The alternative minimum tax has spent eight years as a rounding error for all but a handful of taxpayers. From tax year 2026 it stops being one. The One Big Beautiful Bill Act made the generous post-2017 exemption permanent — $90,100 for single filers and $140,200 for married couples filing jointly in 2026 — but simultaneously reset the point at which that exemption starts disappearing to $500,000 of alternative minimum taxable income for single filers and $1,000,000 for joint filers, and doubled the speed at which it is withdrawn from 25 cents on the dollar to 50.
Those two changes pull the AMT back into the lives of a large group of high earners who last thought about it before 2018. The exemption is now clawed back twice as fast, starting from roughly half the income level, and the deductions that make your regular tax bill smaller are precisely the ones added back to compute AMTI. If you exercise incentive stock options, hold private activity municipal bonds, claim a large state and local tax deduction, or sold qualified small business stock at one of the new lower exclusion tiers, this is the year to run the calculation rather than assume the answer.
How the alternative minimum tax actually works
The AMT is a parallel tax system. You compute your liability twice — once under the ordinary rules and once under the AMT rules — and pay whichever is higher. The AMT computation starts from your taxable income, adds back a defined list of deductions and preference items to arrive at alternative minimum taxable income, subtracts the AMT exemption, and applies a two-rate structure of 26% and 28% to what remains.
The critical feature is that the AMT base is broader than the regular base. Items that reduce ordinary taxable income are disallowed for AMT purposes, which means the more effectively you have reduced your regular bill through deductions, the more likely the parallel calculation overtakes it. The AMT does not tax you on more income in any economic sense; it taxes you on income you thought you had already sheltered. It is reported on Form 6251 and carried to Schedule 2 of your Form 1040 — see the IRS guidance on Form 6251.
What changed for 2026
Two mechanical changes do all the work. The first is the phase-out threshold. In recent years the exemption did not begin to erode until AMTI reached figures well above a million dollars for a couple; from 2026 the thresholds are $500,000 for single and head-of-household filers and $1,000,000 for joint filers, indexed for inflation thereafter. That is a very substantial reduction in the income level at which the exemption starts to disappear.
The second is the rate of withdrawal. The exemption used to phase out at 25 cents for every dollar of AMTI above the threshold. From 2026 it phases out at 50 cents. The combined effect is that the shelter is both reached sooner and exhausted in half the distance. The 2026 figures come from the IRS inflation adjustments in Revenue Procedure 2025-32.
- AMT exemption for 2026: $90,100 single, $140,200 married filing jointly.
- Phase-out begins at $500,000 of AMTI single, $1,000,000 joint — down from roughly double.
- Phase-out rate doubles from 25 cents to 50 cents per dollar of AMTI above the threshold.
- AMT rates remain a two-tier 26% and 28% structure on AMTI above the exemption.
- Thresholds and exemption are indexed for inflation from 2026 onwards.
The hidden marginal rate the phase-out creates
A 50% phase-out rate is not a 50% tax, but it produces something that behaves unpleasantly like one. Each additional dollar of AMTI in the phase-out range does two things: it is itself taxed at 26% or 28%, and it destroys 50 cents of exemption, which is then also taxed at 26% or 28%. The effective marginal rate on income inside the phase-out band is therefore roughly one and a half times the headline AMT rate.
That produces a spike — a band of income taxed materially harder than the income immediately above and below it, in much the same way the UK's personal allowance withdrawal creates a 60% band. The practical planning point is that the phase-out range is where deferral is worth the most. Moving income out of that band, or accelerating deductions that are allowed for AMT purposes, is worth more per dollar there than anywhere else on the schedule.
The SALT interaction that catches people off guard
Here is the change most likely to surprise a taxpayer who does nothing unusual. The state and local tax deduction cap rose sharply under OBBBA and stands at $40,400 for 2026, phasing down at 30 cents on the dollar once modified adjusted gross income exceeds $505,000 and bottoming out at a $10,000 floor. A larger SALT deduction reduces your regular tax — which is the point.
But state and local taxes are added straight back for AMT purposes. They always have been. So a taxpayer in New York or California claiming a $40,400 deduction has cut their regular liability while their AMTI is unchanged, narrowing the gap between the two calculations from the regular side. Pair that with a phase-out that now starts at $500,000 and runs at 50%, and you have two independent forces pushing the same taxpayer towards the AMT. You can size the SALT side with our SALT deduction calculator and the AMT side with our AMT calculator.
Incentive stock options: still the classic trap
The single biggest AMT preference item for most people who get caught is the exercise of incentive stock options. For regular tax purposes, exercising an ISO and holding the shares is not a taxable event — that is the whole attraction. For AMT purposes, the bargain element, being the difference between the exercise price and the market value on exercise, is added to AMTI in the year of exercise.
The consequence is a cash tax bill on paper gains from shares you have not sold, and in a private company may not be able to sell. If the shares then fall, the AMT is still due on the higher exercise-date value. This is what destroyed a generation of technology employees in 2000 and 2008, and the tightened 2026 phase-out makes the threshold for disaster lower than it has been since. Anyone planning a large ISO exercise should compute the AMT before exercising and consider splitting the exercise across tax years.
The other add-backs worth knowing
Beyond SALT and ISOs, the list that matters for high earners includes interest on private activity municipal bonds, which is exempt for regular tax but included in AMTI unless the bond is specifically excluded; certain depletion and intangible drilling cost deductions for those with oil and gas interests; and differences in depreciation timing on some business assets. Each is individually narrow, but they aggregate.
There is also a specific interaction with the rebuilt qualified small business stock rules. Gain excluded under the full 100% five-year exclusion is not a preference item, but 7% of gain excluded at the new 50% and 75% tiers is. A founder taking an earlier exit under the tiered exclusion introduced for stock issued after 4 July 2025 can therefore find an AMT liability attached to a sale they believed was largely tax-free — we set that out in the QSBS exclusion in 2026.
- State and local taxes — the full deduction is added back, including the enlarged 2026 cap.
- ISO bargain element on exercise — the classic trigger, taxed on unrealised value.
- Private activity municipal bond interest — tax-exempt for regular tax, included in AMTI.
- 7% of QSBS gain excluded at the 50% and 75% tiers.
- Depletion, intangible drilling costs and certain depreciation timing differences.
Why Americans abroad get caught twice
US citizens are taxed on worldwide income wherever they live, so the AMT applies to an American in London exactly as it does to one in Chicago. What differs is the relief. The foreign tax credit is available against the AMT, but the limitation is computed separately within the AMT system rather than borrowed from the regular calculation. Because the AMT base is broader and the rates are different, the credit that fully covered your regular liability may not fully cover the AMT one, leaving residual US tax on income already taxed in full by the UK.
That is the double bind. An American in Britain paying UK income tax at 40% or 45% would ordinarily expect the foreign tax credit to eliminate the US charge. The AMT computation can leave a stub of US tax standing anyway, and the taxpayer discovers it only when the parallel calculation is run. The same structural problem that affects carried interest and other character mismatches applies here, and we set out the mechanics in US and UK tax on RSUs and stock options.
The FEIE does not protect you the way people assume
A common misunderstanding is that the Foreign Earned Income Exclusion, at $132,900 for 2026, takes you out of AMT exposure. It reduces the income in both the regular and the AMT computations, so it helps — but it is capped, applies only to earned income, and does nothing at all about the items most likely to trigger the AMT in the first place.
An expatriate technology employee is the clearest illustration. Salary within the exclusion is removed from both calculations. The ISO bargain element is not earned income for exclusion purposes and is a full AMT preference, so it lands in AMTI unrelieved. The result is an AMT bill for someone whose regular US liability was near zero — the exclusion having done its job on the salary while leaving the equity entirely exposed.
The AMT credit: why the tax is often a timing cost
There is a genuine consolation, and it is widely overlooked. AMT paid on deferral items — most importantly the ISO bargain element — generates a minimum tax credit that carries forward indefinitely and can be used in later years when your regular liability exceeds your tentative AMT. In that sense the AMT on an ISO exercise is often a prepayment rather than a permanent cost.
The distinction that matters is between deferral items and exclusion items. Deferral items, such as the ISO adjustment and depreciation timing, generate the credit. Exclusion items, such as the state and local tax add-back and private activity bond interest, do not — AMT attributable to those is permanently lost. So the taxpayer caught by SALT add-backs and a faster phase-out has paid a real cost; the taxpayer caught by an ISO exercise has usually made a loan to the Treasury. Tracking the credit carefully across years is one of the highest-value pieces of record-keeping in a high earner's file.
Planning levers that actually work
Because the AMT is a parallel calculation, the useful moves are those that change the relationship between the two computations rather than simply reducing income. Splitting a large ISO exercise across two or more tax years keeps the bargain element inside the exemption in each year. Timing a disqualifying disposition — selling ISO shares in the same year as exercise — converts the position to ordinary income and removes the AMT preference entirely, at the cost of the favourable capital treatment.
On the deduction side, accelerating or deferring state tax payments matters more than it used to, because those payments help the regular calculation and not the AMT one. Charitable contributions, by contrast, are allowed in both computations, which makes them a comparatively AMT-efficient way to reduce liability. And for anyone inside the phase-out band, the highest-return action is usually simply moving income across a year boundary to get out of it.
- Split large ISO exercises across tax years to keep the bargain element inside the exemption.
- Consider a same-year disqualifying disposition to eliminate the ISO preference entirely.
- Model state tax payment timing — SALT helps the regular calculation only.
- Charitable giving is allowed in both computations, so it reduces both.
- Track the minimum tax credit from deferral items — it carries forward indefinitely.
- Above all, run the parallel calculation before the transaction, not at filing.
How TaxStone approaches the AMT
At TaxStone we treat the AMT as a planning calculation rather than a filing output. For clients with equity compensation or significant state tax exposure we model both systems before a transaction, because almost every effective lever — exercise timing, disposition choice, payment timing — has to be pulled before the year ends. Once 31 December has passed, the AMT is simply arithmetic.
For US citizens abroad we run the AMT foreign tax credit limitation separately and explicitly, because that is where an expatriate return quietly produces a US liability the client was told would not exist. If you have equity awards, a large UK tax bill and a US filing obligation, contact us or book a free consultation and we will model the parallel calculation across both systems: /get-started.
The short version
For 2026 the AMT exemption is $90,100 for single filers and $140,200 for married couples filing jointly. It now begins to phase out at $500,000 of AMTI for single filers and $1,000,000 for joint filers — roughly half the previous thresholds — and it is withdrawn at 50 cents per dollar rather than 25, creating an effective marginal rate spike inside the phase-out band. The rate structure remains 26% and 28%.
The people most likely to be caught are those exercising incentive stock options, those claiming the enlarged $40,400 SALT deduction that is added straight back for AMT, holders of private activity municipal bonds, and founders selling QSBS at the new 50% or 75% exclusion tiers. Americans abroad face an additional problem: the foreign tax credit is limited separately inside the AMT system, so a UK tax bill that fully covers your regular US liability may leave AMT standing. Run the parallel calculation before you transact — afterwards there is nothing left to decide.
