Contributed by: Henry, FreeTaxUSA Agent, Tax Pro
If you've ever heard the term "alternative minimum tax" and felt a flicker of dread, take a breath — most filers will never owe it. The alternative minimum tax (AMT) was designed to make sure very high earners with certain kinds of income or deductions still pay at least a minimum amount of tax. For most taxpayers, it simply doesn't apply. But thanks to some changes from the One Big Beautiful Bill Act (OBBBA) starting in 2026, more high earners — especially those exercising stock options or claiming large state and local tax deductions — may find themselves affected for the first time. Let’s look at what the AMT is and what's different this year.
What is the alternative minimum tax?
The AMT is essentially a second, parallel tax calculation. You calculate your regular tax the normal way, then calculate it again under AMT rules, and you pay whichever amount is higher.
The AMT calculation starts with your taxable income, then disallows certain deductions the regular tax system allows (AMT adjustments) and adds back certain income items the regular tax system excludes or defers (preference items). Common examples include:
Once these items are added back, you arrive at your alternative minimum taxable income (AMTI). You're then allowed an AMT exemption amount, which reduces your AMTI before the AMT rate is applied. This calculation is reported on Form 6251. FreeTaxUSA automatically checks for AMT and includes it, if applicable, when you file.
What changed for 2026?
OBBBA made permanent the higher AMT exemption amounts that had been in place under prior law:
- $90,100 for single filers
- $140,200 for married couples filing jointly
That part is good news — without OBBBA, these exemptions were scheduled to shrink significantly. But OBBBA also made the exemption phase out faster for high earners, which is the real story for 2026.
Here's how the phase-out works: once your AMTI passes a certain threshold, your exemption starts shrinking. For 2026, those thresholds dropped compared to 2025:
- Single filers: $500,000 (down from $626,350 in 2025)
- Married filing jointly: $1,000,000 (down from $1,252,700 in 2025)
On top of that, the phase-out rate doubled from 25% to 50%. That means for every dollar your AMTI exceeds the threshold, your exemption now shrinks by 50 cents instead of 25 cents.
Put together, your exemption disappears much faster once you're above the threshold. Someone who never came close to owing AMT under the old rules may now find a meaningful chunk of their exemption phased out, simply because the phase-out starts sooner and moves twice as fast.
Who's most likely to be affected?
If your income is fairly straightforward — wages, some interest and dividends, a typical mix of deductions — the AMT changes for 2026 probably won't affect you. But a few groups should pay closer attention:
- People exercising incentive stock options (ISOs). The spread between the exercise price and the stock's fair market value counts as a preference item for AMT purposes, even though it isn't taxed under the regular system until you sell the stock. This can create a large, one-time spike in AMTI.
- Taxpayers with large capital gains. Big gains — from selling stock, a business, or other investments — can increase your AMTI. That can push you past the new, lower phase-out threshold, shrinking your exemption even if the gain itself doesn't trigger AMT directly.
- High earners with large state and local tax (SALT) deductions. OBBBA increased the regular SALT deduction cap to $40,000, but that larger deduction gets added back when calculating AMTI. The bigger your SALT deduction, the bigger the add-back — and the more likely you are to feel the effect of the faster phase-out.
Example
Laurel is single and exercises incentive stock options in 2026, creating a $150,000 preference item for AMT purposes. Combined with her other income, her AMTI comes to $550,000 — $50,000 over the 2026 phase-out threshold of $500,000.
Under the 2026 rules, her exemption shrinks by 50% of that excess:
$50,000 x 50% = $25,000 reduction $90,100 exemption – $25,000 reduction = $65,100 remaining exemption
Subtracting Laurel’s reduced exemption from her AMTI gives her AMT base:
$550,000 AMTI - $65,100 exemption = $484,900 AMT base
The AMT rate isn’t a single flat percentage — for 2026, it's 26% on the first $244,500 of the AMT base ($122,250 if married filing separately), and 28% of any amount above that:
26% x $244,500 = $63,570
28% x ($484,900 - $244,500) = 28% x $240,400 = $67,312
$63,570 + $67,312 = $130,882 tentative minimum tax
Laurel then compares this $130,882 tentative minimum tax to what she owes under the regular tax system. If her regular tax is lower, she pays the difference as AMT, on top of her regular tax. If her regular tax is higher, she doesn’t owe any additional AMT.
If Laurel had exercised those same options in 2025, her $550,000 AMTI would have stayed under that year's $626,350 threshold, so her exemption wouldn't have been reduced at all. The lower 2026 threshold, combined with the higher phase-out rate, is what pulls her exemption down and increases her chances of owing AMT.
The bottom line
For most taxpayers, the AMT remains a non-issue — it's still aimed squarely at high earners with specific kinds of income or deductions. But if you're exercising stock options, expecting a large capital gain, or claiming a sizable SALT deduction in 2026, it's worth running the numbers. FreeTaxUSA automatically calculates whether you owe AMT on Form 6251, so you don't need to do the math yourself — but understanding why the exemption phases out faster this year can help explain any surprises on your tax bill.