Understanding the Alternative Minimum Tax (AMT) After Recent Law Changes

The alternative minimum tax (AMT) is a parallel federal tax system designed to ensure that certain taxpayers pay at least a minimum amount of tax, regardless of deductions and credits under the regular tax system. The AMT requires taxpayers to add back certain income and disallow some deductions, and pay the higher of their regular tax or AMT liability.

What Changed Under the New Law

The Tax Cuts and Jobs Act (TCJA) of 2017 made the AMT less likely to affect many taxpayers from 2018 to 2025 by increasing exemption amounts and phase-out thresholds. The information regarding the One Big Beautiful Bill Act (OBBBA) is hypothetical and not based on any real, enacted U.S. legislation as of September 2025.

AMT Rates

The AMT uses a two-tiered rate structure:

• 26% applies to AMT taxable income below set thresholds

• 28% applies to AMT taxable income above those thresholds

For 2025, the 28% AMT rate applies to income over $220,700 for all taxpayers except married couples filing separately, whose threshold is $110,350 (as per IRS guidelines). These numbers may be updated annually for inflation.

Although the top AMT rate is lower than the top regular income tax rate, the AMT is calculated on a broader base of income with fewer deductions and credits.

AMT Exemptions

Exemptions reduce the amount of income subject to AMT. The TCJA increased these amounts and indexed them for inflation. For tax year 2025, the IRS projects:

• $88,300 for single filers and heads of household

• $126,500 for married couples filing jointly and qualifying widowers

• $63,250 for married individuals filing separately

(Exemption figures may change slightly based on official IRS adjustments.)

Exemption Phase-Outs

The AMT exemption amount begins to phase out when income exceeds:

• $609,350 for single filers and heads of household (2025, projected by IRS)

• $1,218,700 for married couples filing jointly and surviving spouses

Once income exceeds these thresholds, the exemption amount is reduced by 25 cents for every dollar above the phase-out threshold.

Any references to changes after 2025 (such as new phase-out thresholds and rates under the OBBBA) are not supported by any current law and appear to be hypothetical.

Common AMT Risk Factors

Several scenarios increase the likelihood of owing AMT:

• High income from capital gains or other sources (which can accelerate exemption phase-out)

• Large state and local tax (SALT) deductions (disallowed under AMT)

• Exercising incentive stock options (ISOs), where the bargain element is included in AMT income

• Interest from certain private activity bonds (taxable under AMT, but not under regular tax rules)

What This Means for You

Due to the TCJA changes, fewer taxpayers are subject to AMT through 2025. Unless new federal legislation is enacted, the AMT will continue as adjusted for inflation and as prescribed by the TCJA. Taxpayers with high investment income, ISOs, or large SALT deductions should monitor their exposure and consult a tax professional for updated planning.

Contact us to review your situation and plan ahead for the changes coming in 2026.