What Is the Alternative Minimum Tax (AMT)? How It Works and Examples

The calculation runs on Form 6251. It starts from your regular taxable income. Then it adds back items the AMT does not allow. These are the standard deduction or, if you itemize, state and local taxes, plus a list of items called preference items. The result is alternative minimum taxable income (AMTI). From AMTI you subtract the AMT exemption. What remains is taxed at 26% up to $244,500 and at 28% above that. The result is called the tentative minimum tax. If it is higher than your regular tax, you pay the difference as AMT.

The exemption is what keeps most households out. For 2026 it is $90,100 for a single filer and $140,200 for a joint return. It shrinks once AMTI passes $500,000 single or $1,000,000 joint. The One Big Beautiful Bill Act, signed in July 2025, made it shrink faster and start sooner:

• Phase-out start, single$626,350 in 2025 → $500,000 in 2026, −20%
• Phase-out start, joint$1,252,700 in 2025 → $1,000,000 in 2026, −20%
• Phase-out speed25 cents of exemption lost per dollar above the threshold through 2025 → 50 cents from 2026, twice as fast

An incentive stock option (ISO) is an employee stock option with favorable regular-tax treatment. You owe no tax when it is granted and none when you exercise it. If you hold the shares more than two years from grant and more than one year from exercise, the whole profit is long-term capital gain, which is taxed at lower rates than pay. The AMT takes back part of that benefit. In the year you exercise, the spread counts as AMT income. The spread is the fair market value of the shares minus what you paid. It goes on line 2i of Form 6251.

In a private company, both numbers usually come from a 409A valuation, an independent appraisal of the company’s common stock. The strike price was set at the 409A value on the grant date. The fair market value at exercise is normally the latest 409A. As a company raises rounds at rising prices, that gap widens. So does the AMT income from exercising the same number of options.

Two details change the outcome. First, if you exercise and sell the shares in the same calendar year, there is no AMT adjustment. The sale is a disqualifying disposition, a sale that breaks the ISO holding periods. The spread is then ordinary income for regular tax instead. Second, ISO treatment has a $100,000 limit. It applies only to options worth up to $100,000 at grant that first become exercisable in a calendar year. Options above that limit are treated as non-qualified. They are taxed as pay when you exercise them, so the AMT question does not arise for them. For how employee shares behave before a listing, see pre-IPO shares.

A single employee earns $216,100 in wages in 2026 and takes the $16,100 standard deduction. Regular taxable income is $200,000, and regular tax is $40,598. The options have a $2.00 strike price, set at the 409A value when they were granted. The latest 409A values the common stock at $12.00. So each exercised option carries $10.00 of spread. Nothing else on the return is an AMT item.

In this illustration, roughly the first $30,000 of spread fits under the line before any AMT is due. The tentative minimum tax has to climb past the regular tax first. After that, each further dollar of spread costs 26 cents, then 28 cents. It costs more once the exemption starts to phase out. The cash to exercise is only part of the outlay. The 15,000-option exercise needs $30,000 for the shares and another $31,792 for the tax, on stock that still has no market.

Compared with 2025, the exemption rose with inflation. The phase-out, though, starts far lower and runs twice as fast. So a household with a large ISO exercise loses its exemption sooner than it would have a year earlier. The IRS adjusts the figures every fall for the following tax year. The IRS announcement for 2026 lists them with the rest of the year’s adjustments.

AMT paid because of an ISO exercise is not lost. The ISO adjustment only shifts when the income is taxed. So it creates a minimum tax credit, calculated on Form 8801 and carried forward. In a later year you can use it against regular tax. You can use it only to the extent your regular tax exceeds that year’s tentative minimum tax.

The shares also carry two bases. A basis is the amount the tax rules treat as your cost. For regular tax, your basis is what you paid: $2.00 a share in the example. For AMT, the adjustment raises it to $12.00. When you sell, the regular-tax gain is larger than the AMT gain. That pushes regular tax above the minimum tax and frees up the credit. The money comes back, but slowly and not necessarily in full in the year of the sale. The AMT itself was due in cash the April after exercise.

• Exercising in December without a modelThe spread is measured at exercise, and the whole year’s income goes into the calculation. Model AMTI before the trade.
• Using the strike-date valueThe adjustment uses fair market value on the day you exercise, normally the latest 409A. The value at grant only sets your strike price.
• Ignoring the 2026 phase-outFrom $500,000 of AMTI for a single filer, the exemption shrinks by 50 cents per dollar. A large exercise can lose most of it. Rules of thumb built on pre-2026 numbers understate the bill.
• Counting on a sale to pay the taxPrivate shares may have no buyer before April. You do not control when a tender offer, an organized offer to buy shares from employees, or a listing happens.
• Forgetting the creditAMT from an ISO exercise becomes a credit, carried forward on Form 8801. If you do not track it, you pay the same tax twice.
• Missing the holding periodsSelling within two years of grant or one year of exercise turns the gain into ordinary income. Sometimes that is the cheaper result. Make it a planned decision.

AMTI

Alternative minimum taxable income. Regular taxable income with the standard deduction (or itemized state and local taxes) and preference items, such as the ISO spread, added back.

Tentative minimum tax

AMTI minus the exemption, taxed at 26% and 28%. If it is higher than your regular tax, the difference is the AMT you owe.

Incentive stock option (ISO)

An employee option that is not taxed for regular tax on exercise and can turn the whole profit into long-term gain. Its exercise spread does count for AMT.

Strike price

The fixed price at which an option lets you buy a share. At a private company it is set at the 409A value on the grant date.

Spread

Fair market value of the shares at exercise minus the strike price paid. For ISOs it is the line 2i adjustment on Form 6251.

409A valuation

The independent appraisal of a private company’s common stock that sets option strike prices and, usually, the fair market value at exercise.

Minimum tax credit

AMT paid on timing items such as an ISO exercise, carried forward on Form 8801 and used in years when regular tax exceeds the minimum tax.

Disqualifying disposition

Selling ISO shares before the two-year and one-year holding periods are met. The spread becomes ordinary income. In the exercise year, it removes the AMT adjustment.

Every threshold and rate was checked against the IRS and the US Code on October 1, 2026, and applies to tax year 2026. The worked example is illustrative arithmetic on those figures. State alternative minimum taxes, where they exist, are not covered.