Alternative Minimum Tax (AMT)

The Alternative Minimum Tax (AMT) is a parallel federal tax system that runs alongside the regular income tax. Every year, you calculate your tax liability under both systems and pay whichever is higher. The AMT was designed in 1969 to ensure that high earners who use deductions, credits, and tax preferences to reduce their regular tax bill still pay a minimum amount of federal tax. For most middle-income workers, the AMT is invisible — it rarely applies. For tech workers who exercise incentive stock options (ISOs), earn significant income in low-tax structures, or have large itemized deductions, the AMT can produce a surprise tax bill of tens or hundreds of thousands of dollars if not planned for.

How the AMT Works: The Two-Track System

The AMT calculation starts with your regular taxable income and then adds back a specific list of deductions and preferences that the AMT does not allow. The result is your Alternative Minimum Taxable Income (AMTI). You subtract the AMT exemption from AMTI and apply the AMT rates. If the result exceeds your regular tax, you pay the difference as AMT on top of your regular tax.

The process step by step:

1. Start with regular taxable income — the income figure after your standard or itemized deductions, before credits
2. Add back AMT preferences and adjustments — specific items the AMT disallows or recalculates (detailed below)
3. This produces AMTI — Alternative Minimum Taxable Income
4. Subtract the AMT exemption — a threshold amount that phases out at higher incomes
5. Apply AMT rates — 26% on the first $244,500 of AMTI above the exemption; 28% on the remainder
6. Compare to regular tax — if AMT exceeds regular tax, pay the difference as additional tax (reported on Form 6251)

2026 AMT Exemptions and Phase-Outs

The AMT exemption is a flat amount subtracted before applying AMT rates — functioning like a large standard deduction within the AMT system. The 2026 exemption amounts are:

• Single / Head of Household: $90,100
• Married filing jointly / Surviving spouse: $140,200
• Married filing separately: $70,100

The exemption phases out as AMTI rises above a threshold — and for 2026, this threshold dropped significantly compared to prior years due to the One Big Beautiful Bill Act (OBBBA). The 2026 phase-out thresholds are:

• All individual filers (single, HoH, MFS): Phase-out begins at $500,000 (down from $626,350 in 2025)
• Married filing jointly: Phase-out begins at $1,000,000 (down from $1,252,700 in 2025)

The phase-out rate also doubled under the OBBBA: the exemption is now reduced by $0.50 for every $1 of AMTI above the threshold (up from $0.25 in prior years). The exemption is fully eliminated once AMTI exceeds approximately $680,200 for single filers ($500,000 + $90,100 ÷ 0.50) and $1,280,400 for MFJ ($1,000,000 + $140,200 ÷ 0.50).

The doubled phase-out rate creates a steeper hidden marginal rate bump than in prior years. During the phase-out range, each additional dollar of AMTI eliminates $0.50 of exemption — which is itself subject to the 26%–28% AMT rate. This produces an effective marginal AMT rate of 39%–42% during the phase-out range, well above both the nominal AMT rates and the regular income tax brackets for most filers. For a senior tech worker with $600,000 of income exercising ISOs, the ISO bargain element lands squarely in this high-rate zone.

What Gets Added Back: AMT Preferences and Adjustments

The difference between regular taxable income and AMTI comes from a list of items the AMT disallows or treats differently. The most significant for tech workers:

ISO Exercise Spread — The Most Important for Tech Workers

When you exercise incentive stock options (ISOs), no regular income tax is due at exercise — you only pay tax when you eventually sell the shares. This is the defining advantage of ISOs over non-qualified stock options (NSOs). However, the bargain element — the difference between the fair market value at exercise and the exercise price — is an AMT preference item. It gets added to your AMTI in the year you exercise, even though you received no cash and paid no regular tax.

Example: You exercise ISOs for 10,000 shares with a strike price of $5 when the stock is trading at $30. Bargain element = ($30 − $5) × 10,000 = $250,000. This $250,000 is added to your AMTI. If you are in the AMT phase-out range and already have $500,000 of other income, the additional AMTI from the ISO exercise can generate a very large AMT bill — potentially $60,000–$70,000 or more — due entirely to stock you have not yet sold and may not be able to sell immediately if it is restricted.

State and Local Tax (SALT) Deduction

Regular income tax allows you to deduct state income taxes and property taxes (capped at $10,000 under current law). The AMT does not allow any deduction for state and local taxes. For residents of California, New York, or other high-tax states who pay significant state income tax, this add-back alone can push AMTI substantially above regular taxable income.

Depreciation on Real Estate and Business Assets

The AMT requires slower depreciation methods for certain assets than the regular tax accelerated depreciation rules allow. If you own rental properties and take accelerated depreciation deductions, the difference between accelerated and AMT depreciation is added back to AMTI. This is relevant for tech workers who own investment real estate or who have passive activity losses from depreciation-heavy investments.

Certain Itemized Deductions

Before the 2017 Tax Cuts and Jobs Act (TCJA), miscellaneous itemized deductions — investment expenses, unreimbursed employee expenses, tax preparation fees — were deductible for regular tax but not for AMT. The TCJA eliminated most of these deductions entirely for regular tax through 2025, reducing this particular AMT preference's impact. If they are restored after 2025, the AMT difference resurfaces.

Research and Development Credits and Other Preferences

Certain business tax credits and deductions allowed under the regular system are limited or disallowed under the AMT. For most W-2 employees at large tech companies, these are not relevant. For engineers who own small businesses, have significant investment in tax-advantaged activities, or take depletion deductions, additional AMT preferences may apply.

The AMT Credit: Getting Your Money Back in Future Years

When you pay AMT due to timing differences — preferences that defer income rather than permanently exclude it — you accumulate an AMT credit (Form 8801). This credit can be applied against regular tax in future years when your regular tax exceeds your AMT. It does not expire.

The ISO scenario is the clearest example: in Year 1, you exercise ISOs and pay $80,000 of AMT on the bargain element. In Years 2 through 5, after selling the shares and having lower income, your regular tax exceeds AMT each year. You can use the accumulated $80,000 AMT credit to offset regular tax in those years — effectively getting the AMT back over time, though with no interest for the deferral.

This is why ISO AMT is described as a "timing" problem rather than a permanent tax cost — in theory. In practice, the refund timeline can be very long (especially if income remains high), and if the stock crashes after you exercise and you cannot sell at a gain, you may have paid AMT on phantom income that never materialized as real wealth. The AMT credit offsets future regular tax regardless of what happened to the stock, which provides some recovery — but you still had to fund the AMT bill in Year 1 with real cash.

ISOs, AMT, and the Classic Tech Worker Mistake

The most financially damaging AMT scenario for tech workers occurs when someone exercises a large block of ISOs at the end of the year, generates a massive AMTI from the bargain element, pays or plans to pay the resulting AMT — and then the stock price collapses before they can sell. They are left holding stock worth a fraction of the exercise-date value, with an AMT bill based on a value that no longer exists.

In this scenario:

• AMT was calculated on the bargain element at the high exercise-day price
• The stock then declined to near the strike price or lower
• Selling the shares generates a capital loss (not a reversal of the AMT income)
• The AMT credit accrues but may take many years to recover if income remains high
• The cash to pay the AMT must still come from somewhere — often requiring selling other assets or liquidating savings

This scenario is not hypothetical. It destroyed significant wealth for many tech workers during the dot-com collapse of 2000–2001, and repeated on a smaller scale during subsequent market downturns. The lesson: model the AMT impact before exercising ISOs, consider the worst-case stock price scenario, and do not assume you can sell enough shares to cover the tax bill.

Strategies to Manage ISO AMT

• Exercise early in the calendar year: If the stock rises through the year and you hold through December 31, you have the full year's appreciation included in AMTI. Exercising early gives you more time to observe price movement and potentially sell before year-end to make the sale a disqualifying disposition (taxed as ordinary income but eliminating the AMT preference).
• Spread exercises across multiple years: Rather than exercising all available ISOs in one year, exercise smaller tranches annually to keep the AMT preference below the level where it triggers significant additional tax.
• Model the AMT breakeven: Calculate how many ISO shares you can exercise in a given year before AMT begins to exceed regular tax. For many tech workers, there is a meaningful "free zone" of ISO exercises that generate no incremental AMT because the resulting AMTI still falls within the exemption range.
• Disqualifying dispositions in high-AMT years: Selling ISO shares in the same calendar year you exercise them converts the gain to ordinary income for regular tax purposes and eliminates the AMT preference. This is taxed worse in ordinary years but can be better if the alternative is paying 28% AMT on a large bargain element.
• 83(b) election on early exercise: If a company allows early exercise of unvested ISOs, an 83(b) election locks in the bargain element — often near zero at early-stage companies with low FMV — at a small or zero AMT cost, allowing all subsequent appreciation to be capital gain.

Who Is Most Exposed to AMT in 2026

The OBBBA's lower phase-out thresholds and doubled phase-out rate significantly expand AMT exposure compared to 2025. More high-income earners will find themselves in the phase-out zone, and the cost of being there is higher. The primary groups affected:

• ISO exercisers: The ISO bargain element remains a full AMT preference and is the most common AMT trigger for tech workers. The lower $500,000 phase-out threshold for single filers means that a senior engineer earning $400,000 in W-2 income who exercises ISOs with a $200,000 bargain element will have AMTI of $600,000 — well into the phase-out zone where the effective marginal AMT rate is 39%–42%.
• High earners between $500,000 and $680,200 (single) or $1,000,000 and $1,280,400 (MFJ): Even without ISO exercises, AMTI in the phase-out range triggers the elevated 39%–42% effective rate. The lower 2026 thresholds bring more tech workers into this range than in prior years.
• High-income filers in high-tax states: The SALT add-back remains in AMT. California's 13.3% top rate on $500,000 of income means $66,500 of SALT that disappears as a deduction under AMT, pushing AMTI higher and deeper into the phase-out zone.
• Early retirement with large Roth conversions: Roth conversions increase AMTI as ordinary income. A large single-year conversion that pushes AMTI above $500,000 (single) or $1,000,000 (MFJ) can land in the phase-out range at the worst possible effective marginal rate. Spreading conversions across years is even more important under the 2026 rules.

AMT in Early Retirement

Early retirees with lower and more controlled income often fall entirely below the AMT threshold — the exemption is large enough that most retirees living on portfolio income never generate AMTI close to triggering AMT. However, two scenarios reintroduce AMT exposure in early retirement:

• Exercising remaining ISOs from a prior employer: ISOs typically expire 10 years after grant and 90 days after leaving employment (often reduced to 30–90 days post-termination depending on company policy). Tech workers who leave a company with unexercised ISOs face a deadline. If they exercise a large block after leaving, the bargain element still triggers AMT — and they no longer have employer stock sale restrictions, so they can sell and cover the bill, but the tax cost must still be modeled.
• Large Roth conversions in a single year: Converting a large traditional IRA balance to Roth in one year spikes AMTI and can push into the phase-out range where the effective AMT rate exceeds the regular marginal rate. Spreading conversions across multiple years avoids this — and the optimal annual Roth conversion amount should be modeled with AMT as one of the constraints.