Understanding the Alternative Minimum Tax

Many taxpayers aren’t aware they’re subject to a little-known tax, called the alternative minimum tax or AMT, until they’ve slogged their way through lots of paperwork, or received an unexpected surprise during an IRS audit. The AMT can get complex quickly, so here’s what you need to know about the tax and your exposure to it.

Morgan Stanley and its affiliates do not provide tax advice. You should always contact your tax advisor for information specific to your situation.

What’s the Alternative Minimum Tax?

Originally enacted as part of the 1969 Tax Reform Act to prevent wealthy taxpayers from using loopholes to pay little to no taxes, today the AMT affects millions of middle-class families it was never intended to target. Congress passed several measures to tie AMT exemptions to inflation. The Tax Cuts and Jobs Act of 2017 (TCJA) made additional modifications to the individual AMT, including higher exemption amounts and phaseout thresholds, that are intended to help lower income households avoid the tax, and the passage of the One Big Beautiful Bill Act (OBBBA) in 2025 permanently preserves the higher AMT exemption amounts introduced in the TCJA, including annual inflation adjustments.

Who Owes It?

The easiest way to understand the AMT is to view it as a separate, parallel tax system, reducing some of the tax benefits higher income families use to lower their tax liabilities. The AMT also has its own set of deductions and different tax rates that, overall, are more onerous on the taxpayer.

Any taxpayer subject to regular federal taxes could potentially be subject to the AMT. As a general rule, anyone with gross annual income above the applicable exemption amount who claims deductions for expenses or benefits from exclusions that are added back in the AMT calculation process should consider how this tax may potentially affect them.

How the Tax Works

The best way to determine if you owe the AMT is to fill out the regular IRS tax forms, as well as IRS Form 6251. Form 6251 requires you to add back certain deductions and exclusions to calculate your alternative minimum taxable income, which is then used to determine your tentative minimum tax. If your tentative minimum tax exceeds your regular tax, you owe AMT equal to the difference between the two amounts. Technically, you pay whichever is higher—your regular tax amount or your AMT amount.

If you are subject to the AMT, you’ll see a big difference in what you can deduct. Many items that are deductible on a regular tax return are either not deductible through the AMT or are treated differently, including:

• State, local and property taxes
  
  
• Foreign tax credit calculations
  
  
• Investment expenses
  
  
• Some medical and dental expenses
  
  
• Interest from some private-activity bonds

You must also take into account the exercise of any incentive stock options when calculating taxable income potentially subject to the AMT. If you exercise incentive stock options and hold the shares beyond the end of the year, the spread between the fair market value on the exercise date and the exercise price must be included in income for AMT purposes. 

Planning Ahead

It's difficult to avoid the tax altogether, but there are ways to potentially lower the burden.

For instance, though state and local taxes are not deductible under AMT rules, you can deduct the refunds, which are considered income under regular tax rules.

Also, if you exercise incentive stock options and hold the shares beyond the end of the year, the spread between the fair market value on the exercise date and the exercise price is included as income for AMT purposes. As a result, the tax basis for the shares you bought is higher for purposes of  the AMT calculation, which may reduce your AMT liability when you sell the shares.
 

While the AMT takes away exemptions and many deductions, it does provide AMT-specific exemptions. The amount varies by filing status and starts to phase out once your income reaches a certain threshold. This means the higher your income, the higher your effective AMT rate.

For the 2025 tax year, the alternative minimum tax exemption is $137,000 for married couples filing jointly and surviving spouses, $88,100 for single filers and $68,650 for married couples filing separately. For 2025, the AMT exemption begins to phase out at a rate of 25 percent of excess AMT income over $1,252,700 for married filing jointly and surviving spouses. The phaseout begins at $626,350 for married couples filing separately and for single filers (not including surviving spouses).

For the 2026 tax year, the alternative minimum tax exemption is $140,200 for married couples filing jointly and surviving spouses, $90,100 for single filers and $70,100 for married couples filing separately. For 2026, the AMT exemption begins to phase out at a rate of 50 percent of excess AMT income over $1,000,000 for married filing jointly and surviving spouses, $500,000 for single filers and $500,000 for married filing separately.

To potentially claim your current year AMT payment on future tax returns, you may need to complete IRS Form 8801. Consider consulting with a tax advisor to determine your eligibility and ensure accurate completion of the form.