AMT in 2026: Who Still Pays the Alternative Minimum Tax (and Why)

By Tom, CPA · Updated October 27, 2026

Part of: Tax Planning

TL;DR: Most households no longer pay AMT because the higher exemption and phaseout thresholds were made permanent. The people who still get caught usually exercised incentive stock options, hold private activity bonds, or have very large deductions that AMT ignores.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

The alternative minimum tax is a parallel tax system. You compute your tax the normal way, then compute it again under AMT rules that disallow some deductions and add back some income. If the AMT answer is higher, you pay the difference as AMT. It was created in 1969 after a report that a small number of very high-income households paid no federal income tax. It then spent decades catching middle-class families with kids in high-tax states, because it was not indexed for inflation until 2013.

The 2017 tax law raised the AMT exemption and the phaseout threshold dramatically, and the 2025 law (OBBBA) made those higher amounts permanent, with a lower phaseout start and a faster phaseout beginning in 2026. Today AMT mostly affects a narrow set of people. This guide explains who, using 2026 figures as of October 27, 2026. The 2027 AMT exemption had not been published yet. For broader context see the tax planning guide.

CPA Warning Label: AMT is the tax code's evil twin: it recalculates your tax with fewer deductions and charges whichever answer is bigger.

AMT basics

AMT starts from regular taxable income and makes adjustments to reach alternative minimum taxable income (AMTI):

• No standard deduction. If you take the standard deduction, it is added back.
• No SALT deduction. State and local taxes you itemized are added back. With the 2026 SALT cap at $40,400 for many itemizers, this add-back can be meaningful again.
• Incentive stock option (ISO) spread. The bargain element on ISOs you exercise and hold past year end is AMT income, even though it is not regular income.
• Private activity bond interest. Interest on certain "tax-exempt" municipal bonds is taxable for AMT.
• Depreciation and other timing differences, such as some depletion and certain passive activity items.

Mortgage interest on acquisition debt and charitable contributions are generally still allowed. After computing AMTI, subtract the AMT exemption, then apply AMT rates: 26% on the first $244,500 of the result ($122,250 married filing separately) and 28% above. That is the tentative minimum tax. If it exceeds your regular tax, the excess is AMT, reported on Form 6251.

Long-term capital gains and qualified dividends keep their 0%, 15% and 20% rates under AMT, so AMT does not raise the rate on gains directly. It can, however, use up exemption or push other income into higher AMT territory.

Exemption and phaseout

Starting in 2026, the exemption is reduced by 50 cents for each dollar of AMTI above the phaseout threshold, which is why the joint exemption disappears completely at $1,280,400. Under the prior rules the reduction was 25 cents per dollar and the threshold was higher. The $1,000,000 and $500,000 phaseout thresholds were reset (not inflation-adjusted) for 2026 per the IRS's 2026 inflation revenue procedure, and inflation indexing resumes from 2027, starting from a much lower base than the old thresholds.

The phaseout creates a hidden rate

Inside the phaseout range, each extra dollar of AMTI increases AMT income by $1.50 (the dollar plus 50 cents of lost exemption). At the 28% rate, that is a 42% effective AMT marginal rate in the zone. See hidden marginal tax rates for how this compares with other phaseouts.

Common triggers (ISOs, PABs)

Incentive stock options

This is the big one. When you exercise ISOs and hold the shares, there is no regular income tax at exercise, but the spread between the fair market value and the strike price is an AMT adjustment. A tech employee who exercises options with a $300,000 spread can owe a large AMT bill on shares they have not sold and may not be able to sell. If the stock then crashes, the AMT has still been paid. If you exercise and sell the shares in the same calendar year (a disqualifying disposition), the spread becomes ordinary wage income instead and the AMT adjustment goes away.

Private activity bonds

Interest from certain municipal bonds that finance private projects (airports, stadiums, some housing) is a preference item. Many municipal bond funds disclose the percentage of income subject to AMT. Bonds issued in 2009 and 2010 are generally exempt from this rule.

Large SALT add-backs

With the SALT cap at $40,400 for itemizers whose MAGI is under $505,000, high-tax-state residents who itemize add back up to that amount. On its own that rarely causes AMT now because of the large exemption, but combined with ISOs it can.

Other items

• Large miscellaneous deductions on certain trust returns.
• Accelerated depreciation differences on business and rental property (less common with modern methods).
• Net operating loss differences.
• Large long-term gains that use up exemption in the phaseout range.

Credit carryforward

Not all AMT is lost forever. AMT caused by timing items, called deferral items, such as the ISO spread, creates a minimum tax credit. You claim it on Form 8801 in later years when your regular tax exceeds your tentative minimum tax. AMT caused by exclusion items, such as the SALT add-back, the standard deduction add-back and private activity bond interest, does not create a credit.

How the ISO credit plays out

Say you pay $40,000 of AMT in the year you exercise and hold ISOs. Years later you sell the shares. For regular tax, your basis is the strike price, so you report a large gain. For AMT, your basis includes the spread you already paid AMT on, so the AMT gain is smaller. That difference, plus the credit, lets you recover much of the AMT over time. The credit can be used only to the extent regular tax exceeds tentative minimum tax in a given year, so recovery can take several years. Keep records of both regular and AMT basis for every ISO lot; brokers usually report only regular basis.

The credit carries forward indefinitely, but it does not survive the taxpayer's death in any useful way unless used on the final return.

Example

Illustration: the ISO exercise

Morgan and Jamie are married, file jointly and take the standard deduction. In 2026 they have $282,200 of wages, so regular taxable income is $250,000 and regular federal income tax is $45,196 ($35,932 plus 24% of the $38,600 above $211,400).

Without ISOs: AMTI is $250,000 plus the $32,200 standard deduction add-back, or $282,200. Less the $140,200 exemption leaves $142,000. At 26%, tentative minimum tax is $36,920, below their regular tax. No AMT.

With ISOs: Jamie exercises ISOs with a $200,000 spread and holds the shares. AMTI rises to $482,200. Less the $140,200 exemption leaves $342,000. Tentative minimum tax is 26% of $244,500 ($63,570) plus 28% of $97,500 ($27,300), or $90,870. AMT is $90,870 minus $45,196, or $45,674, due with their 2026 return even though they received no cash.

Break-even: They could have exercised ISOs with a spread of roughly $31,800 before AMT started. Exercising in smaller annual tranches up to that point, early in the year, is a common strategy to use the AMT room each year without triggering a bill.

The $45,674 of AMT is from a deferral item, so it becomes a minimum tax credit they can use in future years.

Illustration only. Real ISO planning must consider the stock's risk, liquidity, the holding periods for qualifying dispositions (two years from grant and one year from exercise) and state AMT rules.

Planning moves

• Project AMT before exercising ISOs, and exercise early in the year so you can decide to sell before December 31 if the stock falls.
• Check municipal bond funds for AMT exposure if you are near AMT.
• Track AMT basis and credits on a spreadsheet.
• Remember that a handful of states have their own AMT.