How the AMT works against you, and what you can control

The Alternative Minimum Tax (AMT) is a separate tax calculation that runs parallel to your regular tax. If your AMT comes out higher than your regular tax, you pay the AMT instead. You cannot eliminate the AMT if you are subject to it in a given year, but you can shift income and deductions across years to reduce how often you trigger it, and you can choose which deductions to claim strategically.

The core problem is that the AMT disallows or limits deductions that your regular tax allows. State and local taxes (SALT), mortgage interest on loans above $750,000, and miscellaneous itemized deductions are either capped or removed entirely under AMT rules. If you have high income, exercise stock options, or claim large deductions, you are more likely to hit the AMT threshold. The strategies below work by either reducing your AMT income or by timing income and deductions to years when you will not owe AMT.

Key Takeaways

  • The AMT disallows state and local tax deductions entirely, so bunching charitable donations and property taxes into alternate years can help you avoid the AMT threshold in some years.
  • Exercising incentive stock options (ISOs) in a year when you expect lower income, or deferring them to a year when you have capital losses to offset, reduces AMT exposure.
  • Timing the sale of appreciated securities to harvest losses in high-income years can lower your AMT income and may create regular tax losses you can carry forward.
  • Spreading large one-time income events (bonuses, business sales, rental income spikes) across multiple years through installment sales or deferred compensation agreements reduces the chance of triggering AMT in any single year.
  • Working with a tax professional to model your AMT liability before year-end gives you time to execute timing strategies that actually reduce what you owe.

Bunch deductions in alternate years to stay below the AMT threshold

The AMT exemption amount (the income level at which AMT kicks in) varies by filing status and changes each year. For 2024, the exemption is $85,975 for single filers and $133,300 for married filing jointly, but these numbers adjust annually for inflation. Once your AMT income exceeds the exemption, you owe 26% or 28% tax on the excess, which often exceeds your regular tax rate.

Because the AMT disallows state and local tax deductions and caps mortgage interest, you cannot reduce your AMT income by claiming these deductions. However, you can reduce your regular taxable income in years when you are close to the AMT threshold. Charitable donations, business expenses, and capital losses all reduce both regular and AMT income. If you are near the threshold, consider deferring charitable donations to the following year, or accelerating them from the following year into the current one, so that in at least one of the two years your income stays below the exemption.

Example: You expect $200,000 in income this year and $150,000 next year. You were planning to donate $30,000 to charity over the next two years. If you donate $30,000 this year, your AMT income stays above the threshold both years. If you donate nothing this year and $30,000 next year, next year's income drops to $120,000, below the exemption, and you owe no AMT that year. You still pay the same total tax over two years, but you avoid AMT in one of them.

Time incentive stock option exercises to years with lower income or offsetting losses

Incentive stock options (ISOs) create a unique AMT problem. When you exercise an ISO, the difference between the exercise price and the fair market value of the stock on the exercise date is treated as income for AMT purposes only — it does not appear on your regular tax return. This "spread" can be substantial and can push you into AMT even if your regular taxable income is moderate.

If you have control over when you exercise ISOs, exercise them in years when your other income is low, or in years when you have capital losses that can offset the AMT income. If you exercised ISOs last year and the stock price has fallen, you may have a capital loss when you sell. That loss reduces your AMT income in the year of sale. Conversely, if you know you will have a large capital loss in a future year (from the sale of a depreciated investment), consider deferring your ISO exercise until that year so the loss offsets the ISO spread.

If your employer allows it, you can also spread exercises over multiple years rather than exercising a large block in one year. Smaller exercises in multiple years may keep you below the AMT threshold in each year, whereas one large exercise in a single year would trigger AMT.

Harvest capital losses to offset AMT income in high-income years

Capital losses reduce both your regular taxable income and your AMT income. In years when you expect to owe AMT, selling appreciated securities at a loss can lower your AMT liability. This strategy, called tax-loss harvesting, is most effective when you have securities that have declined in value and you were considering selling them anyway.

The wash-sale rule prevents you from buying back the same or substantially identical security within 30 days before or after the sale. However, you can sell a security at a loss and when ready buy a similar (but not identical) security in the same asset class. For example, you can sell shares of one large-cap index fund at a loss and buy shares of a different large-cap index fund. This keeps your portfolio allocation the same while locking in the loss for tax purposes.

Capital losses that exceed your capital gains in a year can be carried forward indefinitely. If you harvest a large loss in a year when you owe AMT, the loss reduces your AMT income when ready. Any unused loss carries forward to future years and reduces your regular taxable income, even if you do not owe AMT in those years.

Spread large one-time income events across multiple years

A single large income event — a bonus, a business sale, rental income from a property sale, or a severance package — can push you well above the AMT threshold in one year. If you have any control over the timing or structure of this income, spreading it across two or more years reduces the chance of triggering AMT in any single year.

If you are selling a business or investment property, ask your buyer whether they will accept an installment sale agreement. Under an installment sale, you receive payments over multiple years and report income as you receive each payment. This spreads the income and may keep you below the AMT threshold in each year. Similarly, if you are negotiating a severance or bonus, ask whether your employer will defer part of the payment to the following year. Some employers will agree if the deferral is requested before the income is earned.

If you receive a large bonus or commission in December, consider whether you can defer it to January through a written agreement with your employer. The IRS allows this if the agreement is in place before the income is earned. Deferring even half the bonus to the next year can be enough to drop you below the AMT threshold in the current year.

Reconsider itemized deductions versus the standard deduction

Under regular tax rules, you can choose to itemize deductions (mortgage interest, SALT, charitable donations, and others) or take the standard deduction, whichever is larger. Under AMT rules, you cannot take the standard deduction, and many itemized deductions are disallowed or capped. This means that in years when you owe AMT, your deductions are worth less.

If you are close to the AMT threshold, calculate your tax both ways: with itemized deductions and with the standard deduction. In some cases, taking the standard deduction for regular tax purposes (which lowers your regular taxable income) while still owing AMT on a higher AMT income base may result in lower total tax than itemizing. This is counterintuitive, but it can happen. A tax professional can run this calculation for you before year-end.

Additionally, if you know you will owe AMT, do not waste deductions that the AMT does not allow. For example, if the AMT disallows your state tax deduction, paying extra state taxes in that year does not reduce your AMT. Instead, consider deferring the state tax payment to a year when you will not owe AMT, or using the money for a deduction the AMT does allow, such as a charitable donation.

Work with a tax professional to model your AMT before year-end

The AMT calculation is complex, and the benefit of timing strategies depends on your specific income, deductions, and the year-to-year variation in both. A tax professional can run a projection of your AMT liability in October or November, before year-end, and identify which strategies will actually reduce your tax. This is far more effective than trying to implement strategies after the year has ended.

A projection should show your regular tax, your AMT, and which one you will owe. It should also show how much each strategy (bunching deductions, deferring income, harvesting losses) would reduce your total tax. Some strategies that sound good in theory may not help you because your income is too high or your deductions are too low. A professional can tell you which moves are worth the effort.

If you have ISOs, a large bonus coming, or a business or property sale planned, mention these to your tax professional in the fall so they can model the impact before you exercise, receive the bonus, or close the sale. In many cases, the timing of these events is flexible, and a small shift can save thousands in AMT.

Frequently Asked Questions

Can I carry forward an AMT credit to future years?

Yes. If you pay AMT in a year when your regular tax is lower, you can claim an AMT credit in future years when your regular tax exceeds your AMT. The credit offsets your regular tax dollar-for-dollar, but only to the extent that your regular tax exceeds your AMT in that future year. The credit carries forward indefinitely, but it may take several years to use it all if your income remains high.

Does the AMT explore to long-term capital gains?

Long-term capital gains are taxed at preferential rates under both regular and AMT rules, so they do not increase your AMT income as much as ordinary income does. However, they still count toward your AMT income and can push you over the exemption threshold. Short-term gains and losses are treated the same under both systems.

What if I have a large charitable donation I want to make?

Charitable donations reduce both regular and AMT income, so they are one of the few deductions that help you avoid AMT. If you are planning a large donation, consider making it in a year when you expect high income, because the donation will reduce your AMT income and may keep you below the threshold. If you are already below the threshold, the donation may not help you avoid AMT that year, so consider deferring it to a future high-income year.

Does the AMT explore to rental income?

Yes. Rental income counts toward your AMT income, and depreciation deductions on rental property are allowed under both regular and AMT rules. However, passive activity losses from rental property are subject to the same limits under both systems, so the AMT does not create an additional restriction there. If you have rental income, include it in your AMT projection.

Can I use a donor-advised fund to bunch charitable donations and avoid AMT?

Yes. A donor-advised fund (DAF) allows you to make a large charitable donation in one year and recommend grants to charities over multiple future years. The donation is deductible in the year you fund the DAF, which reduces your regular and AMT income in that year. If you bunch donations into a high-income year and fund a DAF, you can reduce your AMT liability in that year while still supporting charities over time.