About the Alternative Minimum Tax
The Alternative Minimum Tax (AMT) is a parallel federal tax system that ensures high-income households cannot reduce their tax bill below a floor through preference items (state and local taxes, ISO bargain element, tax-exempt private-activity bond interest, and several others). It was enacted in 1969 after Treasury reported that 155 high-income households paid zero federal income tax in 1967. The original AMT applied only to those few; today it still applies, although the Tax Cuts and Jobs Act (TCJA) of 2017 dramatically reduced who owes it.
You calculate Alternative Minimum Taxable Income (AMTI) by taking regular taxable income and adding back preference items. Subtract the AMT exemption (phased out at high incomes), apply the 26% or 28% rate, and that is your Tentative Minimum Tax (TMT). You owe AMT only if TMT exceeds your regular tax. The IRS form is Form 6251, attached to your 1040.
How it works (2026)
- Start with your regular taxable income (Form 1040 line 15).
- Add back AMT preference items: SALT deducted, ISO bargain element on shares held past year-end, private-activity-bond interest, certain misc itemized deductions, and others.
- Subtract the AMT exemption: $86,250 single, $134,300 MFJ, $86,250 HoH, $67,150 MFS in 2026.
- Phase-out: above $625,300 single / $1,250,600 MFJ AMTI, reduce the exemption by 25 cents per dollar.
- Apply 26% rate on the first $239,100 above the exemption ($119,550 MFS); 28% rate on the rest.
- Long-term capital gains and qualified dividends are taxed at the regular 0/15/20% LTCG rates even under AMT.
- The result is Tentative Minimum Tax. AMT owed = max(TMT - regular tax, 0).
The formulas
Exemption (after phase-out) = max(0, base exemption - 0.25 × (AMTI - phase-out threshold))
Tentative Minimum Tax = 26% × first $239,100 of (AMTI - exemption) + 28% × remainder + LTCG-rate tax on preferential income
AMT owed = max(TMT - regular tax, 0)
AMT vs regular tax by income tier (2026, single filer, no ISO)
For ordinary wage earners with no ISOs and SALT capped at $40,000, AMT rarely triggers below $500,000 of taxable income. Here is roughly where you stand:
| Taxable income | Regular tax | Tentative AMT | AMT owed | Verdict |
|---|---|---|---|---|
| $200,000 | $39,500 | $39,100 | $0 | Not affected |
| $400,000 | $105,000 | $93,900 | $0 | Not affected |
| $600,000 | $175,500 | $146,500 | $0 | Not affected |
| $1,000,000 | $317,500 | $268,500 | $0 | Not affected (no preferences) |
| $400K + $300K ISO | $105,000 | $176,400 | $71,400 | AMT triggered |
| $400K + $50K SALT | $105,000 | $106,900 | $1,900 | Marginal AMT |
The numbers are illustrative. The dominant AMT trigger today is ISO bargain element, followed by a few high-SALT cases just over the exemption phase-out.
The ISO trap explained in detail
Incentive Stock Options are the #1 source of AMT surprises. Here is exactly why.
Suppose you have 10,000 ISOs with a $5 strike price and your company's fair market value is $55. You exercise all 10,000 and hold the shares. The ISO bargain element is ($55 - $5) × 10,000 = $500,000.
For regular tax: nothing happens. You exercised options; you did not sell anything. There is no taxable event.
For AMT: that $500,000 bargain element is added to AMTI. If your regular taxable income was $300,000, your AMTI becomes $800,000. Less the $86,250 single AMT exemption (which is fully phased out at $625,300 + 4 × $86,250 = $970,300 AMTI), you have roughly $759,500 subject to AMT rates. Twenty-six percent of the first $239,100 plus 28% on the remaining $520,400 yields roughly $208,000 in tentative minimum tax. Regular tax on $300,000 single is roughly $73,000. So you owe an extra $135,000 in AMT just because you exercised and held.
The good news: that $135,000 generates a Minimum Tax Credit you carry forward and recover in future years when regular tax exceeds AMT. The bad news: you have to come up with $135,000 of cash by April 15 to actually pay it, even though you haven't sold any shares.
How the AMT exemption phase-out actually works
The exemption falls by 25 cents per dollar of AMTI over the threshold. Once you exceed:
- Single / HoH / MFS: $625,300 + (4 × $86,250) = $970,300 AMTI, exemption is $0.
- MFJ: $1,250,600 + (4 × $134,300) = $1,787,800 AMTI, exemption is $0.
In the phase-out zone the effective AMT rate becomes 32.5% (in the 26% bracket) or 35% (in the 28% bracket). This is where high earners get bitten. If you can structure income to stay below $625,300 AMTI as a single filer, AMT can often be reduced to zero.
What is added back to AMTI
The big items are:
- SALT (state and local taxes): 100% of Schedule A SALT deduction (income tax + property tax + sales tax).
- ISO bargain element: FMV minus strike, on shares still held at year-end.
- Tax-exempt private-activity bond interest: yes, even though it's tax-exempt for regular tax.
- Investment expenses, certain home-equity-loan interest not used for acquisition (rare post-TCJA).
- Standard deduction add-back: NO, standard deduction is allowed under AMT after TCJA.
- Personal exemptions: NO, these were eliminated by TCJA anyway.
- Depreciation differences (accelerated vs straight-line) on rental property and certain business assets.
The AMT credit (Form 8801)
AMT paid on timing differences (the most important one being ISO bargain element) generates a Minimum Tax Credit. You carry it forward indefinitely and use it in any future year where your regular tax exceeds your tentative minimum tax. The credit reduces regular tax only down to the tentative minimum tax floor, not below.
Example: in 2026 you owe $50,000 in AMT from ISO exercise. In 2027, regular tax is $80,000, TMT is $55,000. You can use $25,000 of the prior-year MTC (the gap between regular tax and TMT). The remaining $25,000 carries forward to 2028. File Form 8801 each year you use the credit.
AMT on permanent differences (SALT, personal-exemption back when it existed) does NOT create a credit. That AMT is gone forever.
Common AMT mistakes
- Exercising ISOs late in the year and holding. If you exercise December 15 and the stock drops 50% by April 15, you owe AMT on the phantom gain and have no cash to pay it. Plan ISO exercises early in the year so you can do a same-year disqualifying disposition if the stock falls.
- Forgetting the exemption phase-out. Above $625,300 AMTI (single) you lose 25 cents of exemption per extra dollar. The effective AMT rate is 32.5%, not 26%.
- Buying private-activity bonds. They're "tax-free" for regular tax but added to AMTI. Use general-obligation municipal bonds instead if you're near the AMT threshold.
- Not tracking the AMT credit. If you paid AMT in 2024 and don't file Form 8801 in 2026 to recover it, you may leave thousands on the table.
- Confusing AMT with NIIT. Net Investment Income Tax (3.8%) is a separate Medicare surtax, not part of AMT. You can owe both.
- Assuming TCJA killed AMT permanently. The TCJA AMT provisions are continued, but Congress can change them. The current $86,250 / $134,300 exemptions are still inflation-indexed each year.
- Filing without Form 6251 when triggers are present. If you had ISO exercises, large SALT, or private-activity-bond interest, the IRS expects to see Form 6251 attached even if AMT is $0.
When the calculator's estimate is not enough
This tool gives a starting estimate. Get a real CPA when any of these apply:
- You exercised more than $100,000 of ISO bargain element in 2026.
- Your AMTI is above the exemption phase-out ($625,300 single / $1,250,600 MFJ).
- You have private-activity-bond interest, depletion deductions, or accelerated depreciation.
- You held ISO shares from a prior year and sold them in 2026 (cost-basis adjustment on Form 6251).
- You have prior-year AMT credits and want to plan a recovery year.
- You're a partner in a partnership with section 1202 QSBS or other preference items.
Frequently asked questions
What is the AMT exemption for 2026?
For tax year 2026, the AMT exemption is $86,250 for single and head-of-household filers, $134,300 for married filing jointly, and $67,150 for married filing separately. The exemption phases out at 25 cents per dollar of AMTI above the threshold: $625,300 for single/HoH/MFS and $1,250,600 for MFJ.
What are the AMT rates for 2026?
AMT has only two rates: 26% on the first $239,100 of AMTI above the exemption (or $119,550 for MFS), and 28% on AMTI above that threshold. Long-term capital gains and qualified dividends are still taxed at the regular 0%/15%/20% LTCG rates, not at AMT rates.
How does the ISO AMT trap work?
When you exercise an Incentive Stock Option (ISO) and hold the shares, the ISO bargain element (fair market value minus strike price) is invisible to regular tax but is added back to income for AMT. If your bargain element is large (over $100,000), AMT can wildly exceed regular tax. Solution: exercise early in the year and sell before year-end (disqualifying disposition) to convert to ordinary income, OR plan exercises over multiple years to stay under the exemption phase-out.
What is Form 6251?
Form 6251, Alternative Minimum Tax for Individuals, is the IRS form you file with your 1040 if you owe AMT. It calculates AMTI by starting with regular taxable income and adding back preference items (SALT deduction, ISO bargain element, private-activity-bond interest, etc.), applies the exemption, and computes tentative minimum tax. You owe AMT only if TMT exceeds regular tax.
Did the Tax Cuts and Jobs Act (TCJA) eliminate AMT?
No, but TCJA dramatically reduced the number of households owing AMT. Before 2018, about 5 million households paid AMT. After TCJA raised the exemption and the phase-out thresholds, that fell to around 200,000. TCJA provisions are scheduled to sunset after 2025 but Congress extended them, so the higher exemptions ($86,250 / $134,300) continue for 2026. ISO exercises remain the dominant AMT trigger.
Is SALT (state and local tax) added back for AMT?
Yes. State and local income tax, property tax, and other SALT items deducted on Schedule A are added back to AMTI on Form 6251. Note that the regular-tax SALT deduction itself is capped at $40,000 in 2026 (raised from the previous $10,000 cap by the One Big Beautiful Bill Act). So the AMT add-back is the SALT amount you actually deducted, not your total SALT paid.
How can I avoid AMT?
Top strategies: (1) Time ISO exercises across multiple years so the bargain element stays under the exemption; (2) If you must exercise a large ISO, do a same-year disqualifying disposition (sell before December 31) to convert to ordinary income; (3) Accelerate or delay state-tax payments to balance years; (4) Use the AMT credit in years you don't owe AMT to recover prior AMT paid; (5) Avoid private-activity-bond interest if you're already near the AMT threshold.
What is the AMT credit?
AMT paid on timing differences (like ISO exercises) generates a Minimum Tax Credit (MTC) that you can carry forward and use against regular tax in future years when regular tax exceeds tentative minimum tax. File Form 8801 to claim it. AMT on permanent differences (like SALT) does NOT generate a credit. For most ISO exercises, expect to recover the AMT over 3 to 7 future tax years.