Alternative Minimum Tax (AMT)

The alternative minimum tax is a second, parallel computation of federal income tax that runs alongside the ordinary one. Section 55, headed "Alternative minimum tax imposed," charges "a tax equal to the excess (if any) of the tentative minimum tax for the taxable year, over the regular tax for the taxable year." So the alternative minimum tax is never charged on top of a full regular tax bill: it is the top-up that brings a taxpayer whose regular tax is lower up to the minimum figure. In practice it means computing the tax twice and paying the larger result, on Form 6251.

One disambiguation before going further. Section 55 contains two different taxes. Subsection (b)(1) sets out the individual calculation described on this page. Subsection (b)(2) sets out the corporate alternative minimum tax, 15% of adjusted financial statement income for what the statute calls an applicable corporation, which reaches only very large companies and never appears on a personal return. They share a section number and almost nothing else.

What the parallel calculation actually changes. The starting point is the regular taxable income figure. From there, certain deductions allowed for regular tax are added back and certain items of income that the regular calculation defers or excludes are brought in, producing alternative minimum taxable income. A large exemption is subtracted, and the remainder, the taxable excess, is taxed at 26% on the first slice and 28% above an inflation-adjusted breakpoint. Those two rates are the whole schedule, which is why the alternative minimum tax can bite a household whose regular marginal rate is higher than 28%: the tax base is broader even though the rates are lower.

The exemption, and the phaseout that is the real mechanism. For 2026 the exemption is $140,200 on a joint return or for a surviving spouse and $90,100 for an unmarried taxpayer who is not a surviving spouse. A married person filing separately gets half the joint amount, and estates and trusts get a much smaller figure of their own. Section 55(d)(2) then reduces the exemption as income rises. The base rate written into that paragraph is 25%, but section 55(d)(4) substitutes 50 percent for it for taxable years beginning after 2025, so the operative withdrawal is now 50 cents of exemption for every dollar of alternative minimum taxable income above the threshold. For 2026 the thresholds are $1,000,000 on a joint return and $500,000 for an unmarried taxpayer. The 50% rate is new: through 2025 the withdrawal ran at the 25% written into paragraph (2).

That 50% figure is the most important number on this page, because of what it does to the marginal rate. Inside the phaseout range, one extra dollar of alternative minimum taxable income increases the taxable excess by $1.50: the dollar itself, plus the 50 cents of exemption it destroys. Taxed at 28%, that is 42 cents of tentative minimum tax on one dollar of income. Households describing an alternative minimum tax bill as coming out of nowhere are usually describing this effect.

What the 2025 law changed, and why 2026 is not a continuation of 2025. The relevant provision of the One Big Beautiful Bill Act is titled "Extension of increased alternative minimum tax exemption amounts and modification of phaseout thresholds," and both halves of that title did something. The extension made the larger exemptions permanent instead of letting them lapse after 2025. The modification went the other way: it reset the joint phaseout threshold to $1,000,000, re-based its inflation adjustment to calendar year 2025 so that no adjustment applies for 2026, and doubled the withdrawal rate from 25% to 50%.

The combined effect on a joint return is easy to state and easy to miss. For 2025 the phaseout began at $1,252,700 and the exemption was not fully gone until $1,800,700. For 2026 it begins at $1,000,000 and, at twice the withdrawal rate, is fully gone by roughly $1.28 million. So a household whose alternative minimum taxable income did not change at all between the two years can lose exemption in 2026 that it kept in 2025. Revenue Procedure 2025-32 records the re-basing in terms worth carrying: "Section 55(d)(4)(B) as amended provides that the $1,000,000 amount described in § 55(d)(4)(A)(ii)(I) is not adjusted for inflation for any taxable year beginning before January 1, 2027." The threshold looks like a fixed statutory amount and is not; it starts moving again after 2026.

The household triggers that survive. Exercising an incentive stock option and holding the shares creates an alternative minimum tax adjustment equal to the spread at exercise, which is the single commonest way an ordinary household meets this tax; the mechanics belong to the incentive stock options page. Interest on a specified private activity bond is a preference item, so a municipal bond portfolio can produce alternative minimum taxable income even though the interest is exempt for regular tax. State and local taxes taken as an itemized deduction on the regular return are added back in full, so a large state tax deduction pushes alternative minimum taxable income up without any change in economic income. Large numbers of dependents used to matter and no longer do, because personal exemptions no longer exist for regular tax either.

Timing items can come back as a credit. Some adjustments, the incentive stock option spread chief among them, are differences of timing rather than of amount: the same gain is eventually taxed under both systems, just in different years. Alternative minimum tax paid because of that kind of item can generate a credit against regular tax in later years under section 53, headed "Credit for prior year minimum tax liability," which is why an exercise-year bill is not always a permanent cost. Adjustments that are permanent, a disallowed state tax deduction among them, generate no credit.

The sequence is fixed, and Form 6251 walks it in order.

1. Start from regular taxable income and add back the deductions the alternative system does not allow, itemized state and local taxes among them.

2. Add the preference and adjustment items, including the spread on an incentive stock option exercised and held, and interest on specified private activity bonds. The result is alternative minimum taxable income.

3. Subtract the exemption, reduced by 50 cents for every dollar of alternative minimum taxable income above the phaseout threshold for your filing status. The result is the taxable excess.

4. Apply 26% to the first slice and 28% above the breakpoint to get the tentative minimum tax.

5. Compare with the regular tax. If the tentative minimum tax is larger, the difference is the alternative minimum tax and it is added to the return.

A hypothetical example of why the phaseout matters more than the rate. Assume for the arithmetic an exemption of $140,000 and a phaseout threshold of $1,000,000 for a joint filer. These are round figures chosen to keep the numbers checkable; the actual 2026 amounts are $140,200 and $1,000,000.

A couple's alternative minimum taxable income is $1,100,000.

• Income above the threshold: $1,100,000 − $1,000,000 = $100,000.
• Exemption lost: 50% of $100,000 = $50,000, leaving an exemption of $90,000.
• Taxable excess: $1,100,000 − $90,000 = $1,010,000.

Now suppose they exercise options and their alternative minimum taxable income is $1,150,000 instead.

• Income above the threshold: $150,000. Exemption lost: $75,000, leaving $65,000.
• Taxable excess: $1,150,000 − $65,000 = $1,085,000.

The extra $50,000 of income increased the taxable excess by $75,000. At 28%, that is $21,000 of additional tentative minimum tax on $50,000 of income, an effective rate of 42%. The stated rate never went above 28%.

What the design is meant to do

• It sets a floor, so a return carrying an unusual concentration of preferential items still produces some tax.
• The rate schedule is only two rates, so the second calculation is simpler than the first one it shadows.
• The exemption is large enough that the tax reaches a small minority of households rather than functioning as a general second tax.
• Where the adjustment is a timing difference, tax paid can return later as a credit against regular tax rather than being lost.

The honest criticisms

• The phaseout produces marginal rates well above the stated 26% and 28% without ever appearing in a rate table, so the tax is hard to anticipate from the schedule alone.
• Exercising incentive stock options can create a tax bill on paper gains that were never sold, in a year with no cash from the transaction at all.
• Adding back state and local taxes charges a household more for living in a high-tax state, which has nothing to do with the sheltering the tax was designed to reach.
• The 2025 law is described everywhere as making the exemption permanent, which is true and incomplete: it also cut the phaseout threshold and doubled the withdrawal rate, so exposure can rise in a year when nothing about the household changed.
• Working out whether you are exposed generally requires actually running the second calculation, which is why the exposure is usually discovered by software rather than anticipated.