The foreign tax credit can help mitigate the impact of the alternative minimum tax (AMT) for taxpayers with income taxed abroad. While the AMT limits certain deductions and credits, it does allow a portion of the foreign tax credit to reduce U.S. tax liability . However, specific rules govern how much of the credit applies, including limitations based on foreign-source income and AMT calculations. Understanding these rules can help taxpayers manage their obligations when earning income across multiple tax jurisdictions.
Consider speaking with a financial advisor with tax expertise if you’re looking for ways to mitigate your AMT liability or otherwise optimize your tax strategy.
The alternative minimum tax, or AMT, is a separate tax system aimed at preventing high-income earners from using deductions, credits and exemptions to significantly reduce their tax liability. It applies primarily to individuals with higher incomes, certain business owners and those who claim large deductions.
Instead of the standard tax calculation, AMT requires taxpayers to compute their liability twice-once under regular tax rules and again under AMT rules-paying whichever amount is higher.
AMT calculations start with adjusted taxable income, adding back disallowed deductions, such as state and local taxes, certain medical expenses and some business-related write-offs. Once adjusted, taxpayers apply an AMT exemption, which reduces the taxable amount before applying the AMT rates of 28% and/or 26%. These exemptions phase out at higher income levels, meaning that wealthier taxpayers lose part or all of their exemption, increasing their AMT liability.
2025 AMT Exemptions
Filing Status
Exemption Amount
Phaseout Threshold
Complete Phaseout
Married Filing Jointly or Surviving Spouse
$137,000
$1,252,700
$1,800,700
Unmarried Individuals
$88,100
$626,350
$978,750
Married Filing Separately
$68,500
$626,350
$900,350
Estates and Trusts
$30,700
$102,500
$225,300
The AMT exemption acts as a buffer, ensuring that lower- and middle-income earners rarely face AMT. However, those with substantial foreign income, large capital gains or stock option income may find themselves subject to AMT despite this exemption.
The foreign tax credit (FTC) is available to U.S. taxpayers who pay income tax to a foreign government on earnings generated outside the United States. This credit prevents double taxation by allowing individuals and businesses to offset U.S. tax liability with taxes already paid to another country. The credit applies to income taxes, but not to value-added, sales or property taxes.
To qualify, the taxpayer must have a legal obligation to pay the foreign tax, and the tax must be imposed on income. Additionally, the tax must be paid to a recognized government and cannot exceed the amount of U.S. tax owed on the same income. If the credit exceeds the U.S. tax liability in a given year, the excess can often be carried back one year or forward up to 10 years, subject to IRS limitations.
IRS tax forms, including Form 6251, the AMT tax form for individuals.
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The foreign tax credit can help reduce AMT liability, but only within specific limitations. Under AMT rules, the credit is still allowed, but the IRS restricts how much can be applied, often leading to a smaller benefit than under the regular tax system. This occurs because AMT calculations disallow certain deductions and apply different income sourcing rules, which can reduce the amount of foreign taxes eligible for the credit.
To use the foreign tax credit against AMT, taxpayers must file IRS Form 1116 (Foreign Tax Credit) and, if applicable, Form 6251 (Alternative Minimum Tax – Individuals). Form 1116 requires taxpayers to categorize income, calculate eligible foreign taxes and determine any carryback or carryforward amounts. If subject to AMT, the credit must be recalculated under AMT rules, leading to an adjusted credit amount.
Imagine you are a single filer earning $350,000, including $75,000 from foreign sources. Under regular tax rules, your taxable income after deductions is $250,000. Using the 2025 marginal tax rates, your federal income tax liability would be $57,063.
Applying AMT, certain deductions are removed, increasing your AMT income to $330,000. The 2025 AMT exemption for single filers is $88,100, reducing your AMT taxable income to $241,900. Under AMT rules, a 26% tax would apply to the first $239,100, resulting in a tax liability of $62,166. Then, a 28% AMT rate would apply to the remaining $2,800 in AMT income, resulting in another $784 in tax.
This adds up to $62,950 in AMT liability. Since this amount is more than your regular tax liability of $57,063, AMT applies, increasing your tax bill by $5,887.
Next, you’ll apply the foreign tax credit to AMT. For this step, you may want to consult a tax professional who can walk you through the calculation. However, your foreign tax credit is worth approximately $14,300 against your AMT liability. As a result, the foreign tax credit lowers your AMT to around $48,650.
To claim this, you would file Form 1116 (Foreign Tax Credit) and Form 6251 (AMT Calculation) to determine how much of the foreign tax credit can be applied under AMT rules. Planning income and deductions carefully can help maximize credit utilization while minimizing AMT exposure.
A senior couple look over their budget together in their home.
Maximizing tax efficiency requires understanding how different tax rules interact, especially when dealing with income taxed in multiple jurisdictions. The alternative minimum tax applies a separate calculation that can limit deductions and credits, but the foreign tax credit offers a way to reduce the overall tax burden. While AMT rules restrict how much of the credit can be used, strategic planning can help offset some of its impact. Careful filing, including the proper use of Form 1116 and Form 6251, can make a difference in managing tax liabilities across regular and AMT systems.
Investing in municipal bonds or tax-efficient mutual funds can help minimize your annual taxable income. Municipal bond interest is generally exempt from federal and, in some cases, state income tax, making it advantageous for those in higher tax brackets.
A financial advisor with tax expertise can be a valuable resource for those looking to optimize their tax strategy. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
