Alternative Minimum Tax

THE ALTERNATIVE minimum tax, or AMT, is a parallel tax system that forces you to calculate how much you owe in federal income taxes using a completely different set of rules. If the amount owed under the AMT is greater than under the usual income tax calculation, you have to pay the difference.

For individuals, the AMT consists of just two tax rates, 26% and 28%. When calculating how much you owe under the AMT, you can’t claim the standard deduction. You can claim itemized deductions, though what counts is severely curtailed. For instance, no deduction is allowed for state, local or property taxes. You can still deduct charitable gifts and most mortgage interest. Deductible retirement plan contributions, which aren’t reported as an itemized deduction, also reduce your income for AMT purposes.

When calculating how much you owe under the AMT, you get the benefit of the much larger AMT exemption. That exemption is adjusted each year for inflation and is now significantly higher, thanks to 2017’s tax law. For unmarried individuals, the exemption is worth $81,300 in 2023, while the exemption for married couples filing jointly is $126,500. In 2024, those figures rise to $85,700 for single individuals and $133,300 for couples. The AMT exemption phases out at higher income levels, so the effective marginal AMT tax rate can be higher than the notional 26% and 28% rates. But the phaseouts occur at very high income levels—another change resulting from the 2017 tax law.

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