Alternative Minimum Tax (AMT)
A parallel federal tax system that ensures high-income taxpayers pay a minimum amount of tax by limiting certain deductions and preferential treatments.
Detailed Explanation
AMT is a parallel tax system, computed on Form 6251, that runs alongside the regular tax calculation. Taxpayers pay whichever is higher. The system was created in 1969 to prevent very-high-income filers from eliminating tax via deductions and preference items. AMT starts with taxable income, then adds back specific items: the entire State and Local Tax (SALT) deduction, the bargain element on Incentive Stock Options exercised and held past December 31, certain accelerated depreciation, private activity bond interest, and the standard deduction (when claimed instead of itemizing). The result is Alternative Minimum Taxable Income (AMTI). AMTI is reduced by an exemption amount that phases out at higher incomes (2026: $90,100 single / $140,200 MFJ exemption; phaseout begins at $500,000 / $1,000,000 at 50 cents per dollar). The AMT base is taxed at 26% up to $244,500 of taxable excess and 28% above that. AMT owed is the excess of tentative AMT over regular tax. The 2017 TCJA raised the exemption and phaseout dramatically, reducing AMT exposure for most middle-income taxpayers. OBBBA then reset the phaseout thresholds down to $500,000 and $1,000,000 and doubled the phaseout rate from 25 to 50 cents per dollar starting in 2026, which pulls more high earners back into AMT. Today AMT primarily hits ISO holders who exercise and hold and very-high-income earners in high-tax states with significant preference items. AMT paid on ISO exercises generally becomes a Minimum Tax Credit (Form 8801) recoverable against regular tax in future years.
Key Points
- 2026 exemption: $90,100 single / $140,200 MFJ. Phaseout starts at $500,000 / $1,000,000 (50 cents per dollar under OBBBA).
- AMT rate: 26% up to $244,500 of taxable excess, 28% above.
- Most common triggers: large ISO bargain element (exercised and held), large SALT deduction, large state tax refund recovery.
- AMT paid on ISOs generally becomes a Minimum Tax Credit (Form 8801) usable against regular tax in later years.
- Computed on Form 6251 and reported on Schedule 2 of Form 1040.
Practical Example
A California single filer with $400K AGI claims a $40K SALT deduction. Adding back SALT pushes AMTI to $440,000, below the $500,000 phaseout start, so the full $90,100 exemption applies. The AMT base is $440,000 minus $90,100, or $349,900. Tentative AMT is 26% of the first $244,500 ($63,570) plus 28% of the remaining $105,400 ($29,512), about $93,082. Regular tax on $360K of taxable income runs higher than that, so no AMT is owed. If the same filer exercises ISOs with a $200K bargain element and holds them, AMTI rises to $640K, the exemption phases down significantly, AMT base climbs, and AMT owed could exceed $40K, recoverable as Minimum Tax Credit in later years.
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Restricted Stock Unit (RSU)
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The individual income tax return that reconciles a year of income, deductions, and credits against tax already paid, producing a refund or balance due.
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