Alternative Minimum Tax (AMT)

The alternative minimum tax is a parallel tax system designed to ensure that taxpayers claiming substantial preferences and deductions pay a minimum level of tax. A taxpayer computes regular tax and tentative minimum tax and pays the greater of the two. Tentative minimum tax is calculated by adding preference items back to taxable income to arrive at alternative minimum taxable income, subtracting an exemption that phases out at higher income levels, and applying rates of 26 and 28 percent.

The corporate AMT was repealed by the Tax Cuts and Jobs Act, though the Inflation Reduction Act subsequently introduced a separate 15 percent corporate alternative minimum tax on adjusted financial statement income for corporations averaging over $1 billion in book income - a distinct regime that should not be confused with the individual AMT.

For individuals, the TCJA sharply raised the exemption and its phase-out thresholds, reducing the number of taxpayers affected from several million to a few hundred thousand. The One Big Beautiful Bill Act made further changes effective in 2026, reverting the phase-out thresholds toward earlier levels indexed for inflation and increasing the phase-out rate, which broadens AMT exposure relative to the immediately preceding years for higher-income taxpayers.

The most common AMT trigger in practice remains the exercise of incentive stock options. The bargain element - the spread between exercise price and fair market value at exercise - is not income for regular tax purposes but is an AMT preference item, which means an employee who exercises and holds can owe substantial tax on paper gains that may later evaporate. Other preferences include certain private activity bond interest and depletion. AMT paid on timing preferences generates a minimum tax credit carried forward against future regular tax.