Congress created the alternative minimum tax (AMT) in 1979. It was designed to work with the regular income tax system as a “shadow tax.” Originally focused on 155 taxpayers, the AMT affected fewer than 1 million annually through the late 1990s.
The Economic Growth and Tax Relief Reconciliation Act of 2001 reduced regular tax rates. This change greatly impacted the number of taxpayers affected by the AMT. Estimates put the number of taxpayers paying the alternative tax in 2017 just north of 5.2 million!
Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (TCJA) of 2017 included several provisions that reduced the impact of the AMT. This involved higher AMT exemptions and an increased phase-out threshold for those exemptions. It also modified itemized deductions that were previously considered preference items. The government eliminated personal and miscellaneous itemized deductions and lowered caps on state and local tax deductions.
The estimated result of TCJA’s changes to the number of AMT taxpayers is a reduction of approximately 5 million, down to only 200,000. The number of taxpayers subject to AMT has remained fairly constant for the last seven years.
For 2025, the AMT exemption, beginning of the phase-out, and phase-out rate are listed below:
| Filing Status | Exemption Amount | Phase-Out | Phase-Out Rate |
| Single | $88,100 | $626,350 | 25% |
| Married Filing Jointly | $137,000 | $1,252,700 | 25% |
One Big Beautiful Bill Act
The legislation, known as the One Big Beautiful Bill Act (OBBBA), made small changes to the AMT system. However, we believe that the AMT adjustments and itemized deduction changes will have some surprising effects for many taxpayers.
| For more information on the OBBBA, visit our library of articles. |
For 2026, the exemption amounts remain the same. However, the income level to start phasing out is reset to the 2018 level, a reduction of over a quarter million dollars! Additionally, the phase-out rate increased to 50%, making the exemption phase-out much quicker than before.
| Filing Status | Exemption Amount | Phase-Out | Phase-Out Rate |
| Single | $88,100 | $500,000 | 50% |
| Married Filing Jointly | $137,000 | $1,000,000 | 50% |
Hypothetical Examples
- Jameson makes $300,000 per year from his employer after deductions for 401(k) contributions, medical insurance, etc. His itemized deductions include $45,000 for state and local taxes (SALT), $35,000 for mortgage interest, and $10,000 for charitable giving. He is debating when to exercise some incentive stock options (ISO) that were granted several years ago. If Jameson exercises the ISOs in 2025, his taxable income is $215,000, the total regular tax is $46,763, and AMT adds $17,087 to the bill. Waiting until 2026 increases the AMT hit by approximately $800, for a total AMT tax of $17,912.
- Sandra, Jameson’s coworker, makes $500,000 per year from her employer and has the same itemized deductions. She also has the same ISOs to exercise. What might surprise you is that her AMT hit is much lower than Jameson’s. She pays more in taxes because the tax rate on her income is higher (35% marginal versus 32% for Jameson). Still, the AMT difference between 2025 and 2026 grows significantly, from $4,153 to $9,593.
- Lastly, Cameron works with Jameson and Sandra. He makes $600,000 each year and has the same itemized deductions and ISO exercise decisions. Cameron has no AMT liability in 2025 when he exercises the ISO. This is because he loses the higher SALT deductions for regular tax purposes (which is an add-back item for AMT). Therefore, more of his income is taxed at higher regular rates, and he escapes AMT with approximately $37,000 of room to spare. Cameron is subject to AMT if he waits until 2026 to exercise. That bill comes to $6,653 in higher taxes by waiting one year!
If you are a Mercer Advisors client, contact your advisor to run tax projections before year-end. If you’re not a client and would like to learn more, let’s talk.
