What is the alternative minimum tax (AMT)? Definition, how it works and examples
Why exercising incentive stock options in a private company can produce a tax bill before you have sold a single share — worked through with numbers.
The short answer
What is AMT? The alternative minimum tax is a second, parallel way of calculating US federal income tax — with fewer deductions, its own exemption and two flat rates of 26% and 28% — and each year you pay whichever of the two results is higher. Most salaried people never reach it. Employees of private companies are the exception: exercising incentive stock options creates no regular income, but the gap between the strike price and the shares’ current value is income for AMT. That can produce a tax bill in April on shares you cannot yet sell.
How does the alternative minimum tax work?
The calculation runs on Form 6251. It starts from your regular taxable income, adds back items the AMT does not allow — the standard deduction or, if you itemise, state and local taxes, plus a list of preference items — and arrives at alternative minimum taxable income (AMTI). From that it subtracts the AMT exemption, taxes what remains at 26% up to $244,500 and 28% above, and compares the result, the tentative minimum tax, with your regular tax. If it is higher, the difference is the AMT. The exemption is what keeps most households out.
What is AMT for ISOs?
An incentive stock option (ISO) is the employee option with the best regular-tax treatment: no income when it is granted, none when it is exercised, and long-term capital gain on the whole profit if the shares are held more than two years from grant and more than one year from exercise. The AMT takes back part of that. In the year you exercise, the spread — the fair market value of the shares minus what you paid — is an adjustment on line 2i of Form 6251. In a private company both numbers usually come from a 409A valuation.
How much AMT does exercising ISOs trigger? A worked example
A single employee earns $216,100 in wages in 2026 and takes the $16,100 standard deduction, so regular taxable income is $200,000 and regular tax is $40,598. The options have a $2.00 strike, set at the 409A value when they were granted. The latest 409A values the common stock at $12.00, so each exercised option carries $10.00 of spread. Nothing else on the return is an AMT item. In this illustration roughly the first $30,000 of spread fits under the line before any AMT is due, because the tentative minimum tax has to climb past the regular tax first.
AMT exemption, phase-out and rates for 2026
Compared with 2025, the exemption rose with inflation but the phase-out starts far lower and runs twice as fast. A household with a large ISO exercise therefore loses its exemption sooner than it would have a year earlier. The figures are adjusted every autumn for the following tax year; the IRS announcement for 2026 lists them with the rest of the year’s adjustments.
How the AMT credit gives some of it back
AMT paid because of an ISO exercise is not lost. The ISO adjustment is a timing difference, so it generates a minimum tax credit, calculated on Form 8801 and carried forward. In a later year you can use it against regular tax, but only to the extent your regular tax exceeds that year’s tentative minimum tax. The shares also carry two bases. For regular tax your basis is what you paid — $2.00 a share in the example. For AMT it is increased by the adjustment, to $12.00.
Common AMT mistakes with private-company options
Exercising in December without a model The spread is measured at exercise, and the whole year’s income goes into the calculation. Model AMTI before the trade, not after it. Using the strike-date value The adjustment uses fair market value at exercise — normally the latest 409A — not the value when the options were granted. Ignoring the 2026 phase-out At 50 cents per dollar from $500,000 single, a large exercise can lose most of the exemption. Rules of thumb built on pre-2026 numbers understate the bill. Counting on a sale to pay the tax Private shares may have no buyer before April.
The terms this page uses
AMTI Alternative minimum taxable income: regular taxable income with the standard deduction (or itemised state and local taxes) and preference items such as the ISO spread added back. Tentative minimum tax AMTI minus the exemption, taxed at 26% and 28%. If it is higher than your regular tax, the difference is the AMT you owe. Incentive stock option (ISO) An employee option that is not taxed for regular tax on exercise and can turn the whole profit into long-term gain — but whose exercise spread counts for AMT. Spread Fair market value of the shares at exercise minus the strike price paid.
Questions about AMT and stock options
Do non-qualified stock options trigger AMT? Not in the same way. The spread on a non-qualified option is ordinary income for regular tax on exercise, so there is no gap between the two systems to create an AMT adjustment. The tax is simply due as income, usually through withholding. Does AMT apply if I exercise and sell in the same year? No AMT adjustment arises when ISO shares are bought and sold in the same calendar year. The sale is a disqualifying disposition, and the spread is taxed as ordinary income under the regular rules instead.
Do non-qualified stock options trigger AMT?
Not in the same way. The spread on a non-qualified option is ordinary income for regular tax on exercise, so there is no gap between the two systems to create an AMT adjustment. The tax is simply due as income, usually through withholding.
Does AMT apply if I exercise and sell in the same year?
No AMT adjustment arises when ISO shares are bought and sold in the same calendar year. The sale is a disqualifying disposition, and the spread is taxed as ordinary income under the regular rules instead.
Which value is used for the spread in a private company?
The fair market value of the shares at exercise. With no market price, that is normally the company’s most recent 409A valuation, not the price of the last preferred round, which is usually higher.
Did the 2025 tax law change AMT?
Yes, from 2026. The One Big Beautiful Bill Act made the higher exemptions permanent but reset the phase-out thresholds to $500,000 single and $1,000,000 joint and doubled the phase-out rate to 50%. Higher earners with large ISO exercises lose the exemption faster than before.
Can I get AMT back?
AMT caused by an ISO exercise becomes a minimum tax credit, carried forward on Form 8801. You use it in later years when regular tax exceeds the minimum tax — typically after selling the shares — so it comes back over time rather than at once.
Where every figure on this page comes from
Every threshold and rate was checked against the IRS and the US Code on 1 October 2026 and applies to tax year 2026. The worked example is illustrative arithmetic on those figures, not market data. State alternative minimum taxes, where they exist, are not covered.