Alternative Minimum Tax (AMT)
Also: AMT, alternative minimum tax
A parallel federal tax system that disallows certain preferences and credits so high-income filers owe a minimum tax. For tech employees, ISO exercises are the most common trigger.
The AMT is a parallel calculation to the regular federal income tax. Taxpayers compute both their regular tax and their tentative minimum tax on Form 6251. The final liability is the higher of the two. AMT uses a broader income base, disallows many itemized deductions, and applies a 26% rate up to the excess over $232,600 (2025) and 28% above. The ISO bargain element at exercise is an AMT preference item, which is why exercising ISOs in volume can trigger an AMT bill even without selling shares.
Example: a married filer has $350,000 of wage income and exercises 5,000 ISOs with a $200,000 bargain element. Regular tax on wages is approximately $70,000. AMT income includes the $200,000 preference. The tentative minimum tax runs about $110,000, making AMT the binding tax. The filer pays an extra $40,000 beyond regular tax.
Common mistake: assuming AMT disappears after 2026. It remains, but the TCJA’s higher exemption amounts and phase-outs sunset at the end of 2025 under current law, which will pull more filers into AMT starting in 2026.
AMT matters at every ISO exercise, at Roth conversion years, and when large capital gains push a filer into the preference zone.