What Is the Alternative Minimum Tax, and Who Pays It in 2026?

The alternative minimum tax is a parallel tax system that runs alongside the regular income tax. You calculate your liability both ways and pay whichever is higher. It exists to ensure that taxpayers with substantial income cannot use deductions and preferences to reduce their tax to very little. For 2026 the AMT exemption is $90,100 for single filers and $140,200 for married couples filing jointly, and the exemption begins phasing out at $500,000 of alternative minimum taxable income for single filers and $1,000,000 for joint filers. The One Big Beautiful Bill Act made two changes that matter: it returned those phase-out thresholds to their lower 2018 levels, down from $626,350 and $1,252,700 in 2025, and it doubled the rate at which the exemption disappears from 25 cents to 50 cents per dollar of income above the threshold. The practical effect is that more high earners will owe AMT in 2026 than in 2025, and the exemption vanishes far more quickly once income crosses the line.

How does the AMT actually work?

The mechanics are simpler than the reputation suggests. You compute your regular tax. Then you compute a second figure, alternative minimum taxable income, by starting from your income and adding back certain deductions and preferences the AMT does not allow. You subtract the AMT exemption, if any remains after phase-out, and apply the AMT rates: 26% on the first portion of the AMT base and 28% above it. If the resulting amount exceeds your regular tax, you pay the higher figure, and the excess is your AMT.

The most consequential add-backs for high earners include state and local taxes, which are not deductible at all for AMT purposes, and the bargain element on exercised incentive stock options, which is invisible for regular tax but fully counted for AMT. Other adjustments include certain private activity bond interest and some depreciation differences. Miscellaneous itemized deductions, historically a common trigger, are largely suspended under current law.

Because the AMT allows only a 26% or 28% rate but disallows valuable deductions, it tends to catch taxpayers with large deductions relative to income rather than simply the highest earners. Someone with $5,000,000 of ordinary income and few preferences typically pays regular tax; someone with $900,000 of income, a large state tax bill, and a significant ISO exercise is a much more likely candidate.

What exactly changed for 2026?

Two changes, both from the One Big Beautiful Bill Act, work in the same direction.

The threshold reduction pulls more taxpayers into the phase-out range. The doubled phase-out rate means the exemption is consumed twice as fast: a joint filer whose alternative minimum taxable income exceeds $1,000,000 loses 50 cents of exemption for every additional dollar, so the $140,200 exemption is fully eliminated roughly $280,400 above the threshold rather than over a much longer range.

There is a subtle consequence worth understanding. Inside the phase-out range, each additional dollar of income both increases the AMT base and destroys 50 cents of exemption, producing an effective marginal rate meaningfully higher than the stated 28%. That creates a band of income in which the marginal cost of an extra dollar is unusually high, which is precisely the kind of thing that should inform the timing of income and deductions.

Who is most likely to owe AMT now?

The typical AMT payer is not the highest earner in the country. The exposure concentrates among several identifiable groups.

Employees exercising incentive stock options are the classic case, because the spread between the exercise price and the fair market value is added to AMT income even though no cash was received and no regular tax is due. This can create a substantial tax bill on paper gains, a risk we treat in detail in equity compensation: ISOs, NSOs, RSUs, and the AMT trap. Residents of high-tax states are also exposed, since state and local taxes are disallowed entirely for AMT even though the regular-tax SALT deduction is capped at $40,400 for 2026 with its own phase-out above roughly $500,000. Taxpayers with income in the phase-out band, roughly $500,000 to $780,000 single or $1,000,000 to $1,280,000 joint, face the highest structural risk. Holders of certain private activity municipal bonds and taxpayers with large depreciation adjustments round out the group.

How do you plan around the AMT?

Planning centers on the timing and character of income and deductions, since the AMT is highly sensitive to which year things land in.

For incentive stock options, the central technique is to model the exercise before doing it, and to size exercises to use available AMT headroom without triggering a large liability. Exercising in tranches across multiple years, or exercising early in the year so you can evaluate a disqualifying disposition before year end if the stock falls, are both common approaches. A disqualifying disposition, selling in the same calendar year as exercise, converts the treatment to ordinary income and removes the AMT preference, which can be the right answer when the stock has declined.

More broadly, because state tax deductions provide no AMT benefit, accelerating or deferring state tax payments should be evaluated in light of which system will apply. In a year when you expect to pay AMT, deductions that the AMT disallows are worth less, which argues for shifting them to a regular-tax year, while income may be relatively cheaper to recognize at 28% than at a higher regular rate. The interaction is highly complex and multi-year, which is why it should be modeled with your CPA rather than estimated.

Finally, the AMT credit is often overlooked. AMT paid because of a timing preference, most commonly an ISO exercise, generally generates a minimum tax credit that can be used to reduce regular tax in later years when you are not in AMT. Taxpayers who pay a large AMT on an ISO exercise should track that credit carefully and plan future years to use it, since it can otherwise sit unused for a long time. The line where all of this surfaces on your return is discussed in how to read your Form 1040.

A worked example: an ISO exercise in the phase-out band

The following is a hypothetical illustration, simplified and ignoring state tax computation details. A married couple has $900,000 of ordinary income. One spouse exercises incentive stock options with a bargain element of $400,000 and holds the shares to start the long-term capital gains clock.

For regular tax, the exercise produces nothing: no income is recognized, and no tax is due. For AMT, the $400,000 spread is added back, pushing alternative minimum taxable income to roughly $1,300,000. That is $300,000 above the $1,000,000 joint threshold, so at the accelerated 50% phase-out rate the couple loses $150,000 of exemption, which fully eliminates the $140,200 exemption. They now compute AMT on the full base at 26% and 28% with no exemption at all, and the result exceeds their regular tax, so they owe AMT, in cash, on a paper gain from shares they have not sold.

Under the 2025 rules, the phase-out would not have begun until $1,252,700 and would have consumed the exemption at half the speed, so the same exercise would have produced a smaller AMT. The lesson is not to avoid exercising, but to model the exercise first and size it deliberately. The example is hypothetical and simplified.

Frequently asked questions

What is the alternative minimum tax in simple terms?It is a parallel tax calculation that disallows certain deductions and preferences, applies 26% and 28% rates, and requires you to pay whichever is higher, the regular tax or the AMT. It exists so that large deductions cannot reduce a substantial income to very little tax.

What is the AMT exemption for 2026?$90,100 for single filers and $140,200 for married couples filing jointly. The exemption begins phasing out at $500,000 of alternative minimum taxable income for single filers and $1,000,000 for joint filers.

Why will more people owe AMT in 2026?The One Big Beautiful Bill Act returned the phase-out thresholds to lower 2018 levels and doubled the phase-out rate from 25 cents to 50 cents per dollar. More taxpayers fall into the range, and the exemption disappears twice as fast once they do.

Do incentive stock options trigger the AMT?They can. Exercising and holding ISOs adds the spread between the exercise price and fair market value to AMT income even though no regular tax is due and no cash was received, which can create a substantial bill on unrealized gains.

Can I get AMT back that I paid?Often, in part. AMT paid because of a timing item such as an ISO exercise generally creates a minimum tax credit usable against regular tax in future years when you are not subject to AMT. Tracking and planning to use the credit matters.

How do I know if I will owe AMT?It requires running both calculations, ideally before year end and before any large ISO exercise. If your income sits in the phase-out band, you live in a high-tax state, or you plan to exercise options, model it with your CPA in advance rather than discovering it at filing.