AMT in 2026: Who's Still Affected and How to Plan Around It
The Alternative Minimum Tax has been part of the federal tax code since 1969, originally designed to prevent a small number of wealthy taxpayers from using deductions and exclusions to pay little or no tax. More than five decades later, the AMT continues to affect a targeted but significant group of taxpayers, particularly Bay Area residents with equity compensation, high state and local tax deductions, or both.
The Tax Cuts and Jobs Act (TCJA) dramatically reduced the number of AMT-affected taxpayers by increasing exemption amounts, and the One Big Beautiful Bill Act of 2025 (OBBBA) made those higher exemptions permanent. The sunset risk that loomed over prior-year AMT planning has been resolved for 2026 and beyond. This guide explains how the AMT works, the 2026 thresholds, the most common triggers, and the planning strategies our equity compensation tax team uses to help clients minimize exposure.
How the AMT Works: A Parallel Tax System
The AMT operates as a shadow tax calculation that runs alongside your regular tax computation. Here is the simplified process:
- Start with taxable income. Begin with your regular taxable income from Form 1040.
- Add back AMT preferences and adjustments. Certain deductions and exclusions allowed under the regular tax system are disallowed or modified for AMT purposes. These include state and local tax deductions, certain miscellaneous deductions, and the spread on ISO exercises.
- Subtract the AMT exemption. The exemption amount depends on your filing status and phases out at higher income levels.
- Apply AMT tax rates. The AMT uses a two-bracket rate structure: 26% on the first $239,100 (for married filing jointly in 2025, adjusted for inflation) and 28% above that.
- Compare to regular tax. You pay the higher of your regular tax or the AMT. If the AMT exceeds your regular tax, you pay the difference as additional tax.
2026 AMT Exemption Amounts and Phase-Outs
The OBBBA of 2025 permanently extended the TCJA's higher AMT exemption amounts, resolving the sunset uncertainty that previously complicated multi-year planning. The 2026 exemptions reflect those permanent levels, adjusted for inflation:
| Filing Status | 2026 AMT Exemption (OBBBA Permanent) | Pre-TCJA Exemption (historical, no longer applicable) |
|---|---|---|
| Single / Head of Household | $88,100 | ~$57,000 (est. inflation-adjusted) |
| Married Filing Jointly | $137,000 | ~$85,000 (est. inflation-adjusted) |
| Married Filing Separately | $68,500 | ~$42,500 (est. inflation-adjusted) |
The phase-out thresholds are equally important. Under the OBBBA-permanent rules, the exemption begins to phase out at $626,350 for single filers and $1,252,700 for married filing jointly (2025 figures, adjusted annually for inflation). These thresholds are now permanent, removing the prior-year uncertainty about whether they would revert to much lower pre-2018 levels.
Bay Area taxpayers with significant equity compensation or high state tax deductions should continue to model AMT exposure carefully. The exemption permanence provides planning certainty, but the ISO exercise and SALT dynamics that create AMT liability are unchanged.
Common AMT Triggers
While the AMT involves numerous adjustments, a handful of items account for the vast majority of AMT exposure for our clients:
1. ISO Exercises
The spread between the exercise price and fair market value of Incentive Stock Options at the time of exercise is the most significant AMT trigger for tech employees. Unlike NSOs, which are taxed as ordinary income at exercise, the ISO spread is a preference item that is added to AMT income but not regular income. A single large ISO exercise can generate hundreds of thousands of dollars in AMT preference.
For a detailed comparison of ISO and NSO tax treatment, see our guide on ISO vs. NSO stock options.
2. State and Local Tax (SALT) Deductions
State and local income taxes and property taxes are fully deductible for regular tax purposes but are completely disallowed for AMT purposes. For California residents paying marginal state rates up to 13.3% and property taxes on Bay Area real estate, this adjustment alone can be substantial. The OBBBA of 2025 raised the SALT cap for regular tax from $10,000 to $40,000 for filers with MAGI below $500,000 (phasing out above that), while keeping the SALT disallowance for AMT unchanged. For high-income Bay Area clients who phase out of the increased cap, the regular-tax SALT deduction remains at $10,000, keeping the AMT dynamic similar to prior years.
3. Tax-Exempt Interest from Private Activity Bonds
Interest on certain private activity municipal bonds is tax-exempt for regular purposes but included in AMT income. If your portfolio includes these bonds, the interest can push you into AMT territory.
4. Large Long-Term Capital Gains
While capital gains are taxed at the same rates under both systems, a large capital gains event increases your overall AMT income, which can push you past the exemption phase-out threshold, effectively reducing your AMT exemption and increasing your AMT liability.
AMT Credit Carryforward
One of the most misunderstood aspects of the AMT is the AMT credit. When you pay AMT due to timing differences (as opposed to permanent differences), you generate a credit that can be used in future years to reduce your regular tax liability.
The most common source of AMT credit is ISO exercises. When you exercise ISOs and pay AMT on the spread, and then later sell the shares, the ordinary income or capital gain recognized at sale increases your regular tax. In the year of sale, your regular tax may exceed your AMT, and the AMT credit from prior years can be applied to reduce the regular tax owed.
Key points about the AMT credit:
- It carries forward indefinitely until used.
- It can only reduce your regular tax down to the AMT amount for that year (you cannot use it to create a refund below your AMT liability).
- Many taxpayers forget they have AMT credits from prior years. If you exercised ISOs in the past and paid AMT, check Form 8801 on your prior returns.
Planning Strategies to Minimize AMT Exposure
Effective AMT planning requires projecting your tax liability under both the regular and AMT systems and making strategic decisions throughout the year:
- Limit ISO exercises to the AMT crossover point. Work with your tax advisor to calculate the maximum number of ISOs you can exercise in a given year without triggering AMT. This "AMT-free zone" varies based on your other income, deductions, and the current exemption levels.
- Spread ISO exercises across multiple tax years. Rather than exercising a large block of ISOs in one year, stagger exercises to stay within the AMT-free zone each year. This is particularly important in the years leading up to an IPO or liquidity event.
- Consider disqualifying dispositions strategically. Selling ISO shares in the same calendar year as exercise (a disqualifying disposition) converts the AMT preference to ordinary income, which eliminates the AMT adjustment. While you lose the long-term capital gains benefit, you avoid the AMT entirely.
- Time large capital gains events. If possible, avoid realizing large capital gains in the same year as significant ISO exercises. The combined effect can push you past the AMT exemption phase-out.
- Maximize AMT credit recovery. In years when you do not exercise ISOs, file Form 8801 to claim any available AMT credit carryforward. Some taxpayers have tens of thousands of dollars in unused AMT credits.
- Plan with permanent exemptions. The OBBBA of 2025 made the TCJA AMT exemption levels permanent, so multi-year AMT planning can now be built on a stable foundation rather than a cliff scenario. ISO exercise ladders and capital gain timing strategies no longer require sunset contingencies.
AMT and California Taxes
California has its own AMT, separate from the federal AMT. The California AMT rate is 7% (compared to 26-28% federally), and it uses different exemption amounts and phase-outs. While the California AMT is generally less significant than the federal AMT, it adds another layer of complexity for Bay Area taxpayers.
Notably, ISO exercises trigger the California AMT just as they trigger the federal AMT. The spread is an AMT preference for both systems. However, because California does not conform to all federal AMT adjustments, the calculations can diverge. It is essential to model both systems separately when planning ISO exercises or other transactions that affect AMT.
California AMT credit is generated similarly to the federal credit and carries forward until used. Many taxpayers focus exclusively on their federal AMT exposure and overlook the California component, leaving potential credits unclaimed.
The Bottom Line
The AMT remains a significant planning consideration for Bay Area taxpayers, especially those with equity compensation. The OBBBA of 2025 removed the sunset uncertainty that previously made multi-year planning difficult, but the underlying mechanics of ISO exercises, SALT disallowances, and phase-out thresholds are unchanged. Understanding how the AMT interacts with your specific financial situation is essential for minimizing your overall tax burden.
At Silicon Valley Tax, AMT planning is a core part of our equity compensation advisory services. We run detailed projections for every client with ISOs, model the impact of various exercise scenarios, and develop multi-year strategies to optimize the interplay between regular tax and AMT. If you are concerned about AMT exposure, schedule a consultation and let us build a plan tailored to your situation.