What Is the Alternative Minimum Tax?

Paula Heid is an assistant director in High-Net-Worth Tax Planning at Northwestern Mutual.

Wouldn’t it be amazing if you could use tax deductions and credits to write off all of your income so that you could avoid paying income taxes entirely? There was a time, way back before 1969, that this was possible. That’s the year that Congress passed the alternative minimum tax (AMT) into law to ensure that all taxpayers, including those with higher incomes who benefit from certain tax breaks, pay a minimum amount of tax.

Below, we explain what the alternative minimum tax is, why it exists and how it’s calculated. We also review how recent tax laws have changed and updated the AMT since its creation and answer other common questions you might have.

What is the alternative minimum tax?

The AMT is simply a different way of calculating income taxes for individuals and households with high income. It works by adding back certain disallowed deductions or income exclusions that apply for regular tax—ensuring that taxpayers with higher incomes contribute an appropriate amount in taxes.

To determine if you’re subject to the AMT, you’ll calculate your income taxes twice: once using regular tax rules and once under separate AMT rules. You’ll then pay whichever amount is higher.

Why does the AMT exist?

Before the AMT was passed into law in 1969, it was possible for some taxpayers to effectively pay nothing in income taxes by claiming a large number of tax deductions and credits. Although this was done by a relatively small number of individuals, it was generally taxpayers with high income who could put these deductions to use, raising questions and concerns about whether the regular tax system was equitable.

Instead of simply doing away with the deductions and credits in question, which would have had an impact on all taxpayers, Congress devised the AMT. This alternative means of calculating income taxes would apply only to individuals and households with a certain level of income each year (i.e., above an applicable exemption amount), ensuring that they would indeed pay some form of taxes.

Who is most likely to pay the AMT?

The AMT most commonly applies to taxpayers with high economic income who benefit from certain deductions and income exclusions that significantly lower their regular income tax liability. Here are some situations that can increase the odds of owing the AMT:

• You’ve realized significant capital gains during the year on top of your regular pay, boosting your income past the AMT exemption amount.
• You’ve claimed substantial itemized deductions (e.g., state income, real estate taxes and medical expenses) that can trigger the AMT, as these deductions are limited under the AMT rules.
• You exercise incentive stock options (ISOs), allowing you to purchase stock at preset (usually discounted) prices. The difference in the discounted price and the fair market value increases your income for AMT purposes.
• You earn a large amount of passive income from certain types of municipal bonds.

How is the AMT calculated?

The AMT is calculated by determining your tax liability under two sets of rules, whether you do it yourself using tax preparation software or hire a tax professional.

First, you’ll calculate your regular taxable income and liability as you normally would, using IRS Form 1040. This calculation should include any deductions, adjustments or tax credits you are entitled to.

Next, you’ll use IRS Form 6251 to calculate your alternative minimum taxable income (AMTI), making adjustments to your regular taxable income (from first calculation). Some of the more common adjustments and preferences include the following:

• The standard deduction
• State and local tax deductions (if itemized and claimed on Schedule A)
• Depreciation adjustments (if required to be recomputed for AMT)
• Certain interest income that is tax-exempt under regular tax rules
• Certain oil and gas items
• ISO adjustments (when ISOs were exercised during tax year)

The resulting figure is your AMTI. Next, you will need to apply any AMT exemption allowed. This exemption is subject to phaseout and can be reduced to $0 depending on your AMTI. The exemption is reduced by $0.25 for every dollar AMTI exceeds an applicable threshold until it is reduced to zero.

After subtracting any applicable exemption amount from your AMTI, the remaining figure is what is subject to the alternative minimum tax rate(s), which could be 26 percent or 28 percent—again, depending on your income.

Finally, you will compare this AMT liability to your regular tax liability. Whichever number is higher will be the number you are required to pay as income taxes.

Alternative minimum tax exemption and phaseout

The IRS adjusts the AMT exemption limit each year based on inflation. The chart below notes these levels for the 2025 and 2026 tax years.

Alternative minimum tax rates

The alternative minimum tax is calculated using just two tax rates: 26 percent and 28 percent. Which rate you’re required to pay will depend on your AMTI.

Interestingly, this is much more streamlined than the seven income tax brackets used when calculating income taxes the normal way.

What impact did new tax laws have on the AMT?

In 2018, lawmakers passed the Tax Cuts and Jobs Act (TCJA), which included a number of provisions related to the AMT, including:

• Increasing the AMT exemption amount and pegging it to inflation.
• Significantly increasing the income ranges that would trigger the exemption phaseout (to $500,000 for single filers and heads of household and $1,000,000 for those who are married filing jointly) and pegging it to inflation.

The TCJA significantly reduced the number of people subject to AMT. The One Big Beautiful Bill Act, passed in 2025, built upon these changes. It made the new higher, inflation-adjusted exemption amounts permanent. It also made the new exemption phaseout thresholds permanent. But instead of keeping the inflation-adjusted figures for those phaseout thresholds, it reset them to $500,000 and $1,000,000 for the 2026 tax year—significantly lower than the 2025 phaseout thresholds. After 2026, these amounts will again be adjusted for inflation on an annual basis.

Another big change: Once a taxpayer hits the phaseout threshold, the phaseout rate accelerates from the current 25 percent to a much higher 50 percent.

Navigating the AMT

If you do pay AMT in any year, you may be able to claim an AMT credit in a subsequent year. It is a non-refundable tax credit and can be claimed in a subsequent year only when the taxpayer's regular tax liability is higher than their AMT liability. The credit amount is limited to the difference between the two tax calculations for the respective year. Any unused AMT credit can be carried forward indefinitely to future tax years until it is fully utilized.

Determining whether you are subject to the AMT—and if you are, how much you actually owe in taxes—may feel complicated. If you think you may be subject to the AMT, engaging a tax professional could be a smart move. You can also bring your Northwestern Mutual financial representative into the discussion so they can work with your tax professional to help keep your overall financial plan tax-efficient.

This publication is not intended as legal or tax advice. Financial Representatives do not render tax advice. Consult with a tax professional for tax advice that is specific to your situation.