Legal Strategies for Alternative Minimum Tax (AMT) Planning

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

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

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

Most cases have a vesting 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 recipient can earn a great deal of money by purchasing stock at the option price and then selling it for its FMV.

Unfortunately for those who have received ISOs, 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 for the purposes of calculating the AMT. If the difference between the purchase price and FMV is large enough, purchasing the stocks that were part of an ISO award can trigger the AMT. As most stock must be held for a year to take advantage of the favorable capital gains tax rate, your tax bill may have a substantial increase if you turn around and sell the options to cover the AMT bill.

In the sections that follow, we’ll look at how the IRS applies the AMT and capital gains tax to ISOs. We’ll also explore some common ways for minimizing your AMT bill.

What Is the AMT?

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

The AMT 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-exempt is adjusted each year by the U.S. Treasury Department for inflation.

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

The AMT 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’s ATMI reaches $500,000 for single filers and $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.

The AMT Credit

Fortunately, when you pay the AMT on the exercise of an ISO, you are often eligible to receive a tax credit for that amount, usually referred to as an “AMT credit.” A tax credit reduces the tax you owe on a dollar-for-dollar basis. A $100 AMT credit can be used to reduce other taxes owed by $100.

If the AMT credit exceeds the tax due, you are usually allowed to carry it forward and apply it to future years. While the AMT credit may give you a long-term tax benefit, it can’t be applied to the same year the tax was incurred.

What Is the Capital Gains Tax?

In general, the long-term capital gains tax 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 tax rate is capped at 20% and is usually based on the difference between the purchase price and the sale price.

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

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

Reducing the AMT Due

Because it has become so common for individuals exercising their ISOs to owe the AMT, tax lawyers have developed several financial planning strategies to minimize your AMT liability. Four of the most common are listed below.

Buy When the Stock Price Is Low

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

Time Exercise of the ISOs To Avoid the AMT

The first $91,100 of AMTI ($140,200 or less for MFJ) is exempt from the AMT. Since ISOs are generally not subject to income tax, spreading the ISOs over several years may keep the total spread between the exercise price and FMV below $91,100. This can avoid most of the tax on the transaction.

Avoid the Exemption Phase-Out

The AMT 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 over multiple years to keep your AMTI under $500,000 each calendar year. That will ensure you preserve the $91,100 AMTI exemption, which can significantly reduce the AMT you owe.

Exercise ISOs Early in the Year

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

Timing the transactions this way ensures the stock is held for more than a year and will be taxed as a capital gain while providing you with the funds to cover the AMT bill before it is due. While the AMT liability was incurred in 2026, the bill won’t be paid until you file your tax return for the year, on the same date your regular income tax return is filed.

Still Have Questions? A Tax Attorney Can Help

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