Who qualifies for the Alternative Minimum Tax (AMT) in 2025, and how can I avoid it?

The Alternative Minimum Tax (AMT) is a parallel tax system designed to ensure that high-income taxpayers who benefit from certain deductions and tax preferences pay at least a minimum amount of federal income tax. While many taxpayers fly under the radar, understanding who might be subject to AMT in 2025 is crucial for effective tax planning.

### Who is Subject to AMT?

Generally, the AMT applies to taxpayers who have a substantial amount of "tax preference items" or "adjustments" that reduce their regular tax liability. The AMT calculation involves starting with your regular taxable income and then adding back certain deductions that are disallowed or limited under the AMT rules. These adjustments and preferences can include:

• State and Local Taxes (SALT) Deduction: While the regular tax deduction for state and local income, sales, and property taxes is capped at USD 10,000 (under current law, though this amount is subject to legislative change), this deduction is generally not allowed for AMT purposes. This single item is a major driver for many middle-to-high-income earners in high-tax states to be subject to AMT.
• Incentive Stock Options (ISOs): The bargain element (the difference between the stock's fair market value and the exercise price) when exercising an ISO is an AMT adjustment.
• Large Itemized Deductions: Certain itemized deductions that are allowed for regular tax purposes may be disallowed or limited for AMT.
• Tax-Exempt Interest: Interest earned on certain private activity bonds may be included for AMT calculations.

For the 2025 tax year (filed in 2026), the exemption amounts and phase-out thresholds are key. The AMT exemption amount is indexed for inflation. For married taxpayers filing jointly, the exemption is substantial, but it begins to phase out once Alternative Minimum Taxable Income (AMTI) exceeds a certain threshold. If your AMTI is too high, the exemption amount is reduced, increasing the likelihood that you will owe AMT.

### Calculating and Avoiding AMT

To determine if you are subject to AMT, you must complete IRS Form 6251, Alternative Minimum Tax – Individuals. This form compares your tentative minimum tax (calculated using AMT rules) against your regular tax liability. If the tentative minimum tax is higher, you pay the difference as the AMT.

Strategies to potentially avoid or minimize AMT liability include:

• Managing ISO Exercises: Timing the exercise of Incentive Stock Options can significantly impact your AMTI for the year. Exercising a large number of ISOs in one year can trigger AMT, even if you haven't sold the stock.
• Reviewing State Taxes: Since the SALT deduction is disallowed for AMT, taxpayers in high-tax states must recognize that their effective state tax burden is effectively higher for AMT purposes.
• Tax-Loss Harvesting: Strategic selling of investments to realize capital losses can help offset capital gains recognized in the AMTI calculation.
• Timing Deductions: If you anticipate being close to the AMT threshold, accelerating or deferring certain deductions or income items between tax years can sometimes push you above or below the phase-out limits.

Because the AMT calculation is complex and highly dependent on an individual's specific itemized deductions and preference items, consulting with a qualified tax professional is strongly recommended if you suspect you might be subject to the AMT in 2025.