Skip to content
Rubric AdvisorsRubric Advisors

By

Tax Planning

Alternative Minimum Tax (AMT) Planning

AMT is a parallel federal tax you pay when it exceeds regular tax. ISO exercises are the most common trigger; 2026 law changes widen its reach.

Alternative Minimum Tax (AMT) Planning

1 / 7

What is the alternative minimum tax?

  • AMT is a second federal tax calculation that adds back certain items the regular system allows, then applies 26% and 28% rates.
  • You pay whichever is higher, regular tax or tentative minimum tax; the difference is your AMT.
  • Common triggers are the ISO exercise spread, state and local taxes, and certain private activity bond interest.
  • For tech employees, exercising and holding incentive stock options is by far the most frequent cause.
Direct IndexingOur Approach

Try Our Free Tools

Fee Impact CalculatorCompound Growth Visualizer

Related Topics

Timing ISO Exercises Around the Alternative Minimum TaxISOs vs NSOs: How Stock Option Taxes DifferEquity Compensation Tax Strategy Checklist

Full Guide

What is the alternative minimum tax?

  • AMT is a second federal tax calculation that adds back certain items the regular system allows, then applies 26% and 28% rates.
  • You pay whichever is higher, regular tax or tentative minimum tax; the difference is your AMT.
  • Common triggers are the ISO exercise spread, state and local taxes, and certain private activity bond interest.
  • For tech employees, exercising and holding incentive stock options is by far the most frequent cause.

What are the 2026 AMT numbers?

  • The 2026 exemption is $90,100 for single filers and $140,200 for married couples filing jointly.
  • The exemption phases out by 50 cents per dollar of AMT income above $500,000 single and $1,000,000 joint.
  • The 28% rate applies to AMT income above $244,500 after the exemption, for both single and joint filers.
  • Inside the phase-out range, the effective marginal AMT rate is about 42% (28% times 1.5), not just 28%.

2026 changes from the July 2025 tax law

  • The July 4, 2025 tax law made the higher exemption permanent but reset the phase-out thresholds lower and doubled the phase-out rate.
  • The same law raised the SALT deduction cap to $40,400 for 2026, phasing down above $505,000 of income.
  • State and local taxes are not deductible for AMT, so a larger regular-tax SALT deduction can widen the gap and pull more people into AMT.
  • Net effect: high earners, especially in California, may have less room for ISO exercises before AMT starts than in 2025.

How do ISO exercises create AMT?

  • The spread between fair market value and strike price at exercise counts as AMT income, even though no shares were sold.
  • If you sell the shares in the same calendar year as exercise, the AMT adjustment generally goes away and the gain is ordinary income.
  • AMT from exercise-and-hold creates cash taxes due before any liquidity, which matters most at private companies.
  • California has its own AMT, and it also counts the ISO spread, so state exposure needs separate modeling.

Can you get AMT back later?

  • AMT caused by timing items like ISO exercises generates a minimum tax credit, claimed on IRS Form 8801.
  • The credit is usable in later years when regular tax exceeds tentative minimum tax, and it carries forward indefinitely.
  • A later sale of the ISO shares often speeds recovery, because the AMT basis is higher than the regular-tax basis.
  • Recovery can take several years, and a large drop in share price can leave credits that are slow to use.

Common AMT planning approaches

  • Projecting both regular tax and AMT before an exercise shows how much spread fits under the AMT crossover point.
  • Spreading ISO exercises across calendar years can use each year's exemption, but delays carry price and expiration risk.
  • Years with lower regular income, such as a sabbatical, may leave more room for exercises without AMT.
  • Once you are already in AMT, additional ordinary income may be taxed at a lower marginal rate than usual.

Key takeaways

  • AMT is mainly a concern for ISO holders, high SALT payers, and some private activity bond investors.
  • The 2026 rules lower where the exemption phase-out starts, so prior-year rules of thumb may no longer hold.
  • AMT paid on ISO exercises can usually be recovered over time, but it is still cash out of pocket now.
  • Rubric Advisors does not prepare tax returns; model any exercise with a CPA before acting.
← Browse All Topics

Related Topics

Equity Compensation

Timing ISO Exercises Around the Alternative Minimum Tax

Exercising ISOs creates no regular income tax, but the spread counts for AMT; knowing where AMT starts helps size and time each exercise.

Equity Compensation

ISOs vs NSOs: How Stock Option Taxes Differ

NSO spreads are taxed as wages at exercise; ISO spreads skip regular tax but can trigger AMT, and qualify for long-term rates if holding periods are met.

Tax Planning

Equity Compensation Tax Strategy Checklist

ISOs, NSOs, RSUs, and ESPP shares are each taxed at different moments; knowing which you hold sets which tax planning choices you have.

Sources