The Alternative Minimum Tax under IRC §§ 55-59 is a parallel income tax system designed to ensure high-income taxpayers pay a minimum amount of federal tax despite deductions and exemptions that reduce regular tax. Taxpayers compute both regular tax and tentative AMT; pay the higher of the two. OBBBA made TCJA-era higher AMT exemptions PERMANENT (TCJA had scheduled the higher exemptions to sunset 12/31/2025; OBBBA removed the sunset). However, OBBBA simultaneously TIGHTENED two AMT phaseout provisions starting 2026 for joint filers: (1) the phaseout threshold was RESET to $1,000,000 (down from the recently inflation-adjusted ~$1.252M for 2025) - bringing more high earners into AMT exposure; and (2) the phaseout RATE was DOUBLED from 25% to 50%. The text does not state a similar reset for other filing statuses (single, HOH), which practitioner commentary characterizes as a potential drafting oversight pending technical correction. Combined with OBBBA's much higher SALT cap ($40,000 vs $10,000 under TCJA), more taxpayers with high state-local tax deductions may find themselves owing AMT - because SALT is NOT deductible for AMT purposes (§56(b)(1)(A)(ii)). AMT also remains a major issue for incentive stock option (ISO) exercises - the bargain element is an AMT preference item (§56(b)(3)) even when no regular tax is owed on the exercise. The §53 AMT credit (Minimum Tax Credit) allows recovery of AMT paid attributable to timing/preference items (not exclusion items) when later years' regular tax exceeds tentative AMT.
(1) Higher exemption made permanent: $88,100 single / $137,000 MFJ for 2025 (inflation-indexed); preserves TCJA's doubled exemption that was scheduled to sunset 12/31/2025.
(2) 2026 joint phaseout threshold reset: $1,000,000 for joint filers - LOWER than recently inflation-adjusted $1.252M. Subjects more high earners to AMT exposure.
(3) Phaseout rate doubled: From 25% to 50% (for joint filers; other filing statuses possibly drafting issue).
SALT interaction: SALT NOT deductible for AMT - higher $40K SALT cap means larger AMT add-back.
ISO bargain element: Remains AMT preference item under §56(b)(3) - major tech employee issue.
§53 AMT Credit: Unchanged - recovers AMT paid on timing items in future regular-tax years.
| Step | Computation |
|---|---|
| Step 1 - Start with regular taxable income | Form 1040 taxable income |
| Step 2 - Add AMT adjustments and preferences | SALT add-back (§56(b)(1)), standard deduction add-back if used (§56(b)(1)(E)), ISO bargain element (§56(b)(3)), accelerated depreciation differences, tax-exempt interest on certain private activity bonds (§57(a)(5)), and others. Result: Alternative Minimum Taxable Income (AMTI). |
| Step 3 - Subtract AMT exemption | $88,100 single / $137,000 MFJ for 2025 (subject to phaseout). Result: AMT base. |
| Step 4 - Apply AMT rates | 26% on first $232,600 of AMT base (2025); 28% on excess. Result: Tentative Minimum Tax (TMT). |
| Step 5 - Compare to regular tax | If TMT > regular tax, pay the difference as AMT under §55(a) |
| Form 6251 | Alternative Minimum Tax - Individuals; attach to Form 1040 |
| Filing Status | 2025 Exemption | 2026 (Estimated, Inflation-Adjusted) |
|---|---|---|
| Single / Head of Household | $88,100 | ~$89,500 |
| Married Filing Jointly / Qualifying Surviving Spouse | $137,000 | ~$139,500 |
| Married Filing Separately | $68,500 | ~$69,750 |
| Estates and Trusts | $29,900 | ~$30,500 |
| Joint Filer Phaseout | Pre-OBBBA (TCJA Path - Inflation-Adjusted 2025) | Post-OBBBA (2026) |
|---|---|---|
| Phaseout begins (AMTI) | ~$1,252,700 | $1,000,000 (RESET) |
| Phaseout rate | 25% of AMTI excess | 50% of AMTI excess (DOUBLED) |
| Complete phaseout (joint) | ~$1,800,000 AMTI | ~$1,274,000 AMTI |
| Effect | Joint filers in $1M-$1.8M zone had partial exemption | Joint filers above $1M lose exemption faster; complete phaseout at ~$1.27M |
OBBBA §70107 explicitly resets joint filer phaseout to $1,000,000 and doubles the rate. The Act does NOT state a similar reset for single, head of household, or married filing separately. Practitioner commentary identifies this as a potential drafting oversight - a technical correction may align other filing statuses. Until clarified, single/HOH/MFS phaseout thresholds and rates remain at TCJA-era inflation-indexed levels.
| Filing Status | 2025 Phaseout Threshold (AMTI) | 2025 Phaseout Rate |
|---|---|---|
| Single / Head of Household | $626,350 | 25% |
| Married Filing Jointly / QSS - 2025 | $1,252,700 | 25% |
| Married Filing Jointly / QSS - 2026 OBBBA | $1,000,000 RESET | 50% DOUBLED |
| Married Filing Separately | $626,350 | 25% |
| Estates and Trusts | $99,950 | 25% |
| AMT Item | Authority | Effect |
|---|---|---|
| State and Local Tax (SALT) | §56(b)(1)(A)(ii) | SALT deduction NOT allowed for AMT - 100% add-back. With OBBBA $40K SALT cap, larger add-back potential. |
| Standard deduction (if not itemizing) | §56(b)(1)(E) | Standard deduction NOT allowed for AMT - 100% add-back |
| Personal exemptions (suspended under TCJA, preserved under OBBBA) | §56(b)(1)(E) | Currently $0 - suspended |
| ISO bargain element (exercise less strike price) | §56(b)(3) | Added to AMTI in year of exercise even though no regular tax owed (until sale) |
| Accelerated depreciation difference | §56(a)(1) | Difference between regular MACRS and AMT depreciation (longer life or straight-line) |
| Tax-exempt interest on certain private activity bonds | §57(a)(5) | Tax-exempt for regular tax but AMT preference (bonds issued before 1/1/2009 or after 12/31/2010 generally subject; some COVID-era bonds excluded) |
| Net operating loss difference | §56(a)(4) | AMT NOL based on AMT adjustments to regular NOL |
| Mining exploration / development | §57(a)(2) | Preference item |
| Percentage depletion (mining) | §57(a)(1) | Preference item - excess over basis |
| Intangible drilling costs | §57(a)(2) | Preference for excess IDC |
| Charitable contribution of appreciated property | NOT a preference | Preserved at FMV (was preference pre-1993) |
| Medical expense (post-AGI threshold) | NOT a preference under TCJA/OBBBA | Same threshold for regular and AMT |
| Mortgage interest on home equity debt | §56(e) | Add-back if not used to acquire/build residence; OBBBA preserved TCJA home equity disallowance for all purposes |
Higher SALT cap ($40,000 vs $10,000) means high-tax-state taxpayers deduct MORE SALT for regular tax - but ALL of it gets added back for AMT. The differential between regular and AMT incomes WIDENS.
Facts: California couple, MFJ, AGI $800,000. SALT (state income + property tax) total $50,000 (capped at $40,000 deductible for regular tax). Other itemized: $35,000 (mortgage, charitable, etc.). MAGI $800,000 (below $1M joint AMT phaseout threshold).
Regular Tax Computation:
Itemized deductions: $40,000 (SALT, capped) + $35,000 = $75,000
Regular taxable income: $800,000 - $75,000 = $725,000
Regular federal tax (2026 MFJ): approximately $192,000
AMT Computation:
Start with regular taxable income: $725,000
Add back SALT (§56(b)(1)(A)(ii)): +$40,000
AMTI: $765,000
AMT exemption (MFJ 2026 ~$139,500): -$139,500
(AMTI $765,000 below $1M reset threshold, no phaseout)
AMT base: $625,500
AMT (26% × $232,600 + 28% × $392,900): $60,476 + $110,012 = $170,488
Compare: AMT $170,488 vs Regular $192,000. Regular is higher, no AMT owed.
However - if AGI were $1,200,000: Reset phaseout kicks in. Exemption reduced by 50% × ($1,200,000 - $1,000,000) = $100,000 reduction. Exemption falls from $139,500 to $39,500 (or zero if computed against AMTI). AMT base widens significantly. AMT may exceed regular tax.
The most common AMT trigger for high earners outside the SALT context. Incentive Stock Options (ISOs) under §422 receive favorable regular tax treatment - no tax on grant or exercise, capital gain on sale if holding period met. But the BARGAIN ELEMENT (FMV at exercise minus strike price) is an AMT preference item under §56(b)(3) added in year of exercise.
| ISO Aspect | Regular Tax | AMT |
|---|---|---|
| Grant | No income | No income |
| Exercise (FMV $100, strike $20) | No income at exercise | $80 bargain element added to AMTI under §56(b)(3) |
| Sale (qualifying disposition - 2 years from grant, 1 year from exercise) | Long-term capital gain on entire gain (sale price - strike) | Lower AMT gain (sale price - AMT basis which includes bargain element) |
| Disqualifying disposition (sold sooner) | Ordinary income on bargain element; capital gain on excess | Reduced AMT consequence - no AMT preference if disqualifying disposition in same year as exercise |
| AMT basis tracking | N/A | AMT basis = FMV at exercise; regular basis = strike price. Difference creates §53 credit potential at sale. |
| Strategy | Mechanism |
|---|---|
| Calendar year exercise timing | Exercise early in year to give time to monitor stock price; if stock drops, consider disqualifying disposition before year-end |
| Spread across multiple years | Exercise smaller batches each year to stay below AMT crossover |
| "AMT crossover" target | Calculate maximum ISO exercise that triggers $0 AMT (point where TMT = regular tax) |
| Disqualifying disposition same-year | If stock dropped after exercise, sell before year-end to convert to ordinary income (regular tax) and eliminate AMT preference |
| 83(b) election on RSAs / ISOs subject to vesting | Accelerate income recognition to lock in low bargain element before further appreciation |
| Charitable contribution of appreciated shares | Donate appreciated stock - charitable deduction + no recognition of gain (regular OR AMT) |
| Use §53 AMT credit in future years | AMT paid on ISO becomes §53 credit recoverable when regular tax exceeds TMT in later years (typically year of stock sale) |
| §53 AMT Credit Mechanic | Detail |
|---|---|
| Authority | IRC §53 - Credit for prior year minimum tax liability |
| Source | AMT paid attributable to TIMING items (deferral) - not exclusion items |
| Recoverable AMT | AMT paid on ISO bargain element, accelerated depreciation difference, NOL difference - timing items |
| NOT recoverable | AMT paid on SALT add-back, standard deduction add-back, personal exemption phaseout - exclusion items (permanent disallowance) |
| Recovery | In future year where regular tax exceeds TMT, claim §53 credit equal to excess |
| Tracking | Form 8801 - Credit for Prior Year Minimum Tax |
| Carryforward | Indefinite - never expires |
| Estate recovery | At death, unused §53 credit is LOST (not transferable to estate or beneficiaries) |
| Refundable portion (pre-OBBBA) | Was refundable 2018-2021 under TCJA; reverted to non-refundable after 2021; OBBBA did NOT restore refundability |
| Profile | AMT Risk Level |
|---|---|
| High-W-2 earner in high-tax state with $40K SALT | MEDIUM - higher SALT cap increases AMT exposure; depends on income level |
| Tech employee exercising ISOs | HIGH - bargain element is AMT preference; common trigger |
| Real estate professional with accelerated depreciation | MEDIUM - depreciation difference can create AMT |
| High-income joint filer above $1M (2026) | HIGH after OBBBA reset - exemption phases out faster at $1M with 50% rate |
| Holders of private activity bonds | VARIES - bond issue date matters; some excluded |
| Standard deduction users | LOW - standard deduction add-back limited; AMT exemption typically shelters |
| Sole proprietors with §179 | LOW after TCJA changes (§179 same for regular and AMT) |
| Wealthy retirees with capital gains only | LOW - LTCG and qualified dividends taxed at same favorable rates for AMT |
| Multiple-state income earners | HIGH - high SALT amounts trigger larger add-back |
Long-term capital gains and qualified dividends are taxed at the SAME preferential rates (0%, 15%, 20%) for AMT as for regular tax under §55(b)(3) and §1(h)(11). LTCG does NOT trigger AMT directly. However, LTCG does INCREASE AMTI (and reduce AMT exemption via phaseout) - so large capital gains in a year can phase out the AMT exemption and indirectly increase AMT on other income.
| State | AMT Position |
|---|---|
| California | Has its own AMT - 7% rate; SALT not added back (different structure); preserved post-federal-OBBBA |
| Iowa | State AMT exists |
| Minnesota | State AMT exists |
| Most other states | No state AMT or conform to federal |
| Form 6251 Line | Key Issue |
|---|---|
| Line 2a - Taxes from Schedule A | SALT add-back - largest item for many high-income taxpayers; OBBBA's $40K cap means up to $40K add-back |
| Line 2i - Exercise of incentive stock options | Bargain element from ISO exercise; report from Form 3921 |
| Line 2j - Estates and trusts (income from K-1) | AMT items flowing from trusts/estates |
| Line 2k - Partnership and S-corp K-1 items | AMT items from passthrough entities |
| Line 2l - Depreciation difference | Difference between regular MACRS and AMT |
| Line 2m - Passive activities | AMT-adjusted passive activity income/loss |
| Line 4 - Alternative Minimum Taxable Income | Sum of regular taxable income plus all adjustments and preferences |
| Line 5 - Exemption | Phased exemption per filing status and AMTI; 2026 joint $1M reset |
| Line 7 - Tentative Minimum Tax before AMT FTC | 26%/28% rates applied |
| Line 11 - Regular tax | From Form 1040 (less certain credits) |
| Line 12 - Net AMT | Line 9 minus Line 11; entered on Form 1040 Schedule 2 |
OBBBA quadrupled the SALT cap. Tax software updated for the $40K cap may not have properly updated AMT calculations for the larger add-back. Verify Form 6251 line 2a reflects FULL SALT actually deducted, not just $10K.
2026 returns must use $1,000,000 phaseout threshold and 50% phaseout rate for joint filers - not the inflation-indexed $1.252M+ that applied through 2025. Software must update for OBBBA §70107.
ISO bargain element is NOT capital gain - it's an AMT preference under §56(b)(3). Capital gain treatment comes only on subsequent qualifying disposition. Form 3921 from employer reports the bargain element.
Taxpayer who paid AMT on ISO exercise has §53 credit for future use. Many taxpayers (and preparers) fail to track this credit on Form 8801. The credit is indefinite carryforward but useless if not claimed.
§53 credit recovers AMT paid on TIMING items only. AMT paid on SALT, standard deduction, personal exemption - all exclusion items - is permanently lost. Practitioners must distinguish timing from exclusion when computing recoverable credit.
LTCG and qualified dividends taxed at same preferential rates for AMT as for regular tax (§55(b)(3)). But LTCG INCREASES AMTI and can trigger exemption phaseout - indirect AMT impact.
California, Iowa, Minnesota have own state AMTs with different structures. Federal AMT calculation alone misses state-level minimum tax.
ISO holders should model AMT BEFORE exercise. April surprises with no cash to pay AMT can force disqualifying dispositions or installment payment plans.
§168(k) bonus depreciation IS allowed for AMT (§168(k)(2)(F)). Not a preference item - regular and AMT depreciation match. OBBBA restored 100% bonus depreciation; same for both regimes.
Separate AMT FTC calculation under §59(a). Cannot use full regular FTC against AMT - must compute separate AMT FTC limit. Software should handle automatically but verify.
The TCJA-era refundable corporate AMT credit (different from individual) was eliminated. Individual §53 credit is non-refundable. OBBBA did NOT restore refundability.
§199A QBI deduction is allowed for AMT - no add-back. OBBBA made QBI permanent. Verify Form 6251 doesn't erroneously add back QBI.
At death, unused §53 credit is LOST. For elderly taxpayers with large §53 credits (often from past ISO exercises), strategic Roth conversions or other income acceleration in final years may recover the credit before death.
Primary authority: IRC §55 (imposition of alternative minimum tax). §55(a) (general rule - AMT is excess of TMT over regular tax). §55(b)(1)(A) (AMT rates - 26% on first $232,600 of AMT base for 2025; 28% on excess - inflation indexed). §55(b)(3) (capital gains rate preservation - LTCG and qualified dividends at same preferential rates for AMT as regular tax). §55(d) (exemption amounts). §55(d)(1) (exemption amounts by filing status). §55(d)(2) (phaseout of exemption). §55(d)(4) (special rule for 2018-2025 under TCJA - OBBBA preserves higher exemptions permanently). §56 (adjustments in computing AMT income). §56(a) (depreciation adjustment). §56(b) (adjustments for individuals). §56(b)(1)(A)(i) (miscellaneous itemized deductions - suspended under TCJA; OBBBA preserved suspension). §56(b)(1)(A)(ii) (state and local taxes - NOT allowed for AMT; full add-back). §56(b)(1)(E) (standard deduction not allowed). §56(b)(3) (incentive stock option bargain element treated as AMT preference). §57 (preference items). §57(a)(1) (depletion). §57(a)(2) (intangible drilling costs). §57(a)(5) (tax-exempt interest on certain private activity bonds). §53 (Credit for prior year minimum tax liability - "Minimum Tax Credit"). §53(a) (general rule). §53(b) (amount of credit - based on adjusted net minimum tax from timing items). §53(d) (carryover indefinite). §59 (other definitions and special rules). §59(a) (AMT FTC - separate computation). §168(k)(2)(F) (bonus depreciation allowed for AMT). §199A (QBI deduction allowed for AMT). §422 (Incentive Stock Options). §421 (general rules for ISOs). §83(b) (election to include compensation in income at grant). §170 (charitable contribution - appreciated property preserved for AMT). §164(b)(6) (SALT cap - $40,000 under OBBBA; not deductible for AMT). One Big Beautiful Bill Act, P.L. 119-21, signed July 4, 2025. OBBBA §70107 (AMT permanent higher exemptions; 2026 reset of joint filer phaseout threshold to $1,000,000; doubled phaseout rate to 50% for joint filers; potential drafting issue regarding other filing statuses pending technical correction). OBBBA §70106 (estate tax exemption permanent $15M). OBBBA §70120 (SALT cap $40K with phaseout). Form 6251 (Alternative Minimum Tax - Individuals). Form 8801 (Credit for Prior Year Minimum Tax). Form 3921 (ISO Exercise reporting). Form 3922 (ESPP transfer reporting). Form 1040 Schedule 2 (Additional Taxes including AMT).