The U.S. tax system is designed to ensure higher earners contribute a larger share of their income in taxes. However, loopholes and significant deductions can sometimes allow these individuals to reduce their tax obligations substantially. The Alternative Minimum Tax (AMT) exists to counteract this, ensuring that even with deductions, high-income taxpayers pay a minimum amount in taxes.
Why the AMT Matters
The AMT isn’t about punishing high earners; it’s about fairness and preventing the tax system from being exploited. It addresses situations where taxpayers with large incomes and extensive deductions end up paying a disproportionately small amount of tax. This is especially relevant because deductions like state and local taxes, stock options, and capital gains can significantly lower taxable income, sometimes to an unreasonable degree.
Who Is Affected?
The AMT primarily affects high-income individuals who utilize numerous deductions. Common triggers include:
- High State and Local Taxes: Taxpayers in states with high income or property taxes may find themselves subject to the AMT.
- Stock Options: Exercising incentive stock options (ISOs) can create a taxable event under the AMT, even if regular taxes don’t apply immediately.
- Capital Gains: Large profits from selling assets, such as businesses or investments, can push taxpayers into the AMT bracket.
- Complex Income Sources: Niche investments, private activity bonds, or accelerated depreciation can also trigger the AMT.
How It Works: The Calculation
The AMT calculation involves determining a “tentative minimum tax” and comparing it to the regular tax liability. If the AMT is higher, the taxpayer pays the AMT instead.
Here’s a simplified breakdown:
- Start with Regular Income: Begin with your standard taxable income.
- Add Back Disallowed Deductions: Include deductions not allowed under AMT rules (e.g., state and local taxes, some bond interest).
- Subtract AMT Exemption: Reduce your income by the AMT exemption amount ($90,100 for single filers in 2026).
- Apply AMT Rate: Multiply the result by either 26% or 28%, depending on the income level.
The AMT is only paid if it exceeds the standard tax liability. Tax software typically handles this calculation automatically.
Income Thresholds and Triggers in 2026
The AMT thresholds for 2026 are lower than they were in 2025, meaning more people could be affected. The phase-out begins at $500,000 for single filers and $1 million for married couples. This means anyone earning above these amounts should carefully review their tax situation.
How to Mitigate AMT Legally
While avoiding AMT entirely may not be possible, you can reduce your liability through strategic planning:
- Spread Stock Option Exercises: Exercising options over multiple years can reduce the AMT impact.
- Donate Appreciated Stock: Donating stock instead of cash can provide a larger tax write-off.
- Strategic Deduction Management: Carefully evaluate which deductions will trigger the AMT and adjust accordingly.
The History of AMT
The AMT originated in 1969 when it was revealed that 155 high-income earners paid no federal income tax in 1966. Public outcry led to the creation of an initial minimum tax, which evolved into the modern AMT in 1979. Its purpose has remained constant: to ensure that high earners pay a fair share of taxes, regardless of deductions.
What’s Changing?
The 2017 Tax Cuts and Jobs Act temporarily reduced the number of taxpayers subject to the AMT. However, these provisions are set to expire at the end of 2025. Without Congressional action, more people will likely face the AMT in 2026 due to lower exemption thresholds.
The AMT is a necessary component of a fair tax system, preventing high earners from exploiting loopholes and ensuring they contribute their share. As tax laws evolve, understanding the AMT’s implications is crucial for those with significant income and deductions.
