California’s Alternative Minimum Tax (AMT) is an additional tax designed to ensure that high-income individuals pay a fair share by limiting certain deductions and tax benefits. The AMT runs parallel to the standard tax system, meaning that taxpayers must calculate their taxes under both the regular and AMT rules—and pay the higher amount.
If you’re a high-income earner in California, understanding how the AMT applies in 2025 can help you plan accordingly and avoid unexpected tax liabilities.
How the AMT Differs from Regular Income Tax
The AMT is different from the standard tax system because it eliminates or reduces many common deductions and credits. Instead of using the traditional tax brackets and deductions, AMT applies a flat tax rate to a broader definition of taxable income.
Key Differences Between the Federal and California AMT
While both the IRS and California have an AMT, they operate under different rules. Here’s how they compare:
| Federal AMT (IRS) | California AMT |
| The AMT exemption amount for 2025 is $88,100 for single filers and $137,000 for married couples filing jointly. (IRS) | California does not offer an AMT exemption, which means more taxpayers can be affected. (FTB) |
| Disallows state and local tax deductions (SALT deduction) | Allows state income tax deductions for regular tax purposes but adds them back under AMT rules. |
| Two AMT tax rates: 26% and 28% depending on income | California AMT tax rate: 7% (FTB) |
| Applies to taxpayers with large deductions, incentive stock options (ISOs), or high capital gains | Applies to California residents who earn high incomes and claim substantial deductions |
[Source: NerdWallet – Alternative Minimum Tax (AMT) Explained]
Who Is Affected by California’s AMT?
Not all taxpayers need to worry about the AMT. However, if you meet any of these conditions, you could be subject to the AMT in California:
✔️ You have high itemized deductions (including mortgage interest, medical expenses, or state/local tax deductions).
✔️ You exercise incentive stock options (ISOs) and don’t sell the stock in the same year.
✔️ You receive a large amount of tax-exempt interest income, such as from private activity bonds.
✔️ You have substantial long-term capital gains or qualified dividends.
✔️ You take business deductions that aren’t allowed under AMT rules.
If your income is high enough and you claim certain tax benefits, you may be required to calculate your Alternative Minimum Taxable Income (AMTI). If your AMT liability exceeds your regular tax liability, you must pay the difference.
How to Calculate AMT in California
If you suspect you might be subject to the AMT, here’s how the calculation works:
Start with your Adjusted Gross Income (AGI) from your standard tax return.
Add back disallowed deductions like state and local tax deductions, business tax benefits, and interest on private activity bonds.
Determine your Alternative Minimum Taxable Income (AMTI) using California’s AMT adjustments.
Apply the 7% AMT rate to the adjusted income.
Compare it to your regular California tax liability—whichever is higher is what you owe.
How to Reduce AMT Liability
If you anticipate being subject to the AMT, consider these strategies to minimize your liability:
- Time Your Income and Deductions: If possible, spread large deductions or capital gains over multiple years to avoid triggering AMT.
- Maximize Tax-Advantaged Accounts: Contributing to 401(k)s, IRAs, or Health Savings Accounts (HSAs) can lower your taxable income and help reduce AMT exposure.
- Be Cautious with Incentive Stock Options (ISOs): If you plan to exercise stock options, consult a tax professional to determine the best timing and strategy.
- Check for AMT Credit Carryforward: If you paid AMT in a previous year, you might be eligible to claim an AMT credit to offset future tax liabilities.
[Source: IRS AMT Guide – Understanding the Alternative Minimum Tax]
Final Thoughts
California’s Alternative Minimum Tax adds another layer of complexity to the tax code, especially for high-income earners, investors, and business owners. Since California doesn’t offer an AMT exemption, it’s easier to get caught in the AMT system at the state level than at the federal level.
If you think the AMT may apply to you, consider working with a tax professional to help you strategize and reduce your tax liability. Staying informed and planning ahead can help you avoid unnecessary AMT payments.