Alternative Minimum Tax 2026: Who Pays AMT

Congress created the AMT in 1969 after discovering 155 wealthy households paid zero federal income tax. The fix: a stripped-down tax calculation that disallows many deductions and applies its own rates.

You start with regular taxable income, then add back deductions the AMT disallows. The result is your Alternative Minimum Taxable Income (AMTI). Subtract the AMT exemption, apply the AMT rates, and compare to your regular tax. If the AMT figure is higher, you pay the excess.

The deductions most commonly added back:

• State and local tax (SALT) deductions — entirely disallowed under AMT, even though the OBBBA raised the regular-tax SALT cap to $40,000
• Incentive stock option (ISO) spreads — the gap between exercise price and fair market value counts as AMT income when you exercise and hold
• Private activity bond interest — tax-exempt under regular rules, fully taxable under AMT
• Certain itemised deductions that reduce regular taxable income but not AMTI

The SALT interaction is particularly punishing. The OBBBA's $40,000 SALT cap phases down by 30% for modified AGI above $500,000 under regular tax — but under AMT, SALT is zero regardless. A married couple in California paying $120,000 in state income tax gets zero benefit from that amount when calculating AMT liability. For context on how the regular brackets work alongside AMT, see our federal tax brackets breakdown.

The AMT exemption is your buffer — AMTI below this threshold faces no AMT. For 2026:

• Single filers: $90,100
• Married filing jointly: $140,200

These are inflation-adjusted amounts made permanent by the OBBBA. Before that legislation, there was real risk of reversion to pre-TCJA levels that would have been roughly half as generous.

The catch is the phaseout. As your AMTI rises, the exemption shrinks:

• Single filers: phaseout begins at $500,000 AMTI
• Married filing jointly: phaseout begins at $1,000,000 AMTI

The OBBBA doubled the phaseout rate from $0.25 to $0.50 per dollar of excess AMTI. The exemption now vanishes entirely at:

• Single filers: $680,200 ($500,000 + $90,100 × 2)
• Married filing jointly: $1,280,400 ($1,000,000 + $140,200 × 2)

Under the old 25% rate, those complete-phaseout thresholds would have been $860,400 (single) and $1,560,800 (joint). The faster phaseout compresses the pain zone by $180,000 for single filers.

The AMT uses two rates — simpler than the regular system's seven federal tax brackets:

• 26% on AMTI (after exemption) up to $244,500
• 28% on AMTI above $244,500

Those headline rates look modest next to the 37% top regular rate. They're misleading. The phaseout zone creates a hidden marginal rate spike that exceeds 28%.

Here's why: each additional dollar of AMTI in the phaseout zone not only gets taxed at 26% or 28% — it also eliminates $0.50 of exemption, which is itself subject to AMT. The effective marginal rate in the phaseout zone reaches roughly 35% for taxpayers in the 26% bracket and 42% for those in the 28% bracket.

That 42% effective rate exceeds the top regular income tax rate of 37%. Taxpayers earning between $500,000 and $680,200 (single) face the sharpest marginal rates in the entire federal tax code — a fact most tax planning conversations ignore.

Sarah is a single filer and software engineer in California earning $350,000. She exercised incentive stock options in 2026 with a $200,000 spread (FMV minus exercise price) and held the shares.

Regular tax calculation:

• Salary: $350,000
• Standard deduction: −$16,550
• Regular taxable income: $333,450
• Regular tax: ~$80,400

AMT calculation:

• Start with regular taxable income: $333,450
• Add ISO spread (held, not sold): +$200,000
• AMTI: $533,450

Exemption after phaseout:

• Base exemption: $90,100
• Excess over $500,000: $33,450 × 50% = $16,725 reduction
• Remaining exemption: $73,375

AMT liability:

• AMT base: $533,450 − $73,375 = $460,075
• First $244,500 at 26%: $63,570
• Remaining $215,575 at 28%: $60,361
• Tentative minimum tax: $123,931

The bill:

• AMT owed: $123,931 − $80,400 = $43,531

That's a 12.4% effective surcharge on Sarah's total income. The ISO exercise alone created $43,531 in additional tax — money she owes now, on stock she hasn't sold. If the stock drops before she sells, she's paid AMT on phantom gains.

A disqualifying disposition (selling in the same calendar year) would have eliminated the AMT hit entirely by converting the spread to ordinary income. The trade-off: losing long-term capital gains treatment on the spread. For Sarah's $200,000 spread, the rate differential between ordinary income (37%) and long-term capital gains (20%) on future appreciation makes the AMT cost worth modelling both ways.

Sarah should also plan for estimated quarterly tax payments to avoid underpayment penalties on the AMT amount.

The doubled phaseout reshapes who falls into the AMT net. These groups face the highest risk:

1. Tech employees exercising ISOs. The ISO spread is the single most common AMT trigger for earners under $1 million. If you exercise and hold — which maximises long-term capital gains treatment — plan for AMT. The risk is acute when your company's stock price is volatile: you owe AMT on the exercise-date spread even if the stock later crashes.

2. High earners in high-tax states. California's top rate is 13.3%. New York City's combined state-plus-city rate reaches 12.7%. A married couple paying $150,000 in state and local taxes gets zero AMT benefit from any of it. The $40,000 SALT cap helps under regular tax; under AMT, it's irrelevant.

3. The $500K–$700K income band. The compressed phaseout zone creates the highest effective marginal rates here. Paradoxically, earners above $700,000 are often less affected — their regular tax already exceeds AMT because the top 37% rate exceeds the 28% AMT rate once the exemption is fully phased out.

4. Private activity bond holders. Municipal bond interest from private activity bonds is tax-free under regular rules but fully taxable under AMT. If you hold significant positions in hospital revenue bonds, airport bonds, or housing bonds, check your AMT exposure.

5. Real estate investors with large depreciation deductions. Accelerated depreciation that reduces regular taxable income may need to be added back for AMT purposes, depending on the property type and depreciation method.

If you're in one of these groups, strategies like tax-loss harvesting reduce your overall tax burden but won't directly reduce AMT — capital gains are taxed the same under both systems. Tax-advantaged accounts like an HSA, however, reduce both regular income and AMTI.

You can't opt out of AMT, but you can manage timing and magnitude:

Spread ISO exercises across years. Instead of a single large exercise, batch smaller exercises annually to keep each year's AMT below the crossover point. Model the AMT impact at each exercise level — the marginal cost jumps sharply in the phaseout zone.

Consider same-year ISO sales. A disqualifying disposition converts the spread to ordinary income, taxed under regular rules. You lose long-term capital gains eligibility on the spread but avoid AMT entirely. For large spreads where AMT would be significant, the math often favours the disqualifying disposition.

Swap private activity bonds for general obligation bonds. General obligation bond interest is exempt under both regular tax and AMT. If the after-tax yields are comparable, the swap eliminates one AMT trigger.

Use the AMT credit carryforward. Prior-year AMT paid on timing differences (like ISO exercises) generates a minimum tax credit claimable via Form 8801. This credit offsets future regular tax liability. Many taxpayers leave this credit unclaimed — check whether you have a carryforward.

Plan estimated payments around AMT. If you know you'll owe AMT, factor it into your quarterly estimated payments to avoid the underpayment penalty. The IRS doesn't distinguish between regular tax and AMT shortfalls when calculating the penalty.

Coordinate with capital gains planning. While capital gains rates are identical under both systems, the gains themselves increase AMTI and can accelerate the exemption phaseout. Timing large asset sales in different years from large ISO exercises prevents stacking.