Alternative Minimum Tax (AMT)

The Alternative Minimum Tax (AMT) is a parallel tax system designed to ensure that high-income taxpayers cannot use deductions, exemptions, and credits to eliminate their entire tax liability. You must calculate your tax under both the regular system and the AMT — and pay the higher of the two.

How AMT Works

You calculate your Alternative Minimum Taxable Income (AMTI) by starting with adjusted gross income (AGI) and adding back certain "tax preference items" and "adjustments." Then subtract the AMT exemption (which phases out at higher incomes). Apply the AMT rates (26% for income up to $239,700 married filing jointly in 2026, 28% above that). If your tentative minimum tax exceeds your regular tax, you owe the difference as AMT.

AMT Exemption (2026)

Single: $88,100. Married filing jointly: $137,000. Married filing separately: $68,500. Phaseout begins at: $626,350 (MFJ), $501,650 (single). The exemption is reduced by 25% of AMTI above the threshold — effectively a 6-7% marginal rate increase in the phaseout range.

Common AMT Adjustments

• State and Local Taxes (SALT): No deduction allowed for AMT purposes. The $10k SALT cap under regular tax is already a limitation, but for AMT, even the $10k is added back.
• Personal Exemptions: Not allowed (but personal exemptions are $0 through 2025 under TCJA, so this is currently irrelevant).
• Standard Deduction: Not allowed. If you take the standard deduction, you'll need to add it back for AMT purposes.
• Medical Expenses: Only the amount exceeding 10% of AGI is deductible under AMT (vs 7.5% for regular tax).
• Incentive Stock Options (ISOs): The bargain element (difference between grant price and exercise price) at exercise is an AMT preference item — even if you don't sell the shares. This is the biggest AMT trap for employees at startups.
• Depreciation: Longer depreciation schedules under AMT for assets placed in service before 1999 or certain pre-2021 property.
• Tax-Exempt Interest: Interest from private activity bonds (not regular municipal bonds) is taxable for AMT.
• Net Operating Losses: Limited to 80% of AMTI.

Who Is Affected?

The AMT was originally designed to target millionaires, but without inflation indexing in its early years, it affected millions of middle-class taxpayers (until TCJA 2017 raised exemptions significantly). Current primary victims: residents of high-tax states (CA, NY, NJ, IL) with itemized deductions, employees exercising incentive stock options (ISOs), and taxpayers with large capital gains that push them into the phaseout range.

AMT Credit

If you pay AMT due to timing differences (like ISO exercises), you may be eligible for the AMT credit in future years when your regular tax exceeds your tentative minimum tax. The credit is carried forward indefinitely and can offset regular tax in future years. Form 8801 calculates the credit.

Planning Strategies

• Manage ISO exercises carefully — avoid exercising all ISOs in one year. Consider exercising early (before the stock appreciates) to reduce the bargain element.
• Time large capital gains — they can push you into the AMT exemption phaseout range.
• Accelerate or defer SALT payments strategically (subject to the $10k cap).
• Consider municipal bonds (regular, not private activity) for tax-exempt income not subject to AMT.
• If you'll be in AMT for multiple years, pre-pay deductible expenses in non-AMT years.