Alternative Minimum Tax (AMT)
A parallel tax system that ensures high-income taxpayers pay at least a minimum amount of federal tax.
What is AMT?
The Alternative Minimum Tax (AMT) is a parallel federal income tax calculation that ensures high-income taxpayers cannot reduce their tax bill to near zero through deductions and credits. Taxpayers must calculate their tax liability under both the regular system and the AMT system, then pay whichever is higher. The AMT adds back certain deductions (such as the standard deduction, state/local tax deductions, and some business expenses) and recalculates income. For 2025, the AMT exemption is $88,100 (single) and $137,000 (married filing jointly). The AMT primarily affects upper-middle-income earners who exercise incentive stock options or have large deductions. The Tax Cuts and Jobs Act (2017) significantly reduced AMT exposure for most taxpayers.
Example
An executive exercises $500,000 in incentive stock options (ISOs). The spread between exercise price and market value is added back under AMT rules, potentially creating a large AMT liability even though no regular income tax is triggered by the exercise. This is a classic AMT trap that has caused some executives to owe large tax bills in years when their stock value subsequently declined.
Source: IRS — Alternative Minimum Tax