The Alternative Minimum Tax (AMT) was originally designed to ensure that high-income earners who benefit from various deductions and credits still pay a minimum level of tax. Over time, however, the AMT has affected a broader range of taxpayers due to its different rules and exemption structure. Fortunately, in recent years, the AMT system has been adjusted annually for inflation, significantly reducing its impact on middle-income households.
For the 2025 tax year, the IRS has once again increased the AMT exemption levels to account for inflation. The new exemption amounts are as follows:
- $88,100 for unmarried individuals
- $137,000 for married couples filing jointly
This blog explores what the AMT is, how it differs from the regular tax system, the 2025 updates, how to calculate AMT, and key planning strategies to reduce exposure to this parallel tax regime.
What Is the Alternative Minimum Tax (AMT)?
The AMT is a separate tax calculation system that disallows many deductions and tax preferences permitted under the regular tax rules. It was created to prevent high-income taxpayers from avoiding taxes entirely through loopholes or aggressive deductions.
Taxpayers must calculate their taxes twice: once under the regular tax system and once under the AMT rules. If the AMT calculation results in a higher tax liability, the taxpayer must pay the difference as AMT.
Key Differences Between Regular Tax and AMT
- No standard deduction: The AMT does not allow the standard deduction.
- Limited itemized deductions: Deductions for state and local taxes (SALT), miscellaneous itemized deductions, and some medical expenses are not allowed under AMT.
- Different treatment of income and timing: Incentive stock options (ISOs), depreciation, and passive activity losses are treated differently under AMT rules.
- No personal exemptions: AMT disallows personal exemptions that were previously allowed under the regular system (though these were phased out in the TCJA).
2025 AMT Exemption Amounts
The AMT exemption is the amount of income that is exempt from AMT calculation. This exemption reduces the taxpayer’s AMT income, helping ensure that only high-income earners pay AMT. For the 2025 tax year, the exemption amounts are as follows:
| Filing Status | 2024 Exemption | 2025 Exemption |
|---|---|---|
| Single / Unmarried | $81,300 | $88,100 |
| Married Filing Jointly | $126,500 | $137,000 |
| Married Filing Separately | $63,250 | $68,500 |
| Estates and Trusts | $28,400 | $30,300 |
AMT Phase-Out Thresholds for 2025
Once a taxpayer’s AMTI (Alternative Minimum Taxable Income) exceeds certain limits, the AMT exemption begins to phase out. The phase-out thresholds for 2025 are:
- Unmarried individuals: Begins at $609,350
- Married filing jointly: Begins at $1,218,700
For every dollar of income above these thresholds, the exemption is reduced by 25 cents until it is completely phased out. This means that extremely high-income individuals may not benefit from the AMT exemption at all.
AMT Tax Rates and Bracket Structure
The AMT has its own flat-rate system, distinct from the graduated brackets of the regular tax system. For 2025, the AMT rates remain unchanged:
- 26% on the first $232,600 of AMTI (for married filing jointly)
- 28% on AMTI exceeding $232,600
These thresholds are adjusted for inflation each year. The 28% rate applies to a broader portion of income for high-income earners under the AMT than in the regular system.
Common Triggers of AMT Liability
While fewer taxpayers are subject to AMT today than in past decades, certain activities or deductions can still trigger AMT liability, such as:
- High state and local tax payments (SALT)
- Exercise of incentive stock options (ISOs)
- Depreciation of certain business property
- Large miscellaneous deductions
- Tax-exempt interest from certain private activity bonds
It’s important to analyze your full tax profile each year to see whether AMT might apply, especially if you’ve had a year with major financial events or investment gains.
Planning Tips to Avoid or Reduce AMT
1. Time Deductions Carefully
Since AMT disallows state and local tax deductions, consider bunching these payments into years where you’re not subject to AMT. Alternating deduction-heavy years may reduce overall liability.
2. Exercise ISOs Strategically
Incentive stock options, when exercised, are considered income under AMT even though they’re not taxed under regular income rules. Stagger exercises or exercise early in the year to evaluate tax impact before year-end.
3. Limit Use of Private Activity Bonds
Interest from these bonds, while tax-exempt under regular rules, is added back under AMT. Consider AMT-exempt municipal bonds instead.
4. Work with a Tax Professional
Calculating AMT is complex, especially for taxpayers with multiple income streams or significant deductions. Using tax software or a CPA can help avoid underpayment penalties or unexpected AMT liability.
Do You Have to File Form 6251?
Taxpayers who might be subject to the AMT are required to complete and file Form 6251: Alternative Minimum Tax – Individuals. This form walks through the adjustments and preferences that differ from the regular return and calculates whether AMT is owed.
Form 6251 is typically filed if:
- You received income from ISOs or private activity bonds
- You claimed significant itemized deductions disallowed under AMT
- Your taxable income exceeds the phase-out threshold
Conclusion
The 2025 inflation-adjusted AMT exemption levels represent a significant buffer for many taxpayers, especially those on the cusp of the AMT threshold. With exemption amounts now reaching $88,100 for singles and $137,000 for joint filers, fewer people will fall under the AMT’s reach.
Nevertheless, understanding how the AMT works, recognizing its triggers, and planning accordingly can help you avoid surprises during tax season. By timing deductions wisely, monitoring your incentive stock option exercises, and working closely with a tax professional, you can minimize AMT exposure while remaining fully compliant with IRS rules.
