Alternative Minimum Tax (AMT)

The AMT does not replace the regular income tax. It limits how far deductions, exclusions and timing breaks can cut the tax of people with high economic income. You work out your regular tax as usual, rerun the year under the AMT rules on Form 6251, and effectively pay whichever result is higher. The AMT itself is only the excess of the second calculation over the first, and some credits that reduce regular tax don’t reduce it. The rerun has five steps.

The 2017 Tax Cuts and Jobs Act raised the AMT exemption and the income at which it phases out, and capped the state and local tax deduction at $10,000. Those higher exemptions were due to expire after 2025. The One Big Beautiful Bill Act made them permanent but changed the phase-out in two ways that start in 2026.

First, the phase-out thresholds went back to $500,000 for single filers and $1,000,000 for married couples filing jointly, down from $626,350 and $1,252,700 in 2025, and the $1,000,000 figure is not adjusted for inflation until 2027. Second, the exemption now shrinks by 50 cents per dollar of AMTI above the threshold instead of 25 cents, so a single filer’s $90,100 exemption is gone at $680,200 of AMTI and a couple’s $140,200 at $1,280,400.

Inside that range, each extra dollar of AMTI adds $1.50 to the amount the AMT taxes, so a filer already paying AMT there faces a 42% marginal rate (28% × 1.5) on ordinary income. Meanwhile the larger SALT deduction, capped at $40,400 in 2026, means a bigger AMT add-back for itemizers in high-tax states.

Most households never owe it. The AMT exemption is several times the standard deduction the AMT takes away, so a wage earner who doesn’t itemize and has no preference items usually finds that the regular tax is the higher of the two. The AMT tends to appear when one specific item is large relative to income, or when AMTI climbs into the phase-out range and the exemption starts to disappear.

AMT adjustments come in two kinds, and the difference decides whether you ever get the tax back. Exclusion items, such as the lost standard deduction, disallowed state and local taxes and private activity bond interest, are permanent: AMT they cause is simply extra tax. Deferral items, such as the incentive stock option spread and depreciation, only change when income is counted, so AMT they cause creates a minimum tax credit, claimed on Form 8801 in a later year when your regular tax exceeds your tentative minimum tax.

Incentive stock options are the classic deferral item. Exercising creates no regular income, but for the AMT the spread between the shares’ fair market value and your exercise price counts once the shares are transferable or no longer at risk of forfeiture, often the day you exercise. Sell the shares in the same calendar year and no AMT adjustment is needed. Hold them into January and the whole spread lands in AMTI, though your AMT basis rises by the same amount, so a later sale reports a smaller AMT gain. The example below shows how much spread fits before the AMT begins.

Most AMT is decided by timing, so the useful work happens before December 31, while you can still move option exercises, share sales, tax payments and deductions between years. Running both calculations for this year and next shows how much room is left under the tentative minimum tax and whether an item would cost less in the other year. These are the moves that help most and the mistakes that most often turn a manageable AMT year into an expensive one.