Alternative Minimum Tax: When Owners Still Pay It
A parallel calculation with its own rates and exemption, the items that trigger it, the 2026 changes to the exemption phase-out, and the credit that returns some of it.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
The alternative minimum tax is a second calculation of income tax with fewer deductions, a large exemption, and two rates — 26 and 28 percent. You pay whichever is higher, the regular tax or the alternative. Few owners have owed it since 2018, but the 2025 law lowered the phase-out income from 2026, bringing more high earners back in.
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How does the calculation work?
- Start with regular taxable income.
- Add back preference items and adjustments: state and local taxes deducted, the standard deduction, private activity bond interest, the spread on incentive stock options exercised, and depreciation differences.
- Subtract the exemption, which phases out at 50 cents per dollar above the threshold.
- Apply 26 percent, then 28 percent above the rate breakpoint.
- Compare with regular tax; the excess is the alternative minimum tax.
| Item | Rule for 2026 |
|---|---|
| Exemption | $90,100 single, $140,200 joint; the 2025 law made the higher post-2017 exemption permanent |
| Phase-out threshold | Reset to the 2018 levels ($500,000 single, $1 million joint), indexed after 2026; the exemption is fully phased out at $680,200 single and $1,280,400 joint |
| Phase-out rate | 50 percent of income above the threshold, up from 25 percent |
| Rates | 26 percent, then 28 percent above $244,500 of income after the exemption ($122,250 married filing separately) |
What triggers it for business owners?
- Incentive stock options. Exercising and holding creates alternative minimum taxable income equal to the spread, with no cash to pay it.
- Large state and local tax deductions now that the cap is higher.
- Depreciation. Property depreciated under accelerated methods must be recomputed; bonus depreciation does not create an adjustment.
- Private activity bond interest from municipal bond funds.
- Large long-term capital gains, which do not change rates but push income into the phase-out range.
- Qualified small business stock acquired before late 2010, part of whose excluded gain is a preference.
What is the minimum tax credit?
Alternative minimum tax paid because of timing items — options, depreciation — generates a credit that can offset regular tax in later years when the regular tax is higher. The credit is tracked on Form 8801 and can take years to use.
Does the corporate alternative minimum tax apply to small companies?
No. The corporate version applies only to corporations with average annual adjusted financial statement income above $1 billion over three years.
Frequently asked questions
Do S corporation owners get preference items on the K-1?
Yes. Adjustments such as depreciation differences pass through and appear on the shareholder's Form 6251.
Can I avoid the tax by exercising options in stages?
Often. Spreading exercises across years keeps the spread within the exemption and the lower rate band.
Does the qualified business income deduction reduce alternative minimum taxable income?
Yes. It is allowed for both calculations.
Where is it reported?
On Form 6251 for individuals, attached to Form 1040.
Official sources
The IRS explains: “The AMT is the excess of the tentative minimum tax over the regular tax. Thus, the AMT is owed only if the tentative minimum tax for the year is greater than the regular tax for that year.” — Internal Revenue Service, Topic no. 556, Alternative Minimum Tax, https://www.irs.gov/taxtopics/tc556
The IRS explains: “Use Form 6251 to figure the amount, if any, of your alternative minimum tax (AMT). The AMT applies to taxpayers who have certain types of income that receive favorable treatment, or who qualify for certain deductions, under the tax law.” — Internal Revenue Service, About Form 6251, Alternative Minimum Tax - Individuals, https://www.irs.gov/forms-pubs/about-form-6251
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