The alternative minimum tax is a parallel tax system that runs alongside regular income tax: you calculate both and pay whichever is higher. Congress designed it to ensure that high-income taxpayers with large preference items and deductions could not reduce their regular tax to near zero. The TCJA dramatically raised AMT exemptions in 2018 so that far fewer taxpayers trigger it. The OBBBA, signed July 4, 2025, then made those higher exemptions permanent but also reset the phaseout thresholds downward and doubled the phaseout rate, pulling more high-income earners back into AMT exposure starting in 2026.
How Is AMT Calculated?
AMT starts with regular taxable income, adds back certain deductions and preference items, and arrives at AMTI. You subtract the exemption (reduced by the phaseout if AMTI exceeds the threshold), then apply AMT rates: 26% on the first $244,500 of AMTI above the exemption, and 28% on the remainder. If the result exceeds your regular income tax, you owe the difference as AMT.
Form 6251 performs this calculation. Tax software handles the arithmetic, but knowing which items flow into it tells you whether you are in the risk zone.
What the OBBBA Changed (and What It Did Not)
The OBBBA made three changes to the AMT:
-
Permanent exemptions. Without OBBBA, the TCJA exemption amounts would have reverted to pre-2018 levels (roughly $55,400 single / $86,200 MFJ) starting 2026, creating a massive AMT cliff for middle-income taxpayers. OBBBA prevented that reversion by making the higher amounts permanent.
-
Phaseout thresholds reset downward. After TCJA, phaseout thresholds were inflation-indexed each year and had risen to $626,350 (single) and $1,252,700 (MFJ) by 2025. OBBBA reversed that accumulated inflation adjustment, returning the thresholds to $500,000 and $1,000,000 for 2026 and beyond.
-
Phaseout rate doubled. OBBBA changed the rate at which the exemption phases out from 25 cents to 50 cents for each dollar of AMTI above the threshold. This compresses the phaseout zone significantly. In the phaseout zone, each additional dollar of AMTI now triggers an effective marginal AMT rate of 42% rather than the prior 35%.
The OBBBA did not create any new exclusion for ISO exercises, did not change the 26%/28% rate structure, and did not modify the corporate AMT.
Who Is Most at Risk in 2026?
You are likely to owe AMT in 2026 if any of the following apply:
- You exercised incentive stock options (ISOs) and did not sell the shares by December 31. The spread between exercise price and fair market value is an AMT preference item under IRC Section 56(b)(3), even though it is not regular taxable income.
- Your AMTI falls between $500,000 and $680,200 (single) or $1,000,000 and $1,280,400 (MFJ), where the phaseout zone now operates at the faster 50% rate.
- You have significant private activity bond interest excluded from regular income but counted in AMTI under IRC Section 57(a)(5).
- You claimed accelerated MACRS depreciation on assets where AMT requires the slower ADS recovery method instead.
- You itemize and your SALT deductions (even within the OBBBA's $40,000 cap) and standard deduction are fully disallowed under AMT, adding them back to AMTI.
Three Strategies to Reduce Your AMT
Control When You Exercise ISOs
The ISO spread is the largest individual AMT trigger. Spreading exercises across multiple years keeps the annual preference item below your AMT crossover point rather than creating a large single-year AMT hit. Run a Form 6251 projection early each year to find how many shares you can exercise before generating incremental AMT. In a year when your regular income is lower than usual (a leave of absence, a high-deduction year, a business loss year), the gap between regular tax and tentative minimum tax widens, so you can exercise more ISOs at lower or no AMT cost while starting the long-term capital gain holding period clock.
Harvest the AMT Credit in Low-Tax Years
AMT paid on timing items (ISO spreads, depreciation differences) generates an AMT credit on Form 8801 that carries forward indefinitely. The credit is usable in any year when regular income tax exceeds tentative minimum tax, and that gap is widest in lower-income years: a business loss year, a year with heavy retirement contributions, or a year with large charitable deductions. Filing Form 8801 and applying the credit strategically in those years compresses the recovery period rather than letting it accumulate unused across many years.
Run a Pre-Year-End AMT Projection Now
The OBBBA's lower phaseout thresholds and faster phaseout rate mean more taxpayers land in the AMT zone in 2026 than in 2025 with no change in income. The only way to know your crossover point is a side-by-side regular tax and AMT projection using projected year-end income, ISO exercises, and deductions. Done now (July or August), the projection leaves time to spread ISO exercises, adjust Q3 and Q4 estimated tax payments, or accelerate deductions where they actually reduce AMT. Done in December, most of those options are closed.
If you are near the AMT zone, have pending ISO exercises, or carry a prior-year AMT credit, a mid-year AMT analysis is the highest-value planning move available before year-end. Contact TS CPA to run the numbers.