The Alternative Minimum Tax (AMT) is a parallel U.S. federal income tax calculation that strips out certain deductions and add-back items, then requires the taxpayer to pay whichever amount is higher: the regular tax or the AMT.
In plain terms
Congress built the AMT in 1969 to stop a small number of very high earners from using deductions to get their regular tax bill close to zero. It works by recomputing income a second way — disallowing some deductions and adding back certain untaxed gains — and comparing the result to what the regular system produced. For most households it never matters. For an employee exercising a large block of incentive stock options in one year, it routinely does, because the paper gain on exercise counts as income for AMT purposes even though no shares were sold.
How it works
The calculation starts from taxable income, adds back a short list of “preference items” — the most common for wealthy households being the bargain element on an exercised incentive stock option — and subtracts an AMT exemption amount. That net figure, alternative minimum taxable income (AMTI), is taxed at 26% up to a breakpoint and 28% above it, under 26 U.S.C. §55. The exemption itself phases out once AMTI clears a threshold, which is where the AMT quietly stops being a backstop for the ultra-wealthy and starts hitting anyone with a large, lumpy equity event. If the AMT paid in a given year exceeds regular tax, the excess can become a minimum tax credit usable in later years once the stock is actually sold.
The exemption amounts, phase-out thresholds, and rate breakpoint are inflation-adjusted annually; the 2026 figures come from Revenue Procedure 2025-32.
The numbers
- 2026 AMT exemption: $90,100 (single) / $140,200 (married filing jointly) — Rev. Proc. 2025-32 §4.10.
- Exemption phase-out begins: $500,000 AMTI (single) / $1,000,000 AMTI (joint); fully phased out at $680,200 / $1,280,400.
- Phase-out rate: 50% of AMTI above the threshold — 26 U.S.C. §55(d)(4)(A)(ii)(IV), not the 25% rate that applied before 2018.
- 28% rate breakpoint, 2026: $244,500 of AMT taxable income; 26% applies below it.
- ISO exercise bargain element: an AMT preference item under 26 U.S.C. §56(b)(3), regardless of whether the stock is sold that year.
What people get wrong
That the 2025 tax law simply “fixed” the AMT by locking in a bigger exemption. It’s half true: the law made the higher Tax Cuts and Jobs Act exemption amounts permanent rather than letting them expire after 2025. But the same statute also made permanent the doubled phase-out rate — 50% instead of the original 25% — that eats the exemption twice as fast once AMTI crosses the threshold. A larger exemption and a faster phase-out arrived in the same bill, so a household with one big, lumpy income year — most often an ISO exercise — can still land squarely in AMT territory despite the “higher exemption” headline.
Related
Read more: Equity Compensation: RSUs, ISOs, and the Tech Wealth Engine · Taxes: How Wealth Is Structured and Preserved
See also: ISO vs NSO · Net investment income tax