The alternative minimum tax is a parallel tax system that adds back certain deductions and preferences to income, computes tax at a flat rate, and requires the taxpayer to pay whichever is higher - regular tax or AMT. TCJA dramatically reduced AMT exposure for most taxpayers by raising the exemption and phaseout thresholds significantly. In 2026, relatively few individuals owe AMT - but those who exercise incentive stock options, have large miscellaneous itemized deductions, or have certain preferences remain at real risk.
Exemption: $140,200 (MFJ) / $90,100 (single) - inflation-adjusted annually
Exemption phaseout: Begins at $1,000,000 (MFJ) / $618,725 (single) - exemption reduced $0.25 per dollar above threshold
AMT rates: 26% on AMTI up to $244,500 / 28% above $244,500
AMT credit: Excess AMT paid over regular tax generates a minimum tax credit (MTC) under IRC §53, usable in future years when regular tax exceeds AMT
Before TCJA (2017), millions of middle-income taxpayers owed AMT each year - primarily because the exemption was not indexed for inflation. TCJA roughly doubled the exemption and indexed it going forward. OBBBA made those parameters permanent. As a result, the AMT in 2026 primarily affects:
| Item | AMT Treatment | Regular Tax Treatment |
|---|---|---|
| SALT deduction | Not deductible for AMT (added back entirely) | Deductible up to $40,000 cap (OBBBA) |
| Standard deduction | Not deductible for AMT | $30,000 MFJ / $15,000 single (2026) |
| Miscellaneous itemized deductions | Not deductible for AMT | Eliminated for regular tax by TCJA (so no longer a difference for most) |
| ISO exercise spread | Preference item - full spread added to AMTI | No income recognized at exercise |
| Accelerated depreciation (personal property) | Must use ADS (slower) depreciation; difference is an adjustment | MACRS or 100% bonus depreciation |
| Percentage depletion | Limited to cost depletion | Percentage depletion in excess of cost basis allowed |
| Private activity bond interest | Included in AMTI | Excluded from regular income |
| Qualified dividends and LTCG | Still taxed at preferential rates (0%/15%/20%) for AMT | Same preferential rates |
The most dangerous AMT situation for individuals involves incentive stock options. When an employee exercises an ISO, no regular income tax is owed at exercise - but the entire spread (fair market value minus exercise price) is an AMT preference item added to AMTI. For employees at startups or high-growth companies with large ISO grants, exercising in a year when the stock is highly valued can generate hundreds of thousands of dollars of AMT preference income.
AMT paid because of timing differences (like ISO exercise) generates a minimum tax credit (MTC) under IRC §53. The MTC can be used in future years when regular tax exceeds AMT - effectively recovering the AMT paid when the underlying stock is sold and the income is recognized for regular tax purposes. The MTC carries forward indefinitely. For ISO exercisers who hold and sell in a qualifying disposition, the AMT paid in the exercise year is generally recovered via the MTC in the sale year.
TCJA eliminated the corporate AMT (which had been 20% on AMTI). The Inflation Reduction Act of 2022 (IRA) replaced it with a 15% Corporate Alternative Minimum Tax (CAMT) on Applicable Financial Statement Income (AFSI) - essentially adjusted book income - for corporations averaging more than $1 billion in AFSI over 3 years. This is a separate regime from the individual AMT and is reported on Form 4626.
For most businesses - S-corporations, partnerships, and C-corporations below the $1 billion threshold - the corporate AMT is not relevant. The individual AMT remains the concern for owners of pass-through entities with preference items flowing through to their returns.