{"id":353985,"date":"2022-08-19T07:44:43","date_gmt":"2022-08-19T12:44:43","guid":{"rendered":"https:\/\/ability-fl-prod.internetbrands.com\/ability-law\/tax\/federal-taxes\/what-is-the-alternative-minimum-tax.html"},"modified":"2026-07-06T16:11:31","modified_gmt":"2026-07-06T21:11:31","slug":"what-is-the-alternative-minimum-tax","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/tax\/federal-taxes\/what-is-the-alternative-minimum-tax.html","title":{"rendered":"Legal Strategies for Alternative Minimum Tax (AMT) Planning"},"content":{"rendered":"\n
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Legal Strategies for Alternative Minimum Tax (AMT) Planning<\/h1>\n\n
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\n By J.P. Finet, J.D.<\/a> | Legally reviewed by Catherine Hodder, Esq.<\/a>\n | Last updated\n
\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
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This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n

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Key Takeaways<\/h2>\n

The Alternative Minimum Tax<\/span> (AMT<\/span>) is a federal income tax imposed on certain\u00a0taxpayers<\/span>\u00a0with\u00a0high income<\/span>\u00a0from sources such as\u00a0incentive stock options<\/span>\u00a0(ISOs<\/span>). To determine their final bill, a taxpayer<\/span> must calculate their regular tax<\/span> and the AMT<\/span>, and pay the higher amount.<\/p>\n\n <\/div>\n <\/div>\n<\/div>\n\n\n

The alternative minimum tax<\/span> (AMT<\/span>) was intended to ensure that households with very high incomes<\/span> could not shelter most of their income from taxation through deductions and other tax benefits<\/span>. Changes to tax law<\/span> under the 2017 Tax Cuts and Jobs Act (TCJA) and the One Big Beautiful Bill Act made it easier for wealthy U.S. taxpayers<\/span> to shield their income from the AMT<\/span>.<\/p>\n

However, one category of U.S. taxpayers<\/span><\/a> is still regularly subject to the tax: workers whose incentive stock options<\/span> dramatically increased in value after they were awarded. This can leave them blindsided by an unexpectedly large AMT<\/span> bill.<\/p>\n

Incentive stock option<\/span> (ISO<\/span>) awards allow companies to offer higher pay to employees and managers without incurring the expense of higher wages. ISOs<\/span> grant recipients the right to purchase company stock at a fixed price after a specified holding period<\/span>, regardless of the stock\u2019s fair market value<\/span> (FMV) at the time of purchase.<\/p>\n

Most cases have a vesting<\/span> date, which is the earliest the options can be exercised. If the value of the stock increases significantly after the option was issued, the ISO<\/span> recipient can earn a great deal of money by purchasing stock at the option price and then selling it for its FMV.<\/p>\n

Unfortunately for those who have received ISOs<\/span>, the difference between the amount paid for the options and the FMV of the stock is usually considered equity compensation that may be treated as taxable income<\/span> for the purposes of calculating the AMT<\/span>. If the difference between the purchase price and FMV is large enough, purchasing the stocks that were part of an ISO<\/span> award can trigger the AMT<\/span>. As most stock must be held for a year to take advantage of the favorable capital gains<\/span> tax rate<\/span>, your tax bill<\/span> may have a substantial increase if you turn around and sell the options to cover the AMT<\/span> bill.<\/p>\n

In the sections that follow, we\u2019ll look at how the IRS<\/span> applies the AMT<\/span> and capital gains<\/span> tax to ISOs<\/span>. We\u2019ll also explore some common ways for minimizing your AMT<\/span> bill.<\/p>\n

What Is the AMT<\/span>?<\/strong><\/h2>\n

The AMT<\/span> is essentially a flat tax on adjusted gross income that exceeds the “AMT<\/span> exemption.” It\u2019s based on AMT<\/span> income (AMTI), which includes certain types of income that are exempt from the traditional income tax. It also disallows many ordinary income <\/span>tax<\/span> deductions<\/span>, such as the standard deduction<\/span> and the deduction for state and local taxes. If you may be subject to the AMT<\/span>, you\u2019ll need to perform\u00a0tax calculations<\/span>\u00a0to determine your tax bill<\/span> for both income tax and\u00a0the AMT<\/span>. Once that\u2019s done, you\u2019ll be required to pay the higher of the two taxes.<\/p>\n

The AMT<\/span> has two tax brackets (26% and 28%) that apply to all income above the exempt amount. For 2026, the exempt amount is $91,100 for single filers or heads of household, and $140,200 for married filers filing jointly (MFJ). The amount of income that is AMT<\/span>-exempt is adjusted each year by the U.S. Treasury Department for inflation.<\/p>\n

For 2026, the 26% tax rate<\/span> applies to the first $244,500 above the exempt amount for both individual and married taxpayers<\/span>. Anything above that amount is taxed at 28%.<\/p>\n

The AMT<\/span> exemption will begin phasing out when you earn more than a specified amount in a year. For 2026, the exemption begins to phase out at 50 cents per dollar earned when an individual\u2019s ATMI reaches $500,000 for single\u00a0filers\u00a0and $1 million for MFJ filers. Once the tax exemption is fully phased out, all your income will be taxed at the 28% rate because you will no longer qualify for any exemptions.<\/p>\n

The AMT<\/span> Credit<\/span><\/strong><\/h2>\n

Fortunately, when you pay the AMT<\/span> on the exercise of an ISO<\/span>, you are often eligible to receive a tax credit<\/span> for that amount, usually referred to as an \u201cAMT<\/span> credit<\/span>.\u201d A tax credit<\/span> reduces the tax you owe on a dollar-for-dollar basis. A $100 AMT<\/span> credit<\/span> can be used to reduce other taxes owed by $100.<\/p>\n

If the AMT<\/span> credit<\/span> exceeds the tax due, you are usually allowed to carry it forward and apply it to future years<\/span>. While the AMT<\/span> credit<\/span> may give you a long-term tax benefit<\/span>, it can\u2019t be applied to the same year the tax was incurred.<\/p>\n

What Is the Capital Gains<\/span> Tax?<\/strong><\/h2>\n

In general, the long-term <\/span>capital gains<\/span> tax<\/span> applies to the profit from the sale or other disposition of a capital asset (such as stock) held for at least one year. The capital gains<\/span> tax rate<\/span> is capped at 20% and is usually based on the difference between the purchase price and the sale price<\/span>.<\/p>\n

The capital gains<\/span> tax rate<\/span> is significantly lower than the top income <\/span>tax rate<\/span>, which is 37%. If a capital asset has been held for less than one year, it is considered a short-term<\/span> capital asset that is taxed at the standard income <\/span>tax rates<\/span>. For stock purchased through an ISO<\/span> award, there is an additional requirement that the sale be at least 2 years after the grant date<\/span>.<\/p>\n

While an ISO<\/span> exercise<\/span> may trigger the AMT<\/span>, it is important to remember that the stock may also be subject to capital gains<\/span> treatment<\/span> when it is sold. Fortunately, if the stock is sold at least a year after the ISO<\/span> is exercised, an AMT<\/span> credit<\/span> is often available to reduce the capital gains<\/span> tax due by the amount of AMT<\/span> paid on the options.<\/p>\n

Reducing the AMT<\/span> Due<\/strong><\/h2>\n

Because it has become so common for individuals exercising their ISOs<\/span> to owe the AMT<\/span>, tax lawyers have developed several\u00a0financial planning<\/span>\u00a0strategies to minimize your AMT<\/span> liability<\/span>. Four of the most common are listed below.<\/p>\n

Buy When the Stock Price<\/span> Is Low<\/strong><\/h3>\n

The simplest way to reduce your AMT<\/span> bill is by minimizing the income subject to the tax. This means exercising the ISO<\/span> while the difference between the exercise price<\/span> and the FMV is small. The difference between the price paid (known as AMT<\/span> basis<\/span>) and FMV is often called the \u201cspread.\u201d The smaller the spread, the lower the AMT<\/span>. In fact, purchasing while the spread is low can sometimes eliminate the AMT<\/span> entirely by getting you under the AMT<\/span> threshold.<\/p>\n

Time Exercise of the ISOs<\/span> To Avoid the AMT<\/span><\/strong><\/h3>\n

The first $91,100 of AMTI ($140,200 or less for MFJ) is exempt from the AMT<\/span>. Since ISOs<\/span> are generally not subject to income tax, spreading the\u00a0ISOs<\/span>\u00a0over several years may keep the total spread between the\u00a0exercise price<\/span>\u00a0and FMV below $91,100. This can avoid most of the tax on the transaction.<\/p>\n

Avoid the Exemption Phase-Out<\/strong><\/h3>\n

The AMT<\/span> exemption begins phasing out when AMTI reaches $500,000 ($1 million for MFJ), with a 50-cent rate for each additional dollar of AMTI. This means that for each $2 in AMTI over $500,000, you lose $1 in exemptions. If possible, exercise an ISO<\/span> over multiple years to keep your AMTI under $500,000 each calendar year<\/span>. That will ensure you preserve the $91,100 AMTI exemption, which can significantly reduce the AMT<\/span> you owe.<\/p>\n

Exercise ISOs<\/span> Early in the Year<\/strong><\/h3>\n

If you need to sell the stock received through the ISO<\/span> in the year of exercise<\/span> to cover the AMT<\/span> bill, exercising the ISO<\/span> in the first few months of the year may ensure the proceeds from the sale receive capital gains<\/span> tax treatment<\/span> and are not treated as traditional income. For example, if the ISO<\/span> exercise<\/span> date<\/span> was in January 2026, the stock can be held until February 2027 and then sold.<\/p>\n

Timing the transactions this way ensures the stock is held for more than a year and will be taxed as a capital gain<\/span> while providing you with the funds to cover the AMT<\/span> bill before it is due. While the AMT<\/span> liability<\/span> was incurred in 2026, the bill won\u2019t be paid until you file your tax return<\/span> for the year, on the same date your\u00a0regular income <\/span>tax<\/span> return<\/span>\u00a0is filed.<\/p>\n

Still Have Questions? A Tax Attorney Can Help<\/strong><\/h2>\n

If you are planning on exercising an ISO<\/span> or have other income that you believe could be subject to the AMT<\/span>, consulting with a tax lawyer can often reduce the amount you will owe and ensure you get the tax benefits<\/span> you are due. Minimizing your AMT<\/span> bill often requires planning and taking proactive steps before you exercise an \u00a0ISO<\/span> that may be subject to the tax, so consider consulting with a tax attorney<\/a>. A tax lawyer can also help with related tax situations, such as minimizing the capital gains<\/span> that result from the sale of stock purchased through the exercise of an ISO<\/span> and other tax planning<\/span>.<\/p><\/div>\n\n\n

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