Alternative Minimum Tax (AMT) in 2026: The New Landscape under OBBBA

The One Big Beautiful Bill Act (OBBBA) has permanently extended the increased AMT exemption amounts passed during the Tax Cuts and Jobs Act of 2017 (TCJA). However, there was a tradeoff; the AGI phaseouts were lowered and accelerated from 25% to 50%.

As a refresher, AMT is a secondary federal tax system that runs parallel to the normal federal tax system. If your AMT liability is higher than your regular tax liability, you will pay the additional difference on your taxes. You do get a credit for future tax years that will be utilized whenever your AMT liability is lower than your regular tax liability. In order to calculate AMT, you first start by calculating your Alternative Minimum Taxable Income, which is your taxable income plus some AMT preference items. Notable AMT preference items include:

• Standard deduction or your state and local Tax (SALT) deduction if itemizing
• Bargain element from exercising Incentive Stock Options (ISOs)
• Tax-exempt interest for private activity bonds (e.g., stadiums)

Then your AMT exemption (reduced if within the phaseout or gone if above) is subtracted, and any ordinary income below $244,500 ($122,250 for MFS) is multiplied by 26%, and any ordinary income above is multiplied by 28%. Income taxed at long-term capital gain rates (0%, 15%, and 20%) uses the same rates for AMT purposes.

Since the top marginal AMT rate is 28% and the top marginal federal rate is 37%, as your income increases, you build up more of a gap until you hit AMT (there are temporary dips down as you hit the phaseout ranges).

Below is a graph showing the $ amount of AMT preference items that can be added, before AMT liability occurs at various income levels for S, MFJ, and MFS filing statuses. The taxpayer is assumed to be a New York City tax resident for SALT deduction purposes.

The AMTI gap starts small at lower incomes and builds as income increases. However, MFJ has a notable dip in income from $300k to $500k. This is due to the SALT cap being raised to $40k, and is a full add-back preference item for AMT purposes if you are itemizing. MFJ also has a notable dip between $900k – $1.2M, as the AMT exemption phaseout begins at $1M.An example where this is relevant is for a taxpayer who has vested ISOs from their employer. 

To illustrate, let’s analyze a married NYC taxpayer with a household income of $400,000. The AMTI gap for preference items will be $13,366. Under the previous tax law, if the taxpayer had taken the standard deduction due to the $10k SALT cap, their gap would have been $20,051.  If the taxpayer has 10,000 ISOs with an exercise price of $2.00 and a current fair market value of $50.00, that means for every ISO exercised and held for qualifying disposition treatment, they will have a $48 of bargain element to add back to AMTI. They can exercise up to 278 ISOs ($50 – $2)*278 =  $13.3k before incurring AMT liability. Even though AMT paid can be reclaimed in later tax years, if the stock is private and illiquid, one may have to wait many years to claim the credit. Additionally, there is always a risk with private stock that there won’t be a liquidity event, or that the FMV can drop sharply, neither of which bodes well for using one’s AMT credit.

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