You owe more than you expected. You did not cheat. You did not hide money. You simply triggered a “catch-all” rule called the Alternative Minimum Tax (AMT).
Owing AMT does not mean you are being audited or investigated. It means your income profile fits a specific formula that requires a second calculation.
What Is the Alternative Minimum Tax (AMT)?
The US tax code has two separate tax systems running at the same time:
- Regular tax: The standard brackets (10%, 12%, 22%, etc.) you are used to.
- AMT: An alternative system with fewer deductions and different rates (26% or 28%).
Every year, the IRS forces you to calculate your taxes twice. You calculate your regular tax, and then you calculate your AMT. You must pay whichever number is higher.
Why the IRS Created AMT in the First Place
In 1969, Congress discovered that 155 ultra-wealthy Americans paid zero federal income tax because they used so many legal deductions. To stop this, they created a “minimum” tax to ensure the wealthy paid at least something.
Why AMT Still Exists Even Though Few People Pay It Today
For decades, the AMT was not adjusted for inflation. As salaries rose, it drifted from targeting tycoons to hitting the upper middle class.
In 2017, the Tax Cuts and Jobs Act (TCJA) temporarily fixed this. It raised exemption amounts significantly, dropping the number of AMT payers from 5 million households to roughly 200,000. However, this fix was written with an expiration date. When the TCJA sunsets, the old rules (and the old problems) return.
Who Pays the Alternative Minimum Tax?
There is a myth that you only pay AMT if you make millions. This is false. A person earning $5 million might pay zero AMT because their “regular tax” is already high (37%).
This is where AMT often shows up.
AMT hits people in the “gap,” taxpayers who have high deductions or specific types of income that push their regular tax below the AMT threshold.
Common profiles that trigger AMT:
- Startup Employees: Employees who exercise stock options and hold the shares, often creating a “paper gain” without cash in hand.
- Coastal Residents: Families living in states with high income and property taxes (like NY, CA, NJ), where local deductions are high.
- Business Owners: Owners who use accelerated methods to write off equipment costs quickly.
- Large Families: Historically affected by AMT, and still relevant in certain edge cases involving credits and deduction limitations.
What Triggers the Alternative Minimum Tax?
AMT Preference Items Explained Simply
To calculate AMT, the IRS takes your income and adds back “Preference Items”: deductions you took on your regular return that AMT does not allow.
The regular tax system says, “Sure, deduct that.” The AMT system says, “No, add that back to your income.”
The Top AMT Triggers in 2025
- Incentive Stock Options (ISOs): The spread between your strike price and the fair market value at exercise is considered income for AMT, even if you didn’t sell the stock.
- State and Local Taxes (SALT): Currently capped at $10,000 for regular tax purposes, but fully added back under AMT rules. Even if the cap already limits the benefit, AMT ignores the deduction entirely.
- Net Operating Losses (NOLs): AMT restricts how much past loss you can use to offset current income.
Most people are blindsided because their W-2 withholding is based on regular tax rates. Your employer does not know about your ISO exercises or your spouse’s complicated deductions. You often discover the liability only when you file your return months later.
Alternative Minimum Tax Exemption Amounts (2025 vs 2026)
2025 AMT Exemptions (Current Law)
For the 2025 tax year (returns filed in early 2026), the exemption amounts are high. This is the amount of income you can shield from AMT before the calculation starts.
- Unmarried Individuals: Exemption is $88,100.
- Married Filing Jointly: Exemption is $137,000.
Phase-Outs: The exemption begins to disappear if you earn too much.
- Single filers lose exemption starting at $626,350.
- Married filers lose exemption starting at $1,252,700.
What Happens in 2026 If Congress Does Nothing
This is the critical warning. The current high exemptions expire on December 31, 2025. Unless Congress passes a new law, the 2026 rules will revert to 2017 levels (adjusted for inflation).
- Exemptions will drop significantly (likely near $60,000–$90,000 ranges).
- Phase-out thresholds will drop drastically (likely starting near $130,000–$175,000).
- Result: Millions of taxpayers earning $150k+ will suddenly owe AMT again.
How to Calculate Alternative Minimum Tax
- Start with AGI: Take your Adjusted Gross Income from your regular tax return.
- Add Back Preferences: Add items that are usually tax-free but taxable under AMT (like the ISO spread or state taxes).
- Subtract Exemption: Deduct the specific AMT exemption amount for your filing status.
- Calculate Tax: Multiply the remaining amount by the AMT rate (26% or 28%).
- Compare: If this AMT liability is higher than your regular tax liability, you pay the difference as AMT.
What Is Form 6251?
Form 6251 is the IRS scorecard for this calculation. It looks intimidating, but it is just a list of “add-backs.” It asks: “Did you take a standard deduction? Add it back. Did you exercise ISOs? Add the value back.”
Common Calculation Errors That Trigger IRS Notices
- Missing ISO Adjustments: Brokers send Form 3921 for ISO exercises, but this data does not always auto-populate in tax software correctly. If you omit it, the IRS computers will catch it (matching logic) and send a CP2000 notice.
- Double Counting State Taxes: Misinterpreting how SALT deductions flow between Schedule A and Form 6251.
What Is the Alternative Minimum Tax Rate?
Unlike the regular tax, which has seven brackets (10% to 37%), AMT has only two flat-ish rates:
- 26%: Applies to the first $239,100 of income subject to AMT (amount after exemption).
- 28%: Applies to any income above that $239,100 threshold.
Effective Rate vs. Headline Rate: While 28% sounds lower than the top regular rate of 37%, remember that the AMT “base” is much wider. You are paying 28% on income that might not have been taxed at all under the regular system.
Corporate Alternative Minimum Tax (CAMT)
A new Corporate AMT (CAMT) was introduced recently. It imposes a 15% minimum tax on the “book income” of corporations with over $1 billion in annual profit.
This has nothing to do with your personal Form 1040. If you read news headlines about “New 15% Minimum Tax,” they are discussing Amazon and Google, not you.
Do I Have to Pay Alternative Minimum Tax?
Use this simple logic flow to check your exposure.
Did you exercise Incentive Stock Options (ISOs) and hold the stock?
- Yes: High probability of AMT
- No: Proceed to next.
Is your household income between $200,000 and $500,000?
- Yes: Moderate risk (low risk in 2025, high risk in 2026).
- No: Lower risk (unless income is very high).
Do you have significant “private activity bond” interest or huge depreciation deductions?
- Yes: High probability.
If you answered “No” to all, you likely do not owe AMT under current 2025 rules.
How Can I Avoid Paying Alternative Minimum Taxes? (Legally)
What you can control:
- ISO Timing: This is your biggest lever. You can “smooth” your income by exercising options over several years rather than all at once. You can also sell the stock in the same year you exercise (disqualifying disposition) to avoid the AMT adjustment entirely—though this triggers regular tax rates.
- Income Deferral: Pushing income to a different year can sometimes keep you under the exemption phase-out thresholds.
What you cannot control:
- The Law: You cannot change the exemption amounts.
- The Market: If your stock value crashes after you exercise ISOs, the AMT bill stays fixed based on the value at the moment of exercise.
How to Recover Alternative Minimum Tax
If you pay AMT due to “timing differences” (like ISOs), you do not lose that money forever. You generate an AMT Credit.
When AMT Credits Apply
The IRS acknowledges that you paid tax on “paper income” (ISO spread) that you haven’t realized yet. You get a credit to use in future years when your regular tax is higher than your AMT. It essentially acts as a prepayment on future taxes.
When Recovery Is Not Possible
If your AMT was triggered by “exclusion items” (like the standard deduction or state taxes) that money is gone. You cannot recover AMT paid on exclusion items.
Does AMT Trigger IRS Audits or IRS Notices?
Owing AMT does not trigger a field audit where an agent comes to your house. However, calculation errors frequently trigger Automated Underreporter Notices (CP2000). If the IRS receives a Form 3921 from your employer saying you exercised options, but you didn’t file Form 6251, their computer automatically sends a bill for the difference.
These notices are automated and procedural, not investigative. The real risk is not scrutiny. It’s liquidity.
The biggest danger is cash flow. If you owe $50,000 in AMT on stock you haven’t sold, you must pay the IRS in cash. If you don’t have the cash, you enter the IRS collection cycle (penalties and interest).
What to Do If You Owe AMT and Can’t Pay
If you discover a massive AMT liability that you cannot pay immediately, do not hide.
- File the Return on Time: The penalty for failing to file is ten times higher than the penalty for failing to pay. File the return even if you can’t send a check.
- Verify the Calculation: Have a CPA review the Form 6251. Software inputs for ISO cost basis are frequently wrong.
- Stop Penalties from Compounding: Pay as much as you can immediately to lower the principal balance.
IRS Relief Options That Apply to AMT Debt
- Installment Agreements: You can generally set up a monthly payment plan for balances up to $50,000 (and sometimes higher) relatively easily.
- Offer in Compromise (OIC): If the stock value crashes and you are left with a tax bill that exceeds your total net worth, you may qualify to settle the debt for less. This is common in “ISO blowout” scenarios.
How PrecisionTax Helps in AMT Situations
We specialize in fixing tax surprises. Whether you need to verify if the AMT calculation is even correct, or you need to negotiate a payment plan for a balance you can’t cover, we handle the IRS interaction for you.
Frequently Asked Questions
Do I have to pay alternative minimum tax?
Only if your AMT calculation comes out higher than your regular tax calculation. Most taxpayers currently do not, but this may change in 2026.
How do I calculate alternative minimum tax?
You start with your regular taxable income, add back “preference items” (deductions not allowed by AMT), subtract the exemption amount, and apply the AMT tax rates (26% or 28%).
What is Form 6251 for alternative minimum tax?
Form 6251 is the IRS form used to calculate your AMT liability. It lists the preference items and performs the comparison between regular tax and AMT.
What are the Alternative Minimum Tax exemption amounts?
For 2025, the exemption is $88,100 for singles and $137,000 for married couples filing jointly. These amounts phase out at higher income levels.
What is the minimum alternative tax rate?
There are two rates: 26% on the first tier of AMT income and 28% on amounts above the threshold (approx. $239,100 excess).
Can I avoid paying alternative minimum taxes?
You can mitigate it by planning the timing of ISO exercises or income recognition, but you cannot avoid it if your income composition legally triggers the math.
How do I recover alternative minimum tax?
If you pay AMT due to timing differences (like ISOs), you generate a Minimum Tax Credit (MTC) that can reduce your regular tax bill in future years.
Is corporate alternative minimum tax the same as personal AMT?
No. The Corporate AMT (CAMT) applies to companies with over $1 billion in profit. It operates under completely different rules than the individual AMT.
Why is AMT coming back in 2026?
The 2017 tax cuts (TCJA) temporarily raised AMT exemptions. Those cuts expire after 2025. Without new legislation, the rules revert to 2017 levels, subjecting millions more people to the tax.