Alternative Minimum Tax
Understand the parallel tax that disallows breaks, the 2026 exemptions, and the ISO exercise that triggers it.
TL;DR
- Figure tax twice and pay the higher of regular tax or
tentativeMinimumTax. - AMT ignores
SALTand the standard deduction, widening the tax base. - The biggest trigger is a large
ISOexercise you hold past year-end.
How AMT Works
A Parallel SystemYou compute tax two ways and pay the larger.
Pay max(regular tax, TMT)Broader BaseAMT income adds back deductions regular tax allows.
Fewer deductions = wider baseFlat-ish RatesTwo rates replace the graduated brackets.
26%, then 28% above $244,500Filed on Form 6251The form runs the parallel calculation for you.
Software flags it automatically2026 Exemptions
SingleThe amount subtracted before the AMT rate applies.
$90,100Married Filing JointlyThe exemption for couples on one return.
$140,200Phase-Out BeginsThe exemption shrinks for very high incomes.
$500k single / $1M jointSteeper NowThe 2025 law speeds the phase-out to 50 cents per dollar.
Was 25 cents, now 50What Gets Added Back
State and Local TaxesThe SALT deduction is fully disallowed under AMT.
SALT added back to incomeStandard DeductionIt is replaced by the AMT exemption instead.
No standard deduction in AMTISO SpreadThe bargain element of an ISO exercise is counted.
(FMV - strike) x sharesSome Bond InterestPrivate activity bond interest is taxable under AMT.
Muni PAB interest countsManage Your Exposure
Spread ISO ExercisesExercise in batches to keep each year's spread small.
Stay under the AMT crossoverTime State PaymentsSkip a worthless December state prepayment in AMT years.
No SALT benefit under AMTUse the AMT CreditReclaim prior AMT against regular tax later.
Form 8801 in a non-AMT yearModel FirstRun the numbers before a big exercise or sale.
Form 6251 before you commitTips
- Run
Form 6251before any large ISO exercise or high-SALT year, since most tax software calculates AMT automatically once you enter the details. - Track any
AMTcreditfrom an ISO exercise; it offsets regular tax in later years when you are no longer in AMT.
Warnings
- AMT on an ISO exercise is a prepayment, not extra tax forever, but the shares are still taxed again when you sell them.
- Do not prepay December state estimated taxes in an
AMTyear, since the SALT deduction is worthless under AMT and buys nothing.
In Practice
See how a large ISO exercise pushes tentative minimum tax above regular tax.
You are single with $150,000 of regular taxable income and exercise ISOs with a $200,000 bargain spread, holding the shares.
- AMT income: $150,000 + $200,000 = $350,000 (simplified).
- Subtract the exemption: $350,000 - $90,100 = $259,900.
- AMT: 26% x $244,500 + 28% x $15,400 = about $67,900.
- Your regular tax is about $28,600, so AMT is higher.
You owe about $67,900, roughly $39,000 more than regular tax.
A big ISO exercise can create a huge AMT bill on shares you never sold.
FAQ
It is a parallel tax system from 1969, built so that high earners with many deductions still pay a floor of federal tax. You calculate your tax the normal way and again under AMT rules, which disallow certain breaks, then pay whichever is higher. Most people are unaffected; it targets specific high-deduction situations.
The 2026 exemption is $90,100 for single filers and $140,200 for married couples filing jointly. It subtracts from your alternative minimum taxable income before the AMT rate applies. The exemption phases out once income passes $500,000 single or $1,000,000 joint, at 50 cents per dollar over the line.
Employees who exercise incentive stock options at a low strike, since the bargain spread is added to AMT income even though regular tax ignores it until sale. High earners in high-tax states are also exposed because AMT fully disallows the state and local tax deduction that regular tax allows.
Often, yes. AMT caused by an ISO exercise generates a credit on Form 8801 that offsets your regular tax in future years when you are no longer in AMT. The credit carries forward indefinitely, so track it and use it, especially in the year you finally sell the shares.