What the AMT? I Owe More Taxes?!

High-income earners should be aware of the Alternative Minimum Tax (AMT) system, which may cause their tax bills to be higher than expected.

The AMT is a second tax system that requires high-income earners to calculate their taxes twice, once under the ordinary tax system and a second time under the AMT tax system, and pay the higher amount of taxes.

For 2023, the AMT tax rates are 26% or 28% depending on your AMT Income level as shown below. So if you are a single or married filer earning less than $220,700 you will pay a 26% AMT tax rate and 28% if you earn more than $220,700.

Note: AMT Income is calculated differently versus regular taxable income and allows fewer deductions (see the section below on how the AMT is calculated).

Tax Filing Status	AMT Income Tax Brackets
Married Filing Separately	26% up to $110,350 (28% after)
Single, Married, All Others	26% up to $220,700 (28% after)

While everyone gets an AMT Exemption or amount of income up to a certain limit that is excluded before AMT taxes are triggered, this exemption eventually phases out for high-income earners.

Tax Filing Status	AMT Exemption Amount
Single Filers	$81,300
Married Filing Jointly	$126,500

The AMT Exemption amount begins to phase out at 25 cents per dollar of income over the Phaseout Thresholds shown below. A single filer’s exemption begins to phase out at $578,150 and fully phases out after $903,350. For a married couple, the phaseout begins at $1,156,300 and fully phases out after $1,662,300 (for an example see the section below on how the AMT is calculated).

Tax Filing Status	AMT Exemption Phaseout Thresholds
Single Filers	Starts after $578,150 (full phaseout at $903,350)
Married Filing Jointly	Starts after $1,156,300 (full phaseout at $1,662,300)

Why The AMT Was Created

The AMT was created back in the 1960s to prevent high-income earners from avoiding income tax by adding back items that are not taxed by the standard tax system. Thus, the AMT forces high-income earners to pay a minimum amount of federal taxes.

The Tax Cuts and Jobs Act (TJCA) in 2017 vastly reduced the number of filers who had to pay the AMT. From more than 5 million to just 200,000!

This is primarily because the TJCA made 3 big changes:

1. Increased the AMT Exemption
2. Increased the exemption Phaseout Thresholds
3. Scaled back the largest tax deductions which are added back to AMT Income (personal exemption, SALT deduction, and miscellaneous itemized deductions).

However, the TCJA is set to expire at the end of 2025 and the AMT will return and affect millions if no legislation is passed. Even if the AMT doesn’t affect you today, as a high-income earner, it’s wise to be aware of the AMT tax system and prepare for a likely case in the future when you may have to pay more taxes.  

How The AMT Is Calculated

The AMT tax calculation is complicated and best done by using tax software (or a free calculator found online) or with the help of a tax professional. However, you should aim to understand at a high level how the calculations work:

1. Calculate your AMT Income based on AMT rules (IRS Form 6251) which reduces the number of tax deductions compared to the ordinary tax system.
2. Once you have your AMT Income, subtract out the AMT Exemption amount of $81,300 for a single filer and $126,500 for a married couple filing jointly.
3. If your AMT Income is higher than the Phaseout Thresholds ($578,150 for single / $1,156,300 for married), your AMT Exemption will be reduced or phased out at 25 cents for every dollar of AMT Income over the Phaseout Thresholds until it is completely gone once AMT Income is too high (at $903,350 for single / $1,662,300 for married).
   • For example, Henry is a single individual with an AMT Income of $750,000. He subtracts the Phaseout Threshold of $578,150 from his AMT Income and divides the additional income by 4 which reduces his AMT Exemption by $42,963.
   • Subtracting that $42,963 amount from his AMT Exemption amount of $81,300 leaves him with $38,338 of exemption to reduce his taxable AMT Income.
   • $750,000 of total AMT Income less $38,338 of remaining exemption leaves Henry with $711,663 of taxable AMT Income.
4. Multiply the taxable AMT Income that’s left by the AMT tax rates (26% up to $220,700 for single/married and 28% for any amount over) and calculate how much taxes you owe under the AMT. If taxes are higher under the AMT system versus the ordinary income tax system, you will need to pay the higher tax amount.
   • For Henry, with $711,663 of AMT taxable income, the first $220,700 is taxed at 26% ($57,382) and the remaining $490,963 is taxed at 28% ($137,470) for a total AMT tax liability of $194,852.
   • If his ordinary tax liability is only $150,000, he will need to pay the higher $194,852 AMT tax liability.

Common Scenarios That Trigger The AMT

While calculating the AMT tax is complicated, there are a few common scenarios you should know that tend to trigger it.

• High income and high deductions: If your total household income is over the Phaseout Thresholds ($578,150 for single / $1,156,300 for married) and you have a significant amount of itemized deductions.
• Exercising stock options: If you buy your company’s stock at a discounted price by exercising incentive stock options (ISOs), it isn’t typically a taxable event until you sell the shares. However, the AMT system creates a paper profit that’s considered taxable income even if you do not sell the actual shares.
• Large realized capital gains: While long-term capital gains (and qualified dividends) are taxed at lower rates under both the ordinary and AMT tax systems, having large capital gains in one year can reduce the amount of AMT Exemption you receive and cause the AMT tax to increase.

Save Money By Tax Planning

At a high level, the AMT is triggered by certain types of income and deductions.

While it’s difficult to avoid paying the AMT completely if you qualify, you can incorporate strategies into your tax planning to minimize your AMT tax liability.

The marriage penalty for the AMT is obvious as the income limit ($220,700) to hit the highest AMT tax bracket of 28% is the same for both single and married filers and the AMT Exemption for married filers is only ~56% more than for single filers.  

Here are some thoughts to incorporate into your tax planning to keep taxable AMT Income as low as possible:  

• Max out contributions to qualified retirement accounts that can lower your AMT Income like a 401k, or deductible Traditional IRA (although high-income earners will likely only qualify for a non-deductible IRA).
• Contribute to other pre-tax accounts like a Flexible Spending Account or a Health Savings Account (the ultimate tax-saving investment account)
• Use employer pre-tax Cafeteria Plans to pay for expenses like health insurance, life insurance, long-term disability insurance (although you should get your own LTDI), or commuting expenses
• Shifting some investments to ones that produce tax-exempt income such as municipal bonds which lowers your AMT Income
• Rebalance the investment portfolio to emphasize growth stocks and tax-efficient mutual funds
• Defer capital gains on existing investments into the future and plan around taking large capital gains (consider Tax Loss Harvesting to offset future capital gains)
• Watch the timing of certain payments such as prepaying real estate taxes or local income taxes which may save on regular income tax but can increase AMT tax

At the end of the day, the AMT tax laws are complex and constantly changing so nothing here is tax advice.

For high-income earners, it’s wise to invest time in tax planning as taxes will be your biggest ongoing expense.

I’ve been able to use strategies such as tax-arbitraging to reduce cost of living and aggressively save towards financial freedom.

With the 2025 TCJA expiration date on the horizon, even if the AMT does not affect you today it’s important to know and understand it at a high level.

If you’re a Rich Henry reader you’re focused on becoming rich and maximizing your life to the fullest.

The AMT will undoubtedly affect you one day, and when it does you’ll know what to do and can work with a tax professional to save yourself thousands in taxes every year!