Alternative Minimum Tax (AMT): What It Is and How It Works

SmartAsset Team

Sun, Mar 23, 2025, 12:34 PM 5 min read

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The alternative minimum tax (AMT) is a separate tax system that makes sure people with high incomes still pay some tax, even if they have a lot of deductions. It removes some common deductions, like state and local taxes, and uses different rules to figure out what you owe. It mostly affects people with high deductions or complex tax situations. A financial advisor can help you see if the AMT applies to you and recommend strategies to manage your tax burden.

The AMT is a separate tax system created to prevent high-income earners from using too many tax breaks to lower their tax bill too much. It runs alongside the regular tax system and requires some taxpayers to figure their taxes both ways-under regular rules and AMT rules-and then pay the higher amount.

Unlike the standard tax code, AMT disallows many common deductions adds back some income that's usually tax-free, including state and local tax (SALT) deductions and some business-related expenses, leading to a higher taxable income base for those subject to it.

The AMT generally applies to high-income earners who benefit from large deductions, capital gains, or certain types of investment income. Although the exemption is now adjusted for inflation, some individuals-such as those with incentive stock options or tax-exempt interest from private activity bonds-may still be subject to it.

To see if you might owe AMT, review your income and deductions for common triggers. These include high state and local tax deductions, large capital gains, or exercising incentive stock options. People in high-tax states or with complex investments are often more likely to be affected.

Claiming many itemized deductions, like mortgage interest on home equity loans, large medical expenses, or unreimbursed business costs, can lower your regular taxable income. This may lead to a higher AMT calculation and increase your chances of owing under the AMT system.

Calculating the AMT involves several steps to determine whether a taxpayer owes additional tax beyond their regular liability. The process involves adjusting taxable income, applying an exemption and then calculating tax at a different rate structure.

Below is a step-by-step breakdown of how to determine AMT liability.

AMTI starts with the taxpayer's regular taxable income and is adjusted by adding back certain deductions and tax preference items that are not allowed under AMT rules. Common adjustments include removing deductions for state and local taxes (SALT), and net operating loss deductions for pass-through business.