What Is the Alternative Minimum Tax? Who Has to Pay?

How the Trump Tax Law Changes the AMT

Woman figuring out AMT taxes
Just like this photo, the AMT is a relic of the 1960s. The AMT makes tax time even more annoying and complex. Photo: H. Armstrong Roberts/Getty Images

The Alternative Minimum Tax is a mandatory alternative to the standard income tax. It gets triggered when taxpayers make a certain income. It eliminates many deductions for those in higher brackets to make sure they pay at least some axes. 

That's the annoying part about the AMT. If you make more than the trigger income, you've got to calculate your taxes twice. That's once for the regular income tax, and once for the AMT.

To add insult to injury, you've then got to pay the higher tax bill.

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act. It keeps the AMT, but raises the exemption and phaseout levels from 2018 through 2025. As a result, it will affect 200,000 tax filers instead of the 5 million affected in 2017. The bill includes a cost of living adjustment. Congress eliminated the AMT for corporations. 

How the AMT Works

The AMT is different from the regular tax rate because it doesn't have the standard deduction or personal exemptions. It also doesn't allow popular itemized deductions. These include state and local income taxes, foreign tax credits, and employee expenses. It doesn't allow the interest on home equity mortgages, unless it was used to improve your home. Real estate and personal property taxes are not deductible.

The AMT might also include other income streams not counted by the regular income tax.

These include exercising incentive stock options.  For that reason, the AMT tax is higher than the regular tax.

The AMT tax rate is simpler than the regular tax rates. There are only two tax rates: 26 percent and 28 percent. The rates are 26 percent on the first $187,800 of AMT taxable income, or $93,800 for those who are married filing separately.

The tax rate is 28 percent on amounts above that threshold.

The AMT exemption is much larger than the standard exemption. But it starts to disappear after you reach a certain income level, called the phaseout. Once income hits the phaseout level, $0.25 of the exemption disappears for every dollar above the phaseout. 

Here are the levels for 2017, and under the new tax bill.

Single/Head of Household$54,300$120,700$70,300$500,000
Married Filing Jointly$84,500$160,900$109,400$1M
Married Filing Separate$42,250$80,450N.A.N.A.

Who Has the Pay the AMT

You only have to worry about the AMT if your adjusted gross income is above the exemption. If you make that income or above, that's the AMT taxable income. You may have to calculate the AMTI and pay the higher tax. You can do so on Form 6251. Your tax software package will also do it for you. You can also go to the IRS AMT Assistant

Once you qualify for the AMT in a tax year, you must pay it. But you can adjust your spending to reduce the AMT for next year. 

For that reason, the AMT does not affect everyone above the qualifying income levels. Before the new tax bill, it had the most impact on households earning between $500,000 and $1 million annually.

But even in that bracket, only 62.9 percent paid the AMT. Here is the breakout for 2017, according to the Tax Policy Center.

IncomePercent Who Pay AMT
$0 - $75,000                                     0%
$75,000 - $100,000                      0.2%
$100,000-$200,000                    1.9%
$200,000-$500,000                  29.4%
$500,000 - $1M                           62.9%
$1M+                                             19.9%

The AMT is more likely to snare married taxpayers with children, for several reasons. First, they often have higher incomes, especially if both parents are working. Second, the AMT does not have additional exemptions for each household member. Third, there is no "marriage bonus" under the AMT.

How It Affects the U.S. Economy

Why didn't Congress eliminate the unpopular Alternative Minimum Tax, as Trump promised?

  Our elected officials can't turn down the additional revenue. The AMT produces around $60 billion a year in federal taxes from the top 1 percent of taxpayers. For that reason, it is a progressive tax


Congress created a simplified version of the Alternative Minimum Tax in 1969.  It was originally known as the millionaires' tax. That's because it was designed to make sure the wealthy didn't get away tax free. In 1969, the Internal Revenue Service discovered that 155 millionaires paid no taxes because they used deductions not available to the average worker. Congress applied a higher tax rate on incomes that reached a certain level.  

The Reagan administration created today's AMT to include more widespread exemptions and deductions. It added the personal exemption, state and local taxes, and the standard deduction. It even targeted deductions like union dues and some medical costs. On the flip side, Reagan's AMT tax reform eliminated the more exotic investment deductions that were used only by the very wealthy. 

Congress forgot to allow the income levels to adjust for inflation. That means the definition of wealthy never changed from 1969 levels. That income level would now include just about everyone.

To keep that from happening, Congress passed a "patch" each year that raised the trigger point. Without the temporary fix, families with incomes as low as $30,000 would be subject to the AMT. While the patch protected these families, it also created a lot of uncertainty.

In 2013, Congress permanently set the trigger income levels. It added that the income levels would be adjusted for inflation. Congress added the AMT fix to a law to avoid the fiscal cliff in 2013.