The Alternative Minimum Tax (AMT) is a parallel tax system that requires taxpayers to calculate their tax liability under both the regular tax system and the AMT system, then pay whichever is higher.
Purpose: Prevent high-income taxpayers from using too many deductions and preferences to reduce their tax to near zero.
How it works: 1. Start with regular taxable income. 2. Add back AMT preference items and adjustment items (items that reduce regular tax but are favorable under regular rules). 3. Subtract the AMT exemption. 4. Apply the AMT rate (26% / 28%). 5. If AMT > regular tax → pay the AMT (the excess is the "AMT").
Key AMT preference and adjustment items: - Incentive stock options (ISOs): Spread at exercise is an AMT preference item (taxable for AMT, not for regular tax). - Accelerated depreciation (MACRS vs. straight-line difference). - Depletion (in excess of the property's adjusted basis). - Miscellaneous itemized deductions (eliminated for regular tax by TCJA; still an AMT adjustment). - State and local taxes (SALT) deduction — no SALT deduction for AMT.
AMT exemption (2025): - Single: $88,100; phaseout begins at $626,350. - MFJ: $137,000; phaseout begins at $1,252,700.
AMT rates: 26% on AMT income up to $232,600; 28% above that (for 2025).
AMT credit: AMT paid in one year can generate a minimum tax credit (MTC) that offsets future regular tax liability.
> Exam tip: ISOs triggering AMT is a classic CFP® and EA exam scenario. Know that the spread on ISO exercise (FMV − exercise price) is an AMT preference item, even though it's not taxable for regular income tax.