Alternative Minimum Tax (AMT)
When the AMT applies, which deductions it disallows, and strategies for high-income filers to minimize exposure.
TL;DR
- 01Pay whichever is higher: your regular tax or tentative minimum tax.
- 02Watch ISO exercises — they are the most common AMT trigger.
- 03Check Form 6251 to see if AMT applies to you.
Tips
- 01You only owe AMT when your tentative minimum tax is higher than your regular tax after credits are applied.
- 02Use IRS Form 6251 to calculate AMT liability — most tax software runs this automatically and flags it for you.
Warnings
- 01Paying AMT in the year you exercise ISOs is a prepayment, not an elimination of tax — the stock itself is still taxed when sold.
- 02If the stock price later drops below your exercise price, you may have paid AMT on phantom income you never actually received in cash.
- 03Do not prepay December state estimated taxes if you expect to owe AMT, since the SALT deduction is fully disallowed and the prepayment buys nothing.
What the AMT Is and Why It Exists
The Alternative Minimum Tax (AMT) is a parallel federal income tax system enacted in 1969 after Congress discovered that 155 high-income taxpayers paid zero federal income tax by combining multiple legal deductions. The AMT runs alongside the regular tax system — you calculate your tax liability under both systems and pay whichever amount is higher.
The AMT uses a broader income base (called Alternative Minimum Taxable Income, or AMTI) that adds back certain deductions and preference items that are allowed under the regular tax system. This wider base, combined with a flat-rate tax, ensures that taxpayers with large deductions still pay a meaningful federal tax bill.
| Feature | Regular Tax System | AMT System |
|---|---|---|
| Tax base | Taxable income (AGI minus deductions) | AMTI — broader base, fewer deductions |
| Rates | Graduated: 10% to 37% | Flat: 26% on first $232,600 of AMTI; 28% above |
| Standard deduction | Allowed ($16,100 single / $32,200 MFJ in 2026) | Replaced by AMT exemption ($90,100 single / $140,200 MFJ in 2026) |
| State/local tax deduction | Allowed (capped at $10,000) | Not allowed |
| Personal exemptions | Suspended under TCJA | N/A |
How AMT Income Is Calculated
Alternative Minimum Taxable Income (AMTI) starts with your regular taxable income and then adds back specific preference items and adjustments. The result is reduced by the AMT exemption, and the remaining amount is taxed at the AMT rates.
- Start with: Regular taxable income
- Add back: State and local tax deductions, miscellaneous itemized deductions, standard deduction (if taken), certain depreciation adjustments, ISO exercise spreads, and tax-exempt interest from private activity bonds
- Equals: AMTI
- Subtract: AMT exemption (phased out at higher income)
- Equals: AMT base
- Multiply by: 26% (first $232,600) / 28% (above $232,600)
- Equals: Tentative Minimum Tax (TMT)
- You pay: Max(regular tax, TMT)
| AMT Item | 2026 Amount |
|---|---|
| AMT exemption — Single | $90,100 |
| AMT exemption — Married Filing Jointly | $140,200 |
| Exemption phase-out begins — Single | $500,000 income |
| Exemption phase-out begins — MFJ | $1,000,000 income |
| AMT rate — first $232,600 of AMTI above exemption | 26% |
| AMT rate — above $232,600 | 28% |
Who Typically Gets Hit
The Tax Cuts and Jobs Act of 2017 dramatically raised AMT exemptions and phase-out thresholds, effectively removing most middle-income taxpayers from AMT exposure. As of 2026, the AMT primarily affects a narrower set of high-income situations.
| Common AMT Trigger | Why It Creates AMT Exposure |
|---|---|
| Exercising incentive stock options (ISOs) | The spread (FMV minus exercise price) is added to AMTI in the year of exercise, even though regular tax is not triggered until the shares are sold |
| Large state income tax or property tax deductions | SALT deduction is fully disallowed under AMT (regular tax caps it at $10,000; AMT allows $0) |
| High income in a high-tax state | Combination of large state tax deduction add-back and high overall income pushes AMTI above the exemption |
| Private activity bond interest | Tax-exempt for regular purposes but counted in AMTI |
| Accelerated depreciation (business assets) | AMT requires slower depreciation schedules than regular tax for some assets |
| Large miscellaneous itemized deductions | No longer applicable post-TCJA (most miscellaneous deductions suspended); watch for future law changes |
The most dangerous single-year AMT event for employees is a large ISO exercise at a low strike price. A tech employee exercising $2 million of ISOs with a $10 strike on stock trading at $110 creates a $2 million AMTI addition — potentially triggering $500,000+ in AMT even though no stock was sold.
Deductions Disallowed Under AMT
The AMT achieves its broader tax base primarily by disallowing or modifying deductions that are valid under the regular tax system. Understanding which deductions are at risk is essential for planning.
| Deduction | Regular Tax Treatment | AMT Treatment |
|---|---|---|
| State and local taxes (SALT) | Deductible up to $10,000 (itemized) | Fully disallowed — added back to AMTI |
| Standard deduction | $16,100 single / $32,200 MFJ (2026) | Not allowed (replaced by AMT exemption) |
| Home equity loan interest (non-acquisition) | Deductible on Schedule A | Not deductible under AMT |
| Percentage depletion in excess of cost | Deductible for oil/gas, mining | Preference item; added back to AMTI |
| Accelerated MACRS depreciation (some assets) | Allowed under regular tax | Must use AMT depreciation schedule (slower) |
| Charitable contributions | Deductible | Allowed under AMT |
| Mortgage interest (acquisition debt) | Deductible on Schedule A | Allowed under AMT |
Notably, medical expenses and charitable deductions are allowed under AMT with the same or similar rules as regular tax. The biggest AMT culprit for most high earners — SALT — is fully disallowed, which explains why residents of California, New York, and New Jersey (with high state taxes) are disproportionately exposed.
Strategies to Minimize AMT Exposure
AMT planning is a year-round exercise, not a last-minute April filing decision. The following strategies can reduce or eliminate AMT exposure for affected taxpayers.
- ISO exercise timing: Exercise ISOs in a year when other AMTI additions are low, or exercise only as many options as can be absorbed without triggering AMT. Use an ISO modeling tool to calculate the AMT crossover point before exercising.
- Spread ISO exercises across tax years: Exercising some options each year keeps the ISO spread small enough to stay under the AMT threshold.
- Use AMT credit in future years: AMT paid due to ISO exercises generates an AMT credit (Form 8801) that can be used to reduce regular tax in future years when you are not subject to AMT — particularly valuable when the stock is held and eventually sold.
- Defer state tax payments: Do not prepay state estimated taxes in December if you are subject to AMT — the deduction is worthless under AMT, and prepayment converts a potential regular-tax deduction into zero benefit.
- Accelerate income: In some cases, recognizing more ordinary income in a high-AMTI year can paradoxically reduce AMT by increasing regular tax above the tentative minimum tax.
| Strategy | Best For | Potential Savings |
|---|---|---|
| ISO exercise planning / modeling | Employees with stock options | Can avoid six-figure AMT bills |
| Claiming AMT credit carryforward | Anyone who paid prior-year AMT | Dollar-for-dollar reduction in future regular tax |
| Avoid December state tax prepayment | High-tax state residents | Modest; avoids wasting a deduction |
| Qualified Small Business Stock (QSBS) | Angel investors / startup employees | QSBS gain exclusion applies under AMT as well as regular tax |
FAQ
The Alternative Minimum Tax (AMT) is a parallel federal income tax system enacted in 1969 after Congress discovered that 155 high-income taxpayers paid zero federal income tax by combining multiple legal deductions. The AMT runs alongside the regular tax system — you calculate your tax liability under both systems and pay whichever amount is higher.
The 2026 AMT exemption is $90,100 for single filers and $140,200 for married filing jointly. The exemption phases out once income exceeds $500,000 for single filers or $1,000,000 for married filing jointly.
Employees who exercise incentive stock options at a low strike price face the biggest single-year AMT risk, since the spread between exercise price and fair market value counts as AMT income. High earners in high-tax states are also exposed because the SALT deduction is fully disallowed under AMT.
Yes, AMT paid due to ISO exercises generates a credit on Form 8801 that can offset regular tax in future years when you are no longer subject to AMT. This credit carries forward indefinitely, so track it carefully and use it before it goes to waste.