The Alternative Minimum Tax (AMT) is a parallel federal tax system designed to ensure high-income taxpayers pay at least a minimum amount of tax, even after claiming many deductions and preferences available under the regular income tax rules. You calculate your tax liability under both the regular system and the AMT rules, then pay the higher of the two.
Most taxpayers never owe AMT. It primarily affects people with large incentive stock option (ISO) exercises, significant state and local tax (SALT) deductions, certain tax-exempt interest, or other preference items, especially at higher income levels. Understanding how it works and planning around its triggers can reduce or eliminate exposure.
How the Alternative Minimum Tax Was Created
Congress created the AMT in 1969 after Treasury Secretary Joseph Barr reported that 155 high-income taxpayers (earning more than $200,000 at the time) had paid zero federal income tax in 1966 by stacking deductions and exclusions. The original goal was straightforward: prevent wealthy individuals from completely eliminating their tax liability through legal preferences.
The original minimum tax (the 1969 predecessor to today’s AMT) produced only a very small amount of revenue and did not cause any significant increase in federal tax collections above normal annual revenue growth due to economic expansion. The modern alternative minimum tax (a parallel system where you calculate tax two ways and pay the higher amount) was introduced later, in 1978/1979.
According to Tax Policy Center data and historical IRS statistics:
- In 1970 (the first year), the add-on minimum tax raised only 0.14% of total individual income tax revenue that year.
- Revenue grew over the decade, by 1978 it was still under 1% of individual income tax collections.
Eventually the original add-on tax was repealed, and since then the system has been revised repeatedly. Major changes came with the Tax Reform Act of 1986 and later legislation. The Tax Cuts and Jobs Act (TCJA) of 2017 substantially raised the AMT exemption amounts and phase-out thresholds, dramatically reducing the number of people subject to it (from millions down to roughly 150,000–250,000 in recent years). In 2025, legislation often referred to as the One Big Beautiful Bill Act made the higher TCJA-era exemption levels permanent while adjusting the phase-out rules starting in 2026, lowering the phase-out thresholds and doubling the phase-out rate from 25% to 50%.
How the AMT Works in 2026
You start with regular taxable income and make adjustments: certain deductions are disallowed or reduced, and some income items that are tax-free or deferred under regular rules are added back. Common adjustments and preferences include:
- State and local taxes (SALT deduction is fully added back for AMT)
- The bargain element (spread) on incentive stock options exercised and held past year-end
- Interest from certain private-activity municipal bonds
- Accelerated depreciation in some cases
- Certain other miscellaneous itemized deductions and preferences
This produces Alternative Minimum Taxable Income (AMTI). You then subtract the AMT exemption (subject to phase-out) and apply AMT rates of 26% on the first portion of the excess and 28% above it. Long-term capital gains and qualified dividends generally keep their preferential rates under both systems, though large gains can still push you into the AMT by reducing or eliminating the exemption.
2026 AMT exemption amounts (inflation-adjusted):
- Single or Head of Household: $90,100
- Married Filing Jointly or Qualifying Surviving Spouse: $140,200
- Married Filing Separately: $70,100
Phase-out thresholds (exemption begins to disappear):
- Single / Head of Household / Married Filing Separately: $500,000 of AMTI
- Married Filing Jointly: $1,000,000 of AMTI
The exemption phases out at a rate of 50 cents for every dollar of AMTI above the threshold. It reaches zero at approximately $680,200 (single) and $1,280,400 (joint). In the phase-out range, the effective marginal rate can rise significantly (around 39–42% when the 28% bracket applies).
The 28% AMT rate generally begins once taxable excess exceeds $244,500 for most filers ($122,250 for married filing separately). You report the calculation on IRS Form 6251. If tentative minimum tax exceeds regular tax, the difference is the AMT you owe. AMT paid due to timing differences (such as ISO exercises) can often generate a Minimum Tax Credit that may be usable in future years when regular tax is higher.
Best Ways to Avoid or Minimize the AMT
Complete avoidance is not always possible once income and preference items push you over the thresholds, but proactive planning can substantially reduce exposure. Strategies focus on lowering AMTI, managing the timing of income and deductions, and avoiding common triggers.
- Maximize pre-tax retirement contributions
Contributions to traditional 401(k), 403(b), SEP IRA, SIMPLE IRA, or defined-benefit plans reduce income under both the regular tax and AMT systems. This is one of the most reliable levers available. Catch-up contributions for those age 50+ (and enhanced catch-ups under SECURE 2.0 for ages 60–63) further help. Health Savings Account contributions work similarly if you qualify. - Handle incentive stock options carefully
Exercising ISOs and holding the shares past December 31 is the single most common AMT trigger for many professionals. The bargain element is added to AMTI even though you have not sold the shares.- Model the exercise in advance using tax software or a tax professional.
- Spread exercises across multiple years to stay under phase-out thresholds when possible.
- Consider a same-year sale (disqualifying disposition) so the gain is treated the same under both tax systems and no AMT adjustment arises.
- Exercise when the spread is smaller or in a lower-income year.
- Avoid or limit private-activity bond interest
Interest from certain private-activity municipal bonds is tax-exempt for regular tax purposes but is a preference item for AMT. Prefer general-obligation or other non-private-activity munis, or use AMT-free municipal bond funds if this income is material. - Time income and deductible expenses strategically
If you expect to be in AMT this year but not next (or vice versa), shift controllable income (bonuses, consulting payments, capital gains) or expenses between years. Note that many common itemized deductions (especially SALT) provide little or no benefit under AMT, so accelerating them into an AMT year is often counterproductive. Charitable contributions and qualified residence interest generally remain deductible under AMT and can still help. - Monitor large capital gains and other income spikes
Even though preferential rates apply, large realized gains can phase out the AMT exemption. Spreading sales across years or using installment sales (where appropriate) can keep AMTI lower. Business owners should also review depreciation elections under both systems. - Claim only AMT-allowed deductions and plan itemizing carefully
The standard deduction is not allowed under AMT. If you itemize, focus on deductions that survive the AMT calculation (charity, certain mortgage interest). Miscellaneous itemized deductions subject to the 2% floor are generally disallowed. - Project early and use available tools
Run Form 6251 projections during the year, especially before major transactions such as ISO exercises, large stock sales, or year-end planning. Tax software and a knowledgeable CPA or tax advisor who understands both systems can identify the optimal path.
Key Takeaways for 2026 and Beyond
The higher AMT exemptions from the TCJA era are now permanent, which continues to protect most middle- and upper-middle-income taxpayers. However, the lower phase-out thresholds and faster 50% phase-out rate beginning in 2026 mean that high earners, particularly those with ISO exercises or significant preference items face greater exposure than in 2018–2025.
AMT planning is highly individual. What works in one year may be suboptimal the next depending on income sources, state of residence, and specific transactions. The strategies above are general frameworks; they are not personalized advice. And Landmark, we strongly suggest you consult a qualified tax professional who can model your exact situation under both the regular tax and AMT systems before making major financial moves, and we are available to work closely with your tax professionals when necessary.
Staying informed about AMT rules and integrating tax awareness into investment and compensation decisions remains one of the more effective ways to keep more of what you earn.
About the Author
Joseph M. Favorito, CFP® is a Certified Financial Planner® as well as the founder and managing partner at Landmark Wealth Management, LLC, a fee-only SEC registered investment advisory firm. He specializes in helping individuals and families develop comprehensive financial strategies to achieve their long-term goals.