How to Avoid the Alternative Minimum Tax (AMT)

To avoid the Alternative Minimum Tax, keep your alternative minimum taxable income below the exemption phase-out threshold, time incentive stock option exercises so the paper spread doesn’t push you over that line, skip the deductions and municipal bonds that get added back, and use retirement contributions to buy yourself room. For 2026, the exemption is $90,100 for single filers and $140,200 for married couples filing jointly, and it begins phasing out at $500,000 and $1,000,000 of AMTI respectively.¹ Most avoidance decisions are timing decisions, and most of them have to be made before December 31.

Know the Numbers You’re Planning Against

The AMT is a parallel calculation. It strips away certain deductions, adds back specific income items, and applies its own rates: 26% on AMTI up to $244,500 above the exemption, and 28% on anything beyond that. If the result exceeds your regular tax, you pay the difference.

The exemption is your buffer, and the phase-out is the cliff. You lose 50 cents of exemption for every dollar of AMTI above the threshold, which means a single filer’s entire $90,100 exemption is gone by the time AMTI reaches $680,200.¹ The phase-out rate doubled from 25% to 50% under the One, Big, Beautiful Bill Act, so exposure between $500,000 and roughly $680,200 of AMTI is now significantly larger than it was under earlier rules. Every plan below is built around not crossing that line, or crossing it deliberately and only once.

Time Your Income to Stay Under the Phase-Out

The single most effective move is controlling when income shows up. A spike in one year can blow through the phase-out threshold, while spreading the same total across two years can keep you fully under the exemption in both. This is not about earning less.

If you have discretion over a year-end bonus, deferring it to January can keep AMTI from crossing $500,000 or $1,000,000. The same logic applies to selling appreciated stock or real estate: closing in January instead of December pushes the gain into the next tax year. Every dollar of AMTI inside the phase-out zone effectively faces an added tax because you’re losing exemption at the same time you’re earning, so staying below the phase-out start is far more valuable than shaving income once you’re already inside it.

Retirement contributions help on the same margin. Maxing out a 401(k) or similar workplace plan reduces adjusted gross income, which flows straight into the AMTI calculation. For taxpayers hovering near the phase-out, an extra $23,500 in pre-tax deferrals can preserve thousands of dollars of exemption.

Handle Incentive Stock Options Before You Exercise

Incentive stock options are the most common reason otherwise-careful taxpayers get blindsided. The regular tax return ignores the gain until you sell, but the AMT counts the “spread” as income the moment you exercise.² The spread is the difference between what you paid (the exercise price) and what the stock was worth on the exercise date.

Exercise 1,000 shares at a $10 grant price when the stock trades at $110, and the AMT treats that $100,000 as income even though you’ve received no cash. If it pushes AMTI past the phase-out, you can owe tens of thousands on money you never pocketed. And if the stock price falls before you sell, the AMT still stands on the exercise-date value.

Spread Exercises Across Tax Years

The most reliable defense is exercising only enough options each year to keep AMTI under the phase-out threshold. Work backward from $500,000 or $1,000,000: subtract your other income, and the remainder is roughly how much ISO spread you can absorb. This takes patience when the stock is climbing, but the math almost always favors two or three years of exercises over one big one.

Sell in the Same Year You Exercise

A same-year sale is a disqualifying disposition. It eliminates the AMT adjustment entirely because the gain is reported as ordinary income on your regular return.² You give up the long-term capital gains rate you might have earned later, but you also eliminate the risk of paying AMT on a phantom gain that could evaporate. For volatile stocks, exercise-and-sell is often the safer play.

Weigh the Holding Period Against the AMT Hit

Full long-term capital gains treatment on an ISO requires holding the shares at least two years from the grant date and at least one year from the exercise date.³ Selling before either deadline is a disqualifying disposition. Meeting both deadlines means living with the AMT adjustment for at least one full tax year. Whether that’s worth it depends on the size of the spread and the outlook for the stock. On large spreads, the AMT hit can exceed the capital gains savings.

Watch the Deductions That Get Added Back

Several deductions you claim on your regular return disappear under the AMT. Knowing which ones lets you plan around them.

State and Local Taxes

The SALT deduction is completely disallowed under the AMT.² This matters more in 2026 than it has in recent years. The SALT cap rose from $10,000 to roughly $40,400 for most filers, so you’re deducting up to four times as much on your regular return, and every dollar gets added back for the AMT. In a high-tax state, this add-back alone can push you into AMT territory. There is no workaround. It’s a permanent difference with no future credit.

Mortgage Interest

Most mortgage interest is deductible under both systems, but only if the loan was used to buy, build, or substantially improve the home securing the debt. Interest on a home equity line used for something else, like paying off credit cards or funding a business, is not deductible under either system. The acquisition debt limit is $750,000 for mortgages taken out after December 15, 2017, or $375,000 if married filing separately.⁴ Interest on debt above that limit is added back for AMT.

Medical Expenses

Medical expenses are deductible under both systems, but only above 7.5% of AGI. If you can schedule a major procedure, grouping the costs into a year when your other income is lower increases the deductible portion and reduces the chance of triggering AMT.

Screen Municipal Bonds for Private Activity Interest

Most municipal bond interest is exempt from federal tax under both systems. The exception is interest from “specified private activity bonds,” which is added to AMTI as a tax preference item.⁵ These bonds finance projects like airports, docks, solid waste disposal facilities, mass transit systems, and broadband infrastructure.⁶ Once that interest gets taxed at the AMT rate, the reason you bought a tax-exempt bond in the first place is gone.

Two categories stay AMT-free. Bonds issued by 501(c)(3) charitable organizations, including hospitals and universities, are excluded from the specified private activity bond definition.⁵ Qualified housing bonds, including mortgage revenue bonds and veterans’ mortgage bonds, are also excluded. If you’re anywhere near AMT territory, filter for “AMT-free” bonds when building a portfolio. Most brokerages and fund managers label offerings accordingly.

Recover Past AMT With Form 8801

Paying the AMT once doesn’t always mean the money is gone. If your AMT came from “deferral items,” meaning timing differences that reverse in later years, the amount you overpaid becomes a credit you can use against your regular tax in future years. ISO exercises are the classic deferral item: the spread triggers AMT in the year of exercise, and when you eventually sell the shares, the regular tax catches up and the credit offsets the bill.⁷

You claim the credit on Form 8801. The form separates prior-year AMT that came from deferral items (depreciation, ISO spreads) from AMT that came from exclusion items (SALT, tax-exempt interest, the standard deduction). Only the deferral portion generates a credit.⁷ AMT from exclusion items is a permanent additional tax with no recovery mechanism. That distinction matters for planning. If your AMT comes mainly from ISO exercises, you’ll likely get most of it back over the next few years. If it comes mainly from living in a high-SALT state, that money is gone.

Unused credit carries forward indefinitely until you use it. The catch is that you can only claim it in years when your regular tax exceeds your tentative AMT, meaning years when you wouldn’t owe AMT anyway. If you expect that to happen soon, because you’ve stopped exercising ISOs for instance, file Form 8801 every year to preserve and claim the carryforward.

1
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
2
Office of the Law Revision Counsel. 26 U.S. Code 56 – Adjustments in Computing Alternative Minimum Taxable Income
3
Office of the Law Revision Counsel. 26 U.S. Code 422 – Incentive Stock Options
4
Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
5
Office of the Law Revision Counsel. 26 USC 57 – Items of Tax Preference
6
Office of the Law Revision Counsel. 26 U.S. Code 142 – Exempt Facility Bond
7
Internal Revenue Service. 2025 Instructions for Form 8801