Alternative Minimum Tax
Prepare for This "Tax Trap"
© 2025 by Michael Gray, CPA
The Alternative Minimum Tax (AMT) was created so that taxpayers with substantial income would pay some tax. Many voters were outraged by statistics published by the Treasury Department that several taxpayers had substantial income, but were able to avoid paying income taxes using tax deductions, incentive tax credits, and tax shelter investments.
Although the One Big Beautiful Bill Act of 2025 (OBBBA) generally has permanently extended the tax cuts enacted in the Tax Cuts and Jobs Act of 2017 (TCJA) that were scheduled to expire after 2025, some of the changes will result in more taxpayers being subject to the alternative minimum tax.
In 1986, the AMT was modified to be similar to the flat tax many people had proposed-a single tax rate applying to a broadened tax base with an exclusion amount.
The income tax is computed using the regular tax and the AMT, and the higher amount is usually paid.
Under TCJA and extended by OBBBA, most of the regular tax deductions that were not deductible when computing the alternative minimum tax were repealed or severely curtailed, including repealing miscellaneous deductions subject to the 2% of adjusted gross income floor, interest for most equity lines of credit, and personal exemptions for dependents and the taxpayer.
For 2018 through 2024, TCJA limited the itemized deduction for state and local taxes (SALT) to $10,000 ($5,000 for married persons filing a separate return.) OBBBA raises the limit to $40,000 ($20,000 for married persons filing a separate return) for 2025 and $40,400 ($20,200 for married persons filing a separate return) for 2026. Suddenly, the impact on the minimum tax credit will become more significant for more taxpayers, starting in 2025. The ceiling will be increased to 101% of the amount for the previous year from 2027 through 2029. After 2029, the ceiling will revert to $10,000. The SALT cap is reduced to the lesser of the state and local tax or $10,000 ($5,000 for married persons filing a separate return) by 30% of the excess of the taxpayer's modified adjusted gross income over $500,000 ($250,000 for married, filing separately) for 2025 and $505,000 ($252,500 for married, filing separately) for 2026. The SALT cap phaseout will be increased to 101% of the dollar amount in effect for the previous year for 2027 through 2029 and will no longer apply after 2029.
Although personal exemptions have generally been permanently repealed by TCJA and OBBBA, OBBBA created a new personal exemption for seniors, which will be deductible for the regular tax and will not be deductible for the alternative minimum tax. To satisfy President Trump's promise to make Social Security income tax-exempt, Congress enacted an enhanced deduction for seniors of $6,000 for taxpayers who have attained age 65 by the year-end. For joint returns, each spouse may claim $6,000 provided both spouses have attained age 65 by the year-end. The individuals filing the income tax return must have and report Social Security numbers. Married persons must file a joint return to claim the deduction. No Social Security income is required to claim the deduction.
The senior deduction is phased out by 6% of modified adjusted gross income over $75,000 ($150,000 for a joint return).
The deduction applies for tax years 2025 through 2028.
The elimination or curtailing of these deductions means alternative minimum taxable income will often be much closer to regular taxable income unless there is a significant "timing difference," such as the exercise of an incentive stock option with a lot of deferred income. (See below.)
The standard deduction was also temporarily increased by TCJA for 2018 - 2025 to $24,000 for married individuals filing joint returns, $18,000 for heads of households, and $12,000 for other individuals, indexed for inflation after 2018. Effective 2026, the standard deduction was adjusted by OBBBA to $15,650 for singles, $23,625 for heads of households, and $31,500 for married persons filing joint returns ($15,750 for married persons filing separate returns), indexed for inflation for future years. The standard deduction is not deductible when computing the alternative minimum tax. See below about the alternative minimum tax exemption, which should eliminate the alternative minimum tax for most taxpayers.
A significant AMT adjustment affecting many Silicon Valley executives is the spread between the fair market value and the option price for stock acquired using incentive stock options.
Many changes have been made to the AMT over the years. Most significantly, graduated tax rates were added to the tax computation effective in 1996, thus eliminating the original "flat tax" design. There are currently 26% and 28% tax brackets.
Under TCJA, the alternative minimum tax exemption was temporarily increased for 2018 to 2025 to $109,400 for married taxpayers filing joint returns and $70,300 for all other taxpayers. The AMT exemption is phased out at $1 million of tentative alternative minimum taxable income for married taxpayers filing joint tax returns and $500,000 for all other taxpayers (other than estates and trusts). These thresholds were indexed for inflation after 2018.
Effective for tax years beginning after December 31, 2025, the alternative minimum tax (AMT) exemptions adopted for individuals in the Tax Cuts and Jobs Act of 2017 are extended by OBBBA, with annual inflation adjustments slightly modified, using different base years.
The thresholds for phasing out the exemptions are reduced from $1,252,700 for married, filing joint and surviving spouses for 2025 to $1,000,000 for 2026, indexed for inflation, thereafter and from $626,350 for singles and heads of households for 2025 to $500,000 for 2026, indexed for inflation thereafter.
The exemption phaseout rate is increased from 25% to 50%, so the exemption is phased out twice as fast under the new law.
With the increase in the exemption and the elimination of itemized deductions, many taxpayers who would have paid the alternative minimum tax before 2018 will no longer be subject to the tax.
A part of the AMT could represent a prepayment of tax and be used as a tax credit in a later year.
Many taxpayers who prepare their own income tax returns and some tax return preparers have ignored the AMT because they aren't aware of it, don't understand it, or believe it doesn't apply. Making the computation is still critically important when a taxpayer has a minimum tax credit carryover. The lowest alternative minimum tax rate is 26% while the lowest regular tax rate is 10%. It's still possible to unexpectedly owe the tax.
We consider the AMT important to consider when preparing income tax returns and in tax planning computations. When the tax situation is planned in advance, you can avoid wasting deductions disallowed under the AMT. You can also prepare in advance for the cash required to pay the tax, be sure estimated tax payment requirements are met, and plan to use minimum tax credits.
OBBBA has made federal tax laws more complex, with many different phase outs and tax breaks. Be sure the advisor you're working with is familiar with the latest rules and uses tax projection software that has been updated for the latest tax law changes.
Now is an excellent time for planning your tax situation for 2018. Call Thi Nguyen, CPA at 408-286-7400, extension 206 to find out if Koehler & Associates CPAs, Inc. are the right CPAs for you.
For more information about the alternative minimum tax, visit our FAQ page. Have employee stock options? You may also be interested in The Amazing Disappearing AMT Credit.
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