What is the Alternative Minimum Tax (AMT)? What High-Income Earners Should Know

If you’re a high earner, receive equity compensation, or experience occasional spikes in income, the Alternative Minimum Tax (AMT) may be more relevant than you think.  

While AMT has faded into the background for many households in recent years, 2026 introduces changes that can make the AMT more relevant for higher income taxpayers, particularly those with stock-based compensation or “lumpy” income. 

This guide breaks down how AMT works, what commonly triggers it, and how to plan proactively. 

What Is the AMT? 

Think of AMT as a secondary tax system that runs alongside the regular federal income tax system. Each year, certain taxpayers effectively calculate their tax liability twice: 

• Once under regular income tax rules 
• Once under AMT rules 

If the AMT calculation produces a higher tax than the regular calculation, you pay the difference as AMT. 

AMT rules are stricter. They limit certain deductions, add back some tax-favored items, and treat things like stock options differently than the regular tax code. 

It’s not a penalty, and you’re not doing anything wrong if you trigger it — it’s simply a different set of rules. 

Why Does the AMT Exist? 

The AMT dates back to the late 1960s, when lawmakers discovered that a small number of very high-income households were paying little to no federal income tax by stacking deductions and exclusions. 

Congress responded by creating a backstop tax system. The AMT system acts as a backstop by: 

• Limiting certain tax benefits allowed under regular tax rules 

• Adding back specific “preference items” 

• Applying a separate rate structure (generally 26% and 28%) to AMT-adjusted income 

The result is a system that removes many tax “preferences” and recalculates taxable income under stricter rules. 

While tax laws have changed significantly over time (especially with the recent passing of the One Big Beautiful Bill Act), the AMT still exists and still matters for many high earners.  

How the AMT Works 

Without getting too technical, here’s the simplified flow: 

1. Start with your regular taxable income 
2. Add back certain deductions and adjustments that aren’t allowed under AMT   
3. Apply an AMT exemption (which phases out at higher income levels) 
4. Apply AMT tax rates 
5. Compare AMT to regular tax 
6. Pay the higher amount 

AMT can be unexpected, especially in years with unusual income events or significant financial decisions, so proactive planning is crucial to avoid a big tax surprise come April. 

Why AMT Matters More in 2026 

Based on current law as of February 2026 and subject to future legislative or regulatory changes.

Under the current provisions in the One Big Beautiful Bill Act (OBBBA), the AMT exemption remains relatively high, but the exemption phaseout thresholds reset lower in 2026 and phase out faster, which can increase AMT exposure for higher-income households.  

For 2026: 

• The AMT exemption amount is $90,100 (single) and $140,200 (married filing jointly).  

• The exemption begins to phase out at $500,000 (single) and $1,000,000 (joint).  

• The phaseout is steeper than in recent years, which reduces the “cushion” that previously kept many households out of AMT.  

Bottom line: Even if your regular tax situation looks similar year-to-year, AMT may reappear in 2026 because the AMT exemption disappears more quickly at higher incomes. 

Common AMT “Trigger” Moments 

Most people first hear about AMT from their CPA after something unexpected happens. Here are the situations that most commonly set it off:

1. Exercising Incentive Stock Options (ISOs)

This is one of the most frequent AMT triggers. Under regular tax rules, exercising ISOs may not create taxable income immediately. But under AMT, the “bargain element”—the difference between the stock’s fair market value and the exercise price—can be included in AMT income, even if you don’t sell the shares.  

Translation: You can owe AMT without selling shares or receiving cash.  

2. A Large Bonus or Sudden Income Spike

A one-time high-income year—bonus, deferred comp payout, RSU vesting, business income surge—can push you into AMT territory, particularly because the AMT exemption phases out more aggressively once income crosses the threshold.

3. Realizing Significant Capital Gains

Large realized gains—selling a business, diversifying concentrated stock, or realizing major portfolio gains—can rapidly change your AMT picture by increasing AMT-adjusted income and accelerating exemption phaseout. 

4. Living in a High-Tax State

AMT disallows the state and local tax (SALT) deduction. So even when SALT relief exists under regular tax rules, it may not help under AMT—creating a common “surprise” AMT bill for taxpayers with high property and state income taxes.

5. Holding Certain Types of Municipal Bonds

Some municipal bond interest—particularly private-activity bond interest—can be tax-exempt under regular tax rules but taxable under AMT 

Who Should Be Thinking About AMT? 

AMT planning is especially relevant if you: 

• Have equity compensation (especially ISOs)  

• Expect uneven or “lumpy” income (bonuses, deferred comp, business income, liquidity events)  

• Live in a high-tax jurisdiction where SALT is a meaningful deduction 

• Plan a large capital gain in the next 12–24 months  

• Hold private-activity municipal bonds 

• Care about optimizing taxes across multiple years, not just one return  

If several of these apply, it’s worth modeling AMT  with a tax projection before you execute major transactions. 

AMT Is All About Timing 

One common misconception is that AMT must be avoided at all costs. Not necessarily. 

In some cases, paying AMT can be part of a strategy—especially if it enables an earlier ISO exercise or improves long-term flexibility.  

And importantly, some AMT paid due to “deferral” items (like ISOs) may generate a future minimum tax credit, which can potentially reduce regular tax in later years (subject to your facts and limitations). 

A good strategy looks at multiple years together, not just today. 

How AMT Fits into Plancorp’s Tax Planning Approach 

AMT becomes much easier to manage once you know how close you are to triggering it. That’s where smart, proactive planning makes a huge difference. 

At Plancorp, we help clients: 

• Model AMT across several years 

• Time stock option exercises strategically 
• Coordinate deductions, charitable giving, and capital gains
• Evaluate strategies designed to reduce tax surprises where possible 

Thinking AMT Might Affect You? Let’s Talk. 

If any of this hits close to home, you don’t need to figure it out by yourself. 

Whether you’re exercising options, preparing for a large liquidity event, or simply want a second set of eyes on your tax trajectory, Plancorp can help you make informed, tax-aware decisions.

Schedule a 30-minute call with a Plancorp wealth advisor today to explore a personalized approach that goes beyond the basics.