Alternative minimum tax (AMT)
A parallel federal income tax calculation with fewer deductions; taxpayers owe the higher of the regular tax or this minimum tax.
What it means
The alternative minimum tax was created to keep people with many tax breaks from paying very little. It works as a second calculation. Starting from regular taxable income, certain items are added back, such as state and local tax deductions and the bargain element when incentive stock options are exercised and the shares are held. An exemption amount that phases out at higher incomes is then subtracted, and two rates, 26% and 28%, apply to the rest.
If this tentative minimum tax is higher than regular tax, the difference is owed as AMT. AMT caused by timing items such as incentive stock options can create a credit usable against regular tax in later years. Fewer households have owed AMT since the 2017 tax law changes, but it remains relevant for some.
Example
Suppose someone’s regular tax is $30,000 and their tentative minimum tax is $34,000. They owe $4,000 of AMT on top of regular tax, for a total of $34,000.
How it’s used
- Exercising incentive stock options
- High earners in high-tax states
- Tax planning with large one-time deductions
Good to know
- Tax software calculates AMT automatically, but projecting it before exercising stock options can avoid a surprise bill.
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.