The Alternative Minimum Tax (AMT) is often described as a "shadow tax" — a separate tax calculation that runs alongside the regular income tax system. You pay whichever amount is higher.

It was introduced in 1969 after Congress discovered that 155 high-income households had paid zero federal income tax by taking advantage of every available deduction. The AMT was designed to ensure a floor. Today, it primarily affects two groups: high-income households in high-tax states (whose SALT deductions are disallowed for AMT), and employees who exercise Incentive Stock Options (ISOs).

How AMT is calculated

AMT starts from your regular taxable income and adds back certain "preference items" — deductions and exclusions that are allowed under the regular tax system but not under AMT. The most significant for most readers:

  • ISO spread at exercise. Under regular tax, exercising an ISO is not a taxable event. Under AMT, the difference between the fair market value and your strike price (the "spread") is added to your AMT income.
  • Standard deduction and personal exemptions. These don't exist under AMT.
  • State and local taxes (SALT). Deductible under regular tax (up to $10k–$40k depending on year and OBBBA rules), not deductible under AMT.

After adding these back, you arrive at your Alternative Minimum Taxable Income (AMTI). You then subtract the AMT exemption — a large deduction that phases out at higher income levels — to get your Final AMTI (FAMTI). Tax is assessed at 26% on the first $244,500 (2026) and 28% above that.

The AMT exemption and phaseout

The AMT exemption is what keeps AMT from affecting moderate-income filers. For 2026, single filers get an exemption of $90,100. Married filing jointly: $140,200.

However, this exemption phases out at higher income levels. Under 2026 rules (modified by the One Big Beautiful Bill Act), the phaseout begins at $500,000 (single) or $1,000,000 (MFJ). For every dollar of AMTI above those thresholds, the exemption is reduced by 50 cents — a stricter rate than the 25 cents/dollar that applied through 2025.

That means the exemption disappears twice as fast as it did before. A single filer with $680,100 in AMTI would have their entire $90,100 exemption phased out — leaving the full AMTI exposed to the 26% or 28% rate.

A concrete example

Say you're a single filer with $200,000 in salary and you exercise ISO options with a $300,000 spread (FMV minus strike price). Under regular tax, the $300,000 exercise is not income. Under AMT:

  • AMTI = $200,000 + $300,000 = $500,000
  • AMT exemption at this income level = $90,100 (phaseout begins here in 2026)
  • FAMTI = $500,000 − $90,100 = $409,900
  • AMT = 26% × $244,500 + 28% × ($409,900 − $244,500) = $63,570 + $43,820 = $107,390

Your regular federal income tax on $200,000 might be around $38,000. So you'd owe the AMT amount instead — a $69,000 difference, triggered entirely by the exercise.

This is why ISO exercise planning matters so much. The ISO Planner calculates your exact exercise budget to avoid this outcome.

Who actually pays AMT today?

The typical AMT payer in 2026 is one of:

  • A tech or startup employee who exercised a significant number of ISOs in a year where the spread was large
  • A high earner in a high-state-tax jurisdiction who previously relied on SALT deductions
  • Someone with a combination of factors that pushes AMTI above the exemption even without ISO exercise

If you're in the first category, our AMT Calculator will show you the exact exposure, and our ISO Planner will tell you how many shares you can exercise without triggering any additional AMT.

The AMT credit

One important note: AMT paid because of ISO exercise isn't entirely lost. It generates a Minimum Tax Credit (MTC) that can be used to offset regular tax in future years when your regular tax exceeds your AMT.

Here's how it works: in any year where your regular tax exceeds what your AMT would be, you can apply the accumulated MTC to reduce your regular tax liability — down to the AMT floor, but not below it. For employees who exercise early and pay AMT, then sell shares later (with lower income), the credit often comes back over several years.

This makes timing strategy critical. The AMT you pay this year may come back to you over time — but only if you plan the recovery, not just the exercise.

AMT and the 2025 OBBBA changes

The One Big Beautiful Bill Act, signed into law in 2025, made meaningful changes to AMT starting in 2026:

  • Phaseout threshold lowered from $626,350 (single) to $500,000, and from $1,252,700 (MFJ) to $1,000,000. More people enter the phaseout range.
  • Phaseout rate doubled from 25 cents per dollar to 50 cents per dollar. The exemption disappears twice as fast.
  • SALT cap raised from $10,000 to $40,400 for most filers — but SALT is still not deductible for AMT purposes, so this doesn't directly help AMT payers.

The combined effect is that the 2026 AMT hits harder and at lower income levels than 2025. If you're planning ISO exercises around a multi-year strategy, this is worth recalculating for the new rules.