What Is the Alternative Minimum Tax (AMT)? How AMT Works
The Alternative Minimum Tax (AMT) is a tax calculation that the IRS uses to ensure that high-income earners pay an appropriate amount of taxes. So, what is the Alternative Minimum Tax, exactly, and why does it matter if you receive equity compensation?
Under the standard system, it’s possible to significantly reduce your tax bill using deductions and exemptions. The AMT prevents people from skirting around the tax system by imposing a second calculation with fewer deductions available. Whichever calculation yields the higher tax bill is what you ultimately owe.
High earners and company equity holders should be aware of the AMT so they can plan ahead to cover their tax bill. This is especially true for those who hold incentive stock options (ISOs), as exercising options can trigger a significant AMT bill even if you haven’t sold any shares. Understanding how the AMT works and when it applies to you is a key pillar of equity tax planning.
How Does The Alternative Minimum Tax Work?
The Alternative Minimum Tax (AMT) is a parallel tax calculation that runs alongside the regular tax system. When you file, your tax liability will be calculated twice: once under the regular rules, and once under the AMT rules. Whichever amount is higher is what you owe.
How to Calculate Alternative Minimum Taxable Income
To calculate your alternative minimum taxable income, follow these steps:
Start with your regular taxable income.
Add back the exclusions and deductions that don't count under AMT rules, such as state and local tax (SALT) deductions and other preference items.
Include the paper gain from any ISO exercises. Under regular tax, exercising an ISO isn't taxable; you're only taxed when you sell. AMT taxes that gain in the year you exercise instead. Add these first three steps to arrive at your Alternative Minimum Taxable Income (AMTI).
Subtract your AMT exemption amount from your AMTI to arrive at your AMT taxable base.
Multiply your AMT taxable base by the applicable AMT rate (26% or 28%, depending on your income level) to determine your tentative minimum tax before foreign tax credits.
Subtracting the AMT foreign tax credit gives you your Tentative Minimum Tax. Your final AMT liability is the excess amount by which your Tentative Minimum Tax exceeds your regular tax bill.
If you find yourself wondering, ”how do I calculate AMT tax?”, it’s probably time to connect with your financial planner. Because the AMT calculation involves many moving parts, it's worth having a tax planning professional run the numbers for you.
AMT Exemptions and Threshold Amounts
The AMT exemption works similarly to a standard deduction: It’s the amount of income shielded from AMTs before those tax rates are applied. For 2026, the exemption is $90,100 for single filers and $140,200 for married couples filing jointly.
These exemptions don’t apply evenly to everyone, though. Once your AMTI exceeds $500,000 (single) or $1,000,000 (joint), it phases out at 50 cents per dollar, and disappears entirely at $680,200 (single) or $1,280,400 (joint).*
This is where a lot of high earners get caught off guard: losing the exemption can push your effective AMT rate higher than expected, especially in a year with a large ISO exercise or capital gain.
*Note: These figures are adjusted annually for inflation, so it's worth confirming current numbers each tax year.
AMT Tax Rates
As of 2026, AMT applies just two tax rates:
26% on the first $244,500 ($122,250 for married couples filing separately); and
28% on any amount above that.
For example, if your AMT taxable base is $300,000, the first $244,500 is taxed at 26%, and the remaining $55,500 is taxed at 28%. From there, the bigger question is what actually pushes AMTI high enough to trigger these rates in the first place.
What Triggers the Alternative Minimum Tax?
Certain income types and deductions are far more likely than others to push you into AMT territory. For tech professionals with company equity, a handful of specific triggers account for most AMT liabilities.
Incentive Stock Option Exercises
For tech employees and founders, exercising ISOs is one of the most common ways to trigger the AMT.
When you exercise an ISO and hold the shares, the spread between your exercise strike price and the stock's Fair Market Value (FMV) on the exercise date is treated as a tax preference item. While standard income tax ignores this paper gain until you sell the shares, the AMT adds this spread back into your income calculation in the year of exercise.
If you’re planning to exercise ISOs, especially a large amount, modeling the tax impact in advance as part of your broader equity tax planning ensures you avoid unexpected tax consequences.
State and Local Tax Deductions and Other Preference Items
State and local tax (SALT) deductions are another common AMT trigger for high earners since they’re fully disallowed under the AMT calculation. If you live in a high-tax state and claim a large SALT deduction, that entire amount gets added back to your AMTI.
There are a few other preference items that can push you into AMT territory as well. On their own, they're less common triggers than SALT or ISO exercises, but they can add up quickly when combined with a high income year:
Certain miscellaneous itemized deductions that are allowed under regular tax but not recognized under AMT
Tax-exempt interest on private activity bonds, which is normally tax-free but counts as income under AMT rules
Home equity loan interest, if the loan wasn't used to buy, build, or improve the home
Large Capital Gains and Concentrated Stock Sales
Capital gains themselves aren’t taxed differently under AMT, but a large gain in a single year can still trigger AMT indirectly. That's because a big spike in income pushes up your AMTI, which can carry you into the exemption phaseout range.
That could mean you lose part or all of your AMT exemption, raising your effective AMT rate even though the gain itself isn't a preference item.
This is especially relevant around liquidity events, such as a company IPO or a tender offer, where a concentrated stock sale can create a large, one-time income spike. Combined with an ISO exercise or a large SALT deduction in the same year, that spike can be enough to trigger the AMT.
Do You Have to Pay Alternative Minimum Tax?
Understanding what the Alternative Minimum Tax is and how it applies to your specific income and deductions is the first step to knowing whether you're at risk.
Whether you owe AMT depends on a combination of factors, including:
Income level
Filing status
Deductions
AMT preference items
There’s no single income threshold that guarantees AMT applies. It comes down to how your AMTI compares to your exemption once all the add-backs are factored in.
For most W-2 earners without equity compensation, AMT rarely comes into play. But that can change quickly if you hold Incentive Stock Options (ISOs). A sudden income spike, such as from an ISO exercise or a concentrated stock sale, can be enough to trigger AMT. This is often exactly what happens when a company goes public. Suddenly, you have a large amount of taxable income concentrated in a single year. With the right planning, however, you can manage this risk.
Strategies to Manage AMT Risk
While you can’t eliminate AMT risk, there are ways to manage your exposure. Consider the following strategies for mitigating risk:
Calculate your annual AMT crossover point. Every year, there is a specific dollar amount of ISO spread you can absorb before your Tentative Minimum Tax exceeds your regular tax. Exercising up to this exact threshold allows you to acquire shares without triggering additional tax.
Spread ISO exercises across multiple tax years. Exercising a smaller number of ISOs each year, rather than all at once, can help keep your AMTI below the threshold.
Time exercises around lower-income years. A year with lower regular income creates a wider gap between your regular tax and Tentative Minimum Tax. This lower baseline allows your full AMT exemption to absorb a larger ISO exercise spread without triggering an AMT bill.
Plan carefully around liquidity events. A tender offer, company IPO, or concentrated stock sale can create a massive income spike that reduces your available AMT exemption. Modeling the combined impact of stock sales, ISO exercises, and SALT deductions before executing transactions is critical to avoiding unexpected cash liabilities.
Use the AMT credit carryforward. If you've paid AMT in a prior year, you may be able to claim a credit against your regular tax in future years. This can help offset some of the cost over time.
Because these strategies depend heavily on your specific situation, it's worth working with a financial advisor to model different exercise scenarios before making investment decisions.
Plan for AMT
AMT can be one of the more confusing parts of tax planning, especially if you’re navigating ISOs, a liquidity event, or a high-income year for the first time. At Citrine Capital, we work closely with Bay Area tech professionals and equity holders to model out AMT exposure, so decisions around exercising options or timing a stock sale are made with the full tax picture in mind.
If you’re navigating taxes and equity compensation, we’re here to help. Our trusted advisors will walk through your situation and help you build a plan that works for you. Request a meeting today to get started.
About The Author
Jirayr Kembikian, CFP® is a wealth advisor, managing director and co-founder of Citrine Capital, a San Francisco-based wealth management and tax preparation firm serving tech professionals, founders, and business owners. He specializes in navigating the complexities of equity compensation, private investments, and Bitcoin wealth strategies. With over a decade of experience guiding clients through liquidity events and complex financial decisions, Jirayr brings a grounded yet forward-thinking perspective to building and preserving wealth.