Alternative Minimum Tax (AMT)
The Alternative Minimum Tax is a parallel tax system designed to ensure that high-income taxpayers can't use deductions and preferences to eliminate their federal tax liability entirely. Under 26 U.S.C. §§ 55–59, you calculate your tax twice — once under the regular system, once under AMT rules — and pay whichever is higher. Before the Tax Cuts and Jobs Act of 2017, the AMT ensnared roughly 5 million taxpayers annually, including many in the upper-middle class. TCJA dramatically raised the exemptions and phaseout thresholds, shrinking the affected population to approximately 200,000 taxpayers per year. The AMT primarily hits people who exercise incentive stock options (ISOs), have large amounts of state and local tax deductions disallowed under AMT, or earn income from private activity bonds — not most wage earners.
Current Law (2026)
| Parameter | Value |
|---|---|
| Core statute | 26 U.S.C. §§ 55-59 (IRC Sections 55-59) |
| AMT rate | 26% on AMTI up to threshold; 28% above threshold |
| 2026 exemption | $90,100 (single); $140,200 (MFJ); $70,100 (MFS); $31,400 (estates/trusts) |
| 2026 phaseout threshold | $500,000 (single); $1,000,000 (MFJ); $500,000 (MFS) |
| Exemption phaseout rate | $0.25 per $1 of AMTI above threshold (fully eliminated at high income levels) |
| Key adjustments | State/local tax deduction disallowed; certain depreciation adjustments; ISO exercise income included; tax-exempt interest on private activity bonds |
| Taxpayers affected | ~200,000/year (post-TCJA), down from ~5 million/year (pre-TCJA) |
| Corporate AMT | 15% corporate alternative minimum tax on book income for corporations with $1B+ average annual adjusted financial statement income (enacted by IRA 2022) |
Legal Authority
- 26 U.S.C. § 55 — Alternative minimum tax imposed (tax equals the excess of the tentative minimum tax over the regular tax; tentative minimum tax = 26%/28% of AMTI minus AMT exemption; applies to individuals, estates, and trusts)
- 26 U.S.C. § 56 — Adjustments in computing alternative minimum taxable income (depreciation using longer recovery periods; passive activity losses; state and local tax deduction disallowed; medical expense threshold adjustments; incentive stock option exercise income)
- 26 U.S.C. § 57 — Items of tax preference (tax-exempt interest on private activity bonds; accelerated depreciation on certain property; percentage depletion excess over adjusted basis)
- 26 U.S.C. § 58 — Denial of certain losses (limitation on net operating losses; farming losses)
- 26 U.S.C. § 59 — Other definitions and special rules (AMT foreign tax credit limitations; AMT net operating loss deduction; minimum tax credit for prior year AMT)
How It Works
The Alternative Minimum Tax is a parallel tax system designed to ensure that high-income taxpayers who benefit from significant deductions, exclusions, and credits under the regular Federal Income Tax code still pay a minimum level of tax. It requires affected taxpayers to calculate their tax liability twice — once under the regular income tax and once under the AMT — and pay the higher amount.
The AMT calculation starts with regular taxable income and adds back items that receive preferential treatment under the regular code — producing Alternative Minimum Taxable Income (AMTI). An exemption is then subtracted ($137,000 for married filing jointly in 2026; $88,100 for single filers, phasing out at higher incomes), and the remainder is taxed at 26% up to a threshold and 28% above it. If the resulting "tentative minimum tax" exceeds regular income tax, the difference is additional tax owed. The most significant triggers are: the SALT deduction (fully disallowed for AMT); incentive stock option (ISO) exercise (the spread between exercise price and market value enters AMTI even though it's not taxed for regular purposes until the stock is sold); private activity bond interest (included in AMTI even when exempt for regular tax); and certain depreciation timing differences.
The ISO trap is the AMT's most notorious planning hazard: when an employee exercises ISOs without selling the shares in the same year, the bargain element is not regular taxable income but IS included in AMTI — creating potentially massive liability on phantom income the taxpayer hasn't received in cash. During the dot-com bubble, employees faced AMT bills of hundreds of thousands of dollars on stock that subsequently became worthless. The TCJA's 2018 expansion of AMT exemptions significantly narrowed the AMT's reach — it now primarily affects ISO exercises, private activity bond holders, and certain high-income households rather than the broad upper-middle class affected before 2018. Taxpayers who do pay AMT receive a minimum tax credit usable in future years when regular tax exceeds the tentative minimum tax, recognizing that many AMT adjustments are timing differences. The Inflation Reduction Act of 2022 separately enacted a 15% corporate alternative minimum tax (CAMT) on adjusted financial statement income for corporations averaging over $1 billion in annual book income, affecting approximately 150 of the largest U.S. companies.
How It Affects You
If you exercise incentive stock options (ISOs): The AMT's ISO trap is the most dangerous common scenario. When you exercise ISOs but don't sell the stock in the same year, the "spread" — the difference between your exercise price and the stock's fair market value — is included in AMT income even though you have no cash. Example: you exercise 10,000 ISOs with a $5 strike price when the stock is trading at $45. You just added $400,000 to your AMTI with no cash proceeds. Depending on your other income and exemptions, your AMT bill could be $60,000–$100,000 due April 15. If the stock subsequently drops below your exercise price, you've paid tax on phantom gains you never realized. Strategy: (1) exercise ISOs in small tranches to stay under the AMT threshold, (2) run an AMT projection before exercising, or (3) sell shares in the same calendar year as exercise (a "disqualifying disposition" — you lose the preferential long-term capital gain rates but avoid the AMT trap). Any AMT you pay generates a minimum tax credit that offsets regular tax in future years — track this credit carefully.
If you're a high earner in California, New York, or another high-tax state: The SALT deduction ($10,000 cap for regular tax under TCJA) is entirely disallowed under the AMT — you add back any SALT you deducted. For 2026, the AMT exemption phases out at $500,000 (single) and $1,000,000 (MFJ), at $0.25 for each dollar above those thresholds. If you're at $700,000 in taxable income as a single filer, your exemption has already phased down by $50,000. Practically: even if you don't exercise ISOs, a California or New York resident with $500,000+ in wages, a large SALT deduction, and some private activity bond interest should check their AMT exposure each year. Use Form 6251 or a tax software AMT calculator before finalizing year-end planning.
If you invest in municipal bonds: Most general obligation (GO) bonds issued by states and cities are AMT-free — interest is excluded from both regular tax and AMTI. But private activity bonds (PABs) — issued for airports, sports stadiums, hospital construction, affordable housing, and similar purposes — generate interest that IS added to AMTI. Bond funds often include a mix; look for the "percentage subject to AMT" in the fund's prospectus. For investors in the AMT's phaseout range (income above $500,000/$1,000,000), a fund with even 15–20% PABs can create unexpected AMT exposure.
If you paid AMT in a prior year: Check your Form 8801 credit. AMT payments based on "timing" differences (like ISO exercises) generate a minimum tax credit that can offset your regular tax in years when your regular tax exceeds your tentative minimum tax. If you paid $50,000 in AMT in 2022 when you exercised ISOs, and your ISO shares have since vested or been sold, you may have a $50,000 credit sitting on your return. Many taxpayers are unaware of this credit or let it expire unused — ask your tax preparer to track it each year.
State Variations
- Some states have their own state-level AMT (California, Colorado, Connecticut, Iowa, Minnesota, Wisconsin, and others)
- State AMT rules differ from federal AMT — different exemptions, rates, and adjustments
- States without an AMT may still be affected because the federal SALT deduction disallowance under the AMT historically increased AMT exposure for residents of high-tax states
Implementing Regulations
- 26 CFR Part 1 — Income tax regulations (section 1.55-1: alternative minimum taxable income computation; section 1.1502-55: consolidated group AMT; section 1.904(b)-2: foreign tax credit special rules for AMT)
Pending Legislation
- S 796 (Sen. Thune, R-SD) — Book Minimum Tax Repeal Act: would repeal the 15% corporate alternative minimum tax (CAMT) enacted by the Inflation Reduction Act and create a new non-corporate tentative minimum tax with 26%/28% rates and a $175,000 threshold. Status: Introduced.
Recent Developments
- OBBBA made TCJA's elevated individual AMT exemptions permanent: The One Big Beautiful Budget Act (2025) made the TCJA's higher individual AMT exemption amounts and phase-out thresholds permanent. For 2026, the AMT exemption is approximately $90,100 for single filers and $140,200 for married filing jointly (indexed for inflation), with phase-outs beginning at $637,950 (single) and $1,275,900 (MFJ). Before OBBBA, these TCJA amounts were scheduled to sunset after 2025, reverting to pre-2018 exemptions of approximately $55,000 (single) / $86,000 (MFJ) — which would have brought millions of upper-middle-income households back into AMT territory. The permanent higher exemptions mean AMT now primarily affects a narrow band of high-income households rather than the broader middle-class reach it had before TCJA.
- Corporate Alternative Minimum Tax (CAMT) generating significant compliance complexity: The Inflation Reduction Act's 15% Corporate Alternative Minimum Tax — based on book income (adjusted financial statement income) rather than taxable income — took effect for tax years beginning January 2023. Treasury's Notice 2023-7 and subsequent guidance addressed the calculation of AFSI, treatment of business credits against CAMT, and interactions with the bonus depreciation deduction (which reduces taxable income but not AFSI). CAMT primarily affects large corporations with book income exceeding $1 billion in the applicable 3-year window; the OBBBA preserved CAMT. Corporations with significant accelerated depreciation, stock-based compensation, or book-tax timing differences face the largest CAMT burdens.
- ISO exercises in tech sector remain primary individual AMT trigger: For individual taxpayers, Incentive Stock Option (ISO) exercises generate AMT income (the spread between exercise price and fair market value) even though no regular income tax is owed at exercise. In the technology sector — where ISOs are widely used for employee compensation — employees exercising options in high-valuation companies can face substantial AMT bills in the exercise year even before selling the shares. The AMT credit (Form 8801) allows recovery of AMT paid on ISO exercises against regular tax in future years when stock is sold, but the timing mismatch — paying AMT when stock hasn't been sold — remains a financial planning challenge. The TCJA's higher exemptions reduced ISO AMT exposure for most employees below C-suite levels.
- State AMT interactions — California, Minnesota, and other conforming states: Many states that conform to federal AMT provisions did not conform to TCJA's AMT exemption increases, maintaining their own AMT calculations at pre-TCJA levels. California has its own AMT (7% rate, different exemption structure) that can apply to California residents even when federal AMT doesn't. For high-income taxpayers in California who exercise ISOs, California AMT can be a significant additional tax burden on top of federal regular income tax and California income tax — creating situations where total effective marginal rates on ISO spread exceed 50% in the exercise year.