Alternative Minimum Tax (AMT)

The Alternative Minimum Tax, or AMT, runs alongside the regular income tax system. A taxpayer computes their liability under both systems and pays whichever is higher. The AMT starts with regular income, adds back certain deductions and preference items that the regular tax allows, and then applies its own rate structure to the resulting figure—called Alternative Minimum Taxable Income, or AMTI.

The AMT matters to wealthy families because many common tax-planning techniques can trigger it. Exercising incentive stock options, claiming accelerated depreciation on certain investments, and receiving income from specific private-market structures are among the items that can increase AMTI. An exemption exists that shields a portion of income from AMT, but this exemption phases out at higher income levels, meaning high earners often receive little or no benefit from it.

A hypothetical family that exercises a large block of stock options in a single year might owe far more under AMT than under the regular tax, even though no cash changed hands at exercise. This surprises many families who assumed the options were simply untaxed until sale. A common confusion is treating AMT as a penalty; it is more accurately described as a floor—a minimum tax liability the system will not let a taxpayer fall below. A CPA must evaluate the AMT exposure of any specific situation.