What is the alternative minimum tax?
Running parallel to the regular tax system, the alternative minimum tax (AMT) was enacted in 1969 to require extremely wealthy people to pay taxes when credits and deductions could otherwise reduce or eliminate their tax liabilities. It was first called the Add-On Minimum Tax and was passed in the Tax Reform Act of 1969. However, for various reasons, the reach of the AMT has expanded over time to hit middle-income people it was never intended to tax.
Alert: While the Tax Cuts & Jobs Act, which took effect in 2018, did not repeal the AMT, it made changes in the calculation that will reduce the number of people who have to pay it (see the FAQ on the legislation).
Basics Of The AMT
Generally, each year you must pay either your regular-tax liability or your AMT liability: whichever is higher. For most people, the regular-tax liability always turns out to be greater, so the AMT never comes into play. Unfortunately, employees who exercise incentive stock options (ISOs) and hold the shares beyond the calendar year of exercise face a risk of triggering the AMT—even after tax reform.
It may seem easy to dismiss the AMT if the AMT rates (26% and 28%) are lower than the marginal rate of your regular tax bracket. However, your income as considered under the AMT system can be much higher than it is under the regular-tax system, because fewer deductions are available in the AMT calculation (e.g. no state and local tax deduction). Compared to the current progressive tax rates under the regular tax system, this income also starts getting taxed at a higher rate. If that is the case, your AMT liability at 26% or 28% can turn out to be higher than your regular-tax liability, even if your regular tax bracket has a higher rate.
Alert: Do not expect your employer to give you a form with AMT income (AMTI) on it when you exercise incentive stock options, or to warn you when higher income from stock compensation increases the likelihood of triggering the AMT. You must calculate it and any taxes owed, as explained in a related FAQ.
This website discusses the US federal AMT for individuals. According to the Tax Foundation, five states have an AMT for individuals in their income tax codes: California, Colorado, Connecticut, Iowa, and Minnesota (Wisconsin used to have an AMT but repealed it with effect from tax year 2019 onward).
See the articles and FAQs on this website about AMT topics, including: