, enter adjusted gross income) from Form 1040 |
| Make adjustments to income, including for educator expenses, certain business expenses, health savings accounts, moving expenses for Armed Forces members, self-employment tax, etc. |
Add back or reduce certain tax preferences taken under the ordinary income tax, including:
|
| = Adjusted Gross Income (AGI) | = Alternative Minimum Taxable Income (AMTI) |
|
Choose the larger of the standard deduction or itemized deductions
Apply qualified business deduction (if applicable) |
Apply the following AMT exemptions if income is under the phaseout threshold ($609,350 in AMTI for single filers and $1,218,700 for joint filers in tax year 2024)
|
| = Taxable income | =Taxable income under the AMT |
| Apply ordinary tax rates and take applicable tax credits |
Apply AMT tax rates and take AMT foreign tax credit if applicable (in tax year 2024):
|
| = Total ordinary tax | = Tentative minimum tax |
|
Pay whichever amount is greater |
|
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