Will Your AMT Exposure Change Under the New Tax Rules?

Significantly fewer taxpayers have owed the alternative minimum tax (AMT) for the last several years. This is because the Tax Cuts and Jobs Act (TCJA) made the individual AMT rules more taxpayer-friendly for 2018 through 2025.

The One Big Beautiful Bill Act (OBBBA) contains mixed news about individual taxpayers' AMT exposure. Here's an overview of the AMT rules and how the new law's provisions could impact your personal tax situation.

AMT Basics

The AMT is a separate federal income tax system from the regular federal income tax system. What's the difference? Under the AMT rules, certain types of income that are tax-free under the regular tax rules are taxable, and some deductions that you can claim under the regular tax rules are disallowed.

The AMT calculation begins with the taxable income calculated under the regular tax rules. Then various additions and subtractions are made to reflect the differing AMT rules. The result is your AMT income. If the AMT based on that income exceeds your regular tax obligation, you owe the larger AMT amount.

AMT Rates

The maximum AMT rate is 28% versus the 37% maximum regular federal income tax rate. For 2025, the maximum 28% AMT rate kicks in when your AMT income exceeds the following inflation-adjusted thresholds:

• $239,100 for married couples who file jointly, or
• $119,550 for other taxpayers.

Below these AMT income thresholds, the AMT rate is 26%.

Although the 26% and 28% AMT rates are lower than the 32%, 35%, and 37% regular federal income tax rates, you may still owe AMT because some tax breaks that are allowed for regular tax purposes are disallowed for AMT purposes.

AMT Exemptions

Under the AMT rules, an inflation-adjusted AMT exemption is subtracted when calculating your AMT income. The TCJA significantly increased the exemption amounts for 2018 through 2025. The OBBBA made these increased exemption amounts, with annual inflation adjustments, permanent.

For 2025, the exemption amounts are:

• $137,000 for joint filers,
• $88,100 for single filers and heads of households, and
• $68,500 for separate filers.

However, at high levels of AMT income, your AMT exemption is phased out (that is, reduced or eliminated). This increases the odds that you'll owe the AMT. The TCJA dramatically increased the phaseout thresholds to $1 million for joint filers and $500,000 for other filers, with annual inflation adjustments.

For 2025, the exemption begins to be phased out when AMT income exceeds:

• $1,252,700 for joint filers, or
• $626,350 for other filers.

Your exemption is reduced by 25% of the excess of your AMT income over the applicable phaseout threshold.

OBBBA Changes

The OBBBA makes three changes to the AMT exemption rules starting in 2026:

1. It permanently extends the TCJA exemption phaseout thresholds of $1 million for joint filers and $500,000 for other taxpayers.
2. It resets the exemption phaseout thresholds to those TCJA base amounts, with annual inflation adjustments after 2026. So, for 2026, these thresholds will revert to $1 million for joint filers and $500,000 for other taxpayers, which are significantly lower than the thresholds for 2025.
3. It increases the exemption phaseout percentage from 25% to 50%.

As a result, AMT exemptions for higher-income taxpayers will be phased out at lower income levels and faster under the OBBBA than under prior law. That means more taxpayers may owe the AMT for 2026 and beyond — and people who are accustomed to paying the AMT may face higher AMT obligations going forward.

AMT Risk Factors

In general, the TCJA significantly reduced the odds that you'll owe the AMT. Now the OBBBA increases the odds for some taxpayers. Who's at risk of owing the AMT? Here are some common factors that could increase your exposure:

Substantial income from capital gains or other sources. High income can cause your AMT exemption to be partially or completely phased out. That increases the odds that you'll owe the AMT. If you report significant gains from selling taxable investments, you could be at risk of owing the AMT. Consider spreading investment gains over several years or managing business income to preserve your AMT exemption — and minimize (or eliminate) your AMT exposure.

Itemized SALT deductions. State and local tax (SALT) expenses aren't deductible under the AMT rules. For 2018 through 2024, the TCJA generally limited the regular tax itemized deduction for SALT expenses to $10,000 ($5,000 for single filers). For 2025 through 2029, the OBBBA generally increases the SALT cap to $40,000 ($20,000 for single filers), subject to a limitation for higher-income taxpayers. Overall, the SALT cap reduces this AMT risk factor. But the higher cap under the OBBBA could increase AMT exposure for certain taxpayers for 2025 through 2029.

Exercised ISOs. Exercising incentive stock options (ISOs) can affect your federal income tax obligations. The so-called "bargain element" (the difference between the market value of the shares on the exercise date and your ISO exercise price) is excluded from income under the regular tax rules, but it's added back when calculating income under the AMT rules. Consider exercising ISOs over several years to preserve your AMT exemption — and minimize (or eliminate) your AMT exposure.

Standard deductions. Standard deductions are disallowed under the AMT rules. The TCJA significantly increased the standard deduction amounts for 2018 through 2025 with annual inflation adjustments. The new law made those increases permanent with continued annual inflation adjustments. The higher deductions increase taxpayers' exposure to the AMT for taxpayers who don't itemize.

Depreciation deductions from business assets. Regular tax depreciation deductions from sole proprietorships and investments in pass-through entities (S corporations, partnerships and, generally, limited liability companies) can create AMT adjustments. When depreciation deductions are disallowed under the AMT rules, it increases AMT income and the odds of owing the AMT.

Under the current tax rules, businesses can often immediately deduct the entire cost of many depreciable assets for both regular tax and AMT purposes. This reduces the AMT risk for most newly acquired assets. However, the risk factor still exists for older assets depreciated over extended periods, because they were acquired before the increased first-year depreciation breaks were available. The risk factor also exists for business owners who choose not to claim the first-year depreciation tax breaks.

Private activity bond interest income. This category of interest income is tax-free for regular tax purposes. But it's taxable under the AMT rules. Taxpayers with substantial interest income from these bonds are at higher risk of triggering the AMT.

Seek Professional Guidance

Don't assume you're exempt from the AMT. Failure to make timely tax payments, including any AMT liability, for the year could result in assessments for back taxes, interest and penalties. Work with your tax advisor before year end to assess your AMT exposure under the new law and devise strategies to minimize your AMT risk for 2025 and beyond.

Close-Up on the MTC

A portion of your alternative minimum tax (AMT) liability can potentially generate the minimum tax credit (MTC). If so, you can carry the MTC forward to future tax years and use it to reduce your regular tax liability to the point where it equals your AMT liability.

MTCs are generated only by AMT liabilities that are attributable to so-called "deferral preferences." These are items that are recognized at different times for regular tax purposes and AMT purposes. Examples of deferral preferences are depreciation deductions and the bargain element when you exercise an incentive stock option.

MTCs are not generated by AMT liabilities that are attributable to so-called "exclusion preferences." These items are permanently treated differently under the regular tax and AMT rules. Exclusion preferences include:

• Standard deductions,
• Disallowed itemized deductions under the AMT rules, such as state and local taxes, and
• Tax-exempt interest from certain private-activity bonds.

Contact your tax advisor for more information on MTCs.