Alternative minimum tax (AMT)

What is the alternative minimum tax?

The alternative minimum tax (AMT) is a parallel tax system designed to make sure high-income taxpayers pay the appropriate amount of federal income tax. The alternative minimum tax calculation limits certain tax breaks, deductions, credits, and exemptions to prevent taxpayers from abusing loopholes or using excessive deductions to significantly lower their tax liability.

If you make more than the AMT exemption amount, you must calculate your tax liability twice—once under the regular tax system and once under the AMT rules—and then pay the higher of the two. Since AMT doesn’t allow for many deductions and credits, your taxable income under the AMT calculation is likely to be higher.

Deductions and exclusions added back into the AMT calculation may include:

• State and local tax deductions: Fully disallowed

• Miscellaneous itemized deductions: Generally not allowed

• Medical expense deductions: Subject to a higher threshold under AMT rules

• Depreciation adjustments: Slower depreciation schedule for assets

• Incentive stock options (ISO): The difference between the exercise price and fair market value (FMV) counts as AMT income

• Tax-exempt municipal bonds: Interest from some municipal bonds is taxable under AMT

The AMT was introduced in 1969 to prevent wealthy taxpayers from using excessive deductions and credits to pay little or no taxes. While initially targeting the wealthy, the AMT eventually began affecting middle-income earners due to inflation, cuts in ordinary income tax rates, and tax bracket creep. 

In 2012, AMT exemption amounts were adjusted by Congress under the American Taxpayer Relief Act, which also made future exemption amounts indexed for inflation. Later, the Tax Cuts and Jobs Act (TCJA) of 2017 increased AMT exemption amounts again. If the provision expires in 2025 as planned, taxpayers can expect the AMT rate to revert back to lower 2017 amounts.

You may be more likely to pay AMT if you:

• Have a high income

• Are married

• Have more than three children

• Live in a state with a high income tax

• Recently exercised ISOs and didn’t sell them

If you think you may be subject to the AMT, you can refer to the instructions for Form 1040 (Schedule 2) and Form 1040-SR or work with a tax preparation specialist. To calculate whether you owe AMT, you will use Form 6251, also known as the Alternative Minimum Tax form.

How to calculate AMT

To manually calculate your AMT, start by figuring out your alternative minimum taxable income (AMTI). This includes:

• Your regular income

• Some amounts you can usually subtract for regular income tax purposes, such as personal exemptions and some deductions, like the deduction for state and local taxes

• Preference items, like the spread between the price you paid to exercise your ISOs and their market value when you exercised

• And more

Calculating your AMTI can get complicated, so we recommend using tax software, talking to a tax professional, or a combination of both. If you file a paper tax return, you can calculate your AMTI using IRS Form 6251.

Similar to standard deductions under the regular tax system, you can exempt (subtract) the following amount from your AMTI:

2024 AMT exemption amounts

Source: Internal Revenue Services (IRS)

However, these exemptions start to phase out once your AMTI hits a certain threshold:

2024 AMT exemption phaseout thresholds

Sources: IRS and Tax Foundation 

AMT exemptions phase out at 25 cents per dollar earned once AMTI reaches $609,350 for single filers and $1,218,700 for married taxpayers filing jointly as shown in the table above. For every $1 above the threshold, your exemption is reduced by $0.25. When your AMT income reaches four times the exemption amount plus the phase-out threshold, you are no longer eligible for an exemption.

Once you reach your final AMTI, you can calculate your AMT liability.

Source: IRS

If this amount is higher than what you’d have to pay doing your taxes the usual way, you have to pay AMT.

Free AMT calculator

Calculating AMT can be complicated, but you may want to get an estimate before you exercise, as it could be a significant amount of money.

To help, we created a free AMT calculator you can use to estimate your potential tax bill. To use this calculator, all you need is the following information:

• Your income

• Filing status

• Strike price

• Current fair market value (FMV) of your shares

• The number of options you exercised or plan to exercise

What does AMT have to do with exercising stock options?

If you exercise your incentive stock options (ISO) and don’t sell them in the same year, the spread between the price you paid for the options and the stock’s FMV is treated as AMT income.

For example, if you exercise 1,000 shares at $1 each when they’re worth $5 each, you need to add $4,000 to your income when calculating AMT. You can calculate your spread using IRS Form 6251.

If you exercise your shares and sell them in the same year, the spread doesn’t count as AMT income and instead counts as regular income.

What is an AMT credit?

If you have to pay the alternative minimum tax, you may get an AMT tax credit, which you can use to reduce your tax obligation in future years.

How can I minimize AMT related to my equity award?

To get ahead of tax planning for 2025, or If you have questions about how exercising may impact your tax liability, talk to a tax professional—ideally before you exercise your options. They should be able to tell you how many ISOs you can exercise without triggering AMT and generally advise you on whether to exercise or sell—and if so, when.

If you were to sell your shares (that used to be ISOs) in the same year you exercise, you won’t have to include the spread in your AMTI. Just keep in mind that if you do this, you won’t get to take advantage of the ISOs’ favorable tax treatment, since you need to hold them for at least a year after exercising to qualify for long-term capital gains tax benefits.

If your company allows early exercising (exercising before you vest), you could consider exercising your ISOs right when you’re granted them and filing an 83(b) election within 30 days. This allows you to be taxed on the day you exercise instead of having to wait until your shares vest. If you exercise your ISOs as soon as they’re granted, there usually won’t be a spread you need to add to your AMTI. However, in this circumstance, you’re paying cash now for shares that may depreciate in the future.

Other strategies to minimize your AMT obligation include lowering your adjusted gross income. Your tax advisor may discuss maxing out contributions to your retirement accounts and increasing your charitable contributions. 

Carta Equity Advisory helps the employees of our customer companies make informed decisions about equity ownership and taxes.

What to know about AMT if the Tax Cuts & Jobs Act (TCJA) expires in 2025

The 2017 Tax Cuts and Jobs Act (TCJA) increased AMT exemption amounts. If the provision expires in 2025 as planned, we can expect rates to revert back to lower 2017 amounts.

2017 vs. 2025 AMT exemption amounts:

Source: IRS