The Alternative Minimum Tax (AMT) is a parallel tax system that ensures high-income taxpayers pay at least a minimum amount of tax, even if they have large deductions or credits under the regular tax system. You calculate your taxes twice — once under regular rules, once under AMT rules — and pay whichever is higher. Most middle-income taxpayers don’t owe AMT, but certain income situations and deductions can trigger it.
A Brief History of the AMT
Congress created the AMT in 1969 after discovering that 155 high-income taxpayers owed zero federal income tax that year due to various deductions and loopholes. The AMT was designed to close those gaps. For decades, it was not indexed to inflation, which caused it to creep down and hit millions of middle-class taxpayers who were never its intended targets.
The 2017 Tax Cuts and Jobs Act dramatically raised the AMT exemption amounts and phase-out thresholds, sharply reducing the number of people who pay it. For 2025, fewer than 300,000 taxpayers are expected to owe AMT — down from over 5 million before 2018.
How AMT Is Calculated
The AMT uses a different income calculation called Alternative Minimum Taxable Income (AMTI). Key differences from regular taxable income:
- The standard deduction and personal exemptions are replaced by a flat AMT exemption
- Most itemized deductions are added back (state and local taxes, medical expenses below a higher threshold, miscellaneous deductions)
- Certain income items are added back (like the spread on exercising incentive stock options)
After calculating AMTI, you subtract the AMT exemption, then apply the AMT rate: 26% on AMTI up to $239,100 (2025), and 28% above that. If this AMT calculation results in more tax than your regular tax, you pay the difference as AMT.
2025 AMT Exemption Amounts
| Filing Status | AMT Exemption | Phase-Out Begins |
|---|---|---|
| Single / Head of Household | $88,100 | $626,350 |
| Married Filing Jointly | $137,000 | $1,252,700 |
| Married Filing Separately | $68,500 | $626,350 |
These exemptions are indexed to inflation annually. Once your income exceeds the phase-out threshold, the exemption reduces by $0.25 for every $1.00 of additional income.
Who Is Most Likely to Owe AMT in 2026?
After the 2017 tax law changes, the AMT primarily affects:
- Very high earners: Incomes well above the phase-out thresholds where the exemption has been fully reduced
- Incentive stock option (ISO) holders: Exercising ISOs creates an AMT adjustment equal to the spread (fair market value minus exercise price), even though you haven’t sold the shares yet. This is one of the most common AMT triggers for employees at tech startups and public companies.
- People with very large state and local tax (SALT) deductions: SALT deductions are added back for AMT purposes. However, the $10,000 SALT cap under regular taxes has significantly reduced the AMT impact for most filers.
- Certain depreciation deductions: Some accelerated depreciation allowed under regular taxes must be recalculated under slower AMT depreciation rules
Incentive Stock Options and AMT: What You Need to Know
If you have stock options at your employer, understanding the AMT is critical. When you exercise ISOs:
- Under regular tax: no income recognized at exercise (tax deferred until you sell)
- Under AMT: the “spread” (FMV minus exercise price) is treated as income in the year of exercise
A large ISO exercise can trigger significant AMT even if you don’t sell the shares. This is especially dangerous when you exercise ISOs in a company whose stock later drops — you owe AMT on paper gains that no longer exist.
If you have ISOs, model your AMT exposure before exercising. A tax advisor familiar with stock compensation is worth the cost.
AMT Credit
When you pay AMT, you earn an AMT credit that can offset regular taxes in future years when your regular tax exceeds your AMT. This is important for ISO exercises — the AMT paid when you exercise can be recovered as a credit when you sell the shares and pay regular capital gains tax. The credit doesn’t eliminate the cash flow problem (you owe AMT now and recover it later), but it reduces the long-term cost.
How to Know If You Owe AMT
Tax software calculates AMT automatically and shows you whether you owe it. If you use a tax professional, they handle this. You can also fill out IRS Form 6251 (Alternative Minimum Tax — Individuals) manually. The quickest check: if your regular tax after credits exceeds your tentative minimum tax (line 7 on Form 6251), you don’t owe AMT.
Bottom Line
Most Americans don’t owe AMT under the current law — the 2017 tax reform dramatically raised the thresholds. But if you have high income, exercise incentive stock options, or have large specific deductions, run the AMT calculation before filing. ISO holders in particular should model their AMT exposure before exercising options, as the tax can be substantial even on paper gains.