The Alternative Minimum Tax (AMT) Explained

The Tax Cuts and Jobs Act (TCJA) made the alternative minimum tax (AMT) rules much more taxpayer friendly for 2018 through 2025. As a result, fewer taxpayers have been liable for the tax in recent years — and those who were liable typically owed less than under the old rules. With Republicans controlling Congress and the White House, the more favorable AMT rules will likely be extended or made permanent.

Either way, the AMT will continue to haunt some high-income taxpayers. So, it’s important to review the rules and learn the factors that affect your AMT risk profile.

AMT Basics

The AMT is a separate federal income tax system. Although similar to the regular federal income tax system, the AMT system taxes certain types of income that are tax-free under the regular system and disallows some breaks that you can claim under the regular system.

To calculate the AMT, your tax preparer will start with taxable income calculated under the regular tax rules, and then make various additions and subtractions to reflect the differing AMT rules. The result is your AMT income. If the AMT based on that income exceeds your regular tax obligation, you owe the larger AMT amount.

AMT Rates

The maximum AMT rate is 28%, compared to the 37% maximum regular tax rate. For 2024, the maximum AMT rate kicks in when AMT income exceeds the following levels:

• $232,600 for married couples who file jointly, and
• $116,300 for other taxpayers.

For 2025, the maximum AMT rate kicks in when AMT income exceeds the following levels:

• $239,100 for married couples who file jointly, and
• $119,550 for other taxpayers.

Below these thresholds, the AMT rate is 26%.

AMT Exemptions

You’re allowed an inflation-adjusted AMT exemption (effectively a deduction) that’s subtracted when calculating your AMT income. The TCJA significantly increased the exemption amounts for 2018 through 2025.

For 2024, the exemption amounts are:

• $133,300 for married couples who file jointly,
• $85,700 for single taxpayers and heads of households, and
• $66,650 for married individuals who file separate returns.

For 2025, the exemption amounts are:

• $137,000 for married couples who file jointly,
• $88,100 for single taxpayers and heads of households, and
• $68,500 for married individuals who file separate returns.

Exemption Phaseout Rules

Your AMT exemption is phased out (reduced or eliminated) at higher levels of AMT income. Specifically, your exemption is reduced by 25% of the excess of your AMT income over the applicable phaseout threshold. Thankfully, the TCJA dramatically increased the phaseout thresholds to levels where most people are unaffected.

For 2024, the exemption begins to phase out when AMT income exceeds:

• $1,218,700 for married couples who file jointly, and
• $609,350 for other taxpayers.

For 2025, the exemption begins to phase out when AMT income exceeds:

• $1,252,700 for married couples who file jointly, and
• $626,350 for other taxpayers.

AMT Risk Factors

Various interacting factors make it difficult to pinpoint who the AMT will hit. But here are seven factors that can increase the likelihood that you’ll be affected:

1. Substantial income from capital gains or other sources. High income can cause your AMT exemption to be partially or completely phased out, increasing the odds that you’ll owe the AMT. Gains from investments and home sales could cause some people to report significant capital gains for 2024. Although the TCJA increased the exemption amounts and the income levels where exemption phaseouts begin, you might not be AMT-exempt. The TCJA also lowered five out of the seven regular federal income tax rates, while leaving the AMT rates unchanged at 26% and 28%, increasing the odds that you might owe the AMT.

2. Standard deductions. Standard deductions allowed under the regular tax rules have always been disallowed under the AMT rules. For 2018 through 2025, the TCJA greatly increased the standard deduction amounts, but they’re still disallowed under the AMT rules. So, the TCJA increased this AMT risk factor.

Important: One AMT risk factor that the TCJA eliminated for 2018 through 2025 is personal and dependent exemption deductions. These deductions have always been completely disallowed under the AMT rules. This risk factor is scheduled to come back into play starting in 2026, unless Congress passes legislation to continue eliminating personal and dependent exemptions.

3. Itemized SALT deductions. State and local tax (SALT) payments were fully deductible for taxpayers who itemized under pre-TCJA regular tax rules. But SALT has never been deductible under the AMT rules. Through 2025, the TCJA limits the regular tax itemized deduction for state and local income and property taxes combined to $10,000 ($5,000 for married individuals who file separately). This AMT risk factor is reduced for 2024 due to the limit on itemized SALT deductions.

Important: There is bipartisan support to raise the $10,000 SALT limit. If Congress passes legislation that allows larger itemized SALT deductions, the change probably won’t go into effect until 2025 (or later).

4. Itemized deductions for home equity loan interest. Before the TCJA, you could deduct the interest on up to $100,000 of home equity loan balances if you itemized. But under the AMT rules, you could deduct that interest only to the extent the loan proceeds were used to buy or improve your first or second home. For 2018 through 2025, the TCJA generally disallows itemized deductions for home equity loan interest.

You can potentially treat a home equity loan as generating deductible qualified residence interest if you use the loan proceeds to acquire or improve your first or second residence. But there’s a catch: Your total mortgage debt, including the home equity loan, can’t exceed $750,000 ($375,000 if you’re married and file separately). If you’re within the applicable limit, you can deduct the interest under both the regular tax and AMT rules. If not, the interest on the home equity loan is disallowed for regular tax purposes. So, for now, this AMT risk factor has lost its teeth in many cases.

5. Depreciation deductions. Regular tax depreciation deductions from your business and/or investments in S corporations, limited liability companies and partnerships can create AMT adjustments. These adjustments increase your AMT income and the odds of owing the AMT. Under the TCJA, many businesses can deduct the entire cost of depreciable assets in the first year they’re placed in service. These deductions are allowed under both the regular tax rules and the AMT rules. So, for now, this AMT risk factor is generally reduced for newly acquired assets. However, it still exists for older assets that you’re depreciating over extended periods under the pre-TCJA rules.

6. Exercised ISOs. Exercising in-the-money incentive stock options (ISOs) has federal income tax consequences for employees. The so-called bargain element (the difference between the market value of the shares on the exercise date and the ISO exercise price) doesn’t count as income under the regular tax rules, but the bargain element does count as income under the AMT rules. This AMT risk factor still exists under current law.

7. Private-activity bond interest income. If you report interest income from private-activity bonds, it’s tax-free for regular tax purposes. However, this income is taxable under the AMT rules. This risk factor still exists under current law.

The Lowdown on the Minimum Tax Credit

A portion of your alternative minimum tax (AMT) liability can potentially generate the so-called minimum tax credit (MTC). If so, you can carry the MTC forward to future tax years and use it to reduce your regular tax liability to the point where it equals your AMT liability.

MTCs are generated only by AMT liabilities that are attributable to so-called deferral preferences. These items are recognized at different times for regular tax and AMT purposes.

MTCs are not generated from AMT liabilities that are attributable to so-called exclusion preferences. These items are permanently treated differently under the regular tax and AMT rules. Exclusion preferences include:

• Standard deductions,
• Disallowed itemized deductions under the AMT rules, such as state and local taxes (SALT) and home equity loan interest deductions (if the loan proceeds weren’t spent on your first or second residence), and
• Tax-exempt interest from certain private-activity bonds.

Most other AMT adjustments and preferences are deferral preferences that will generate MTCs. Examples of deferral preferences are AMT depreciation adjustments and the bargain element from exercising ISOs. Contact your tax advisor for more information on MTCs.

Ready, Set, File

Are you at risk for owing the AMT for 2024? Although the TCJA significantly reduced the odds that you’ll be hit with the AMT, don’t assume you’re exempt. Your tax advisor can discuss your exposure to the tax and possible strategies to lower your AMT profile.

Copyright 2025

This article appeared in Walz Group’s February 10, 2025 issue of The Bottom Line e-newsletter, produced by TopLine Content Marketing. This content is for informational purposes only.