Alternative Minimum Tax (AMT) – How to Prepare & Plan for 2026?

[Last Updated on 2 days ago]

Dealing with taxes can be confusing, and the Alternative Minimum Tax (AMT) is one of the most challenging parts. AMT is a special tax system designed to ensure high-income earners pay at least a minimum amount in taxes, even if they have a lot of deductions.

While most people are familiar with regular taxes, AMT can catch people off guard — especially when things like state and local tax (SALT) deductions or incentive stock options (ISOs) come into play.

If you’re wondering whether you might have to pay AMT, it’s important to understand who is affected and how to plan for it. That’s where CPA Pilot can help. 

Our AI Tax Assistant makes it easier for tax professionals and individuals to figure out if they’ll owe AMT and helps them plan to avoid surprises.

Whether you’re a CPA managing clients’ taxes or someone just trying to get a better handle on your own taxes, CPA Pilot has the tools and support you need.

What is the Alternative Minimum Tax (AMT) and How Does It Work?

The Alternative Minimum Tax (AMT) is designed to ensure that taxpayers who claim a lot of deductions and credits still pay a fair amount of taxes. It operates alongside the regular income tax system, and if you’re subject to AMT, you’ll have to calculate your tax both ways: under the regular system and under the AMT rules. Then, you’ll pay whichever is higher.

How Does the AMT Work Compared to Regular Tax?

Unlike the regular tax system, AMT removes certain deductions, like state and local taxes (SALT), and personal exemptions. 

This can cause people who would usually pay lower taxes to owe more. 

For example, if you have significant state and local tax deductions or if you’ve claimed personal exemptions in previous years, AMT will not allow those. The goal is to ensure that people who have a high income but claim a lot of deductions still pay some taxes.

Example of How AMT Works

Let’s say you’re a taxpayer in California with a high salary, and you’ve been using the SALT deductions for years to lower your taxable income. Under the regular tax system, this might help reduce your bill significantly.

But if you’re subject to AMT, the SALT deductions won’t apply. As a result, your taxable income could be higher under AMT, meaning you’ll owe more in taxes.

For instance, if you're making $400,000, and the regular tax would allow you to deduct $50,000 in SALT, under AMT, that $50,000 deduction would not be allowed. Therefore, you would pay taxes on the full $400,000, instead of after the deduction, which could increase your overall tax burden.

Now that we’ve covered what AMT is and how it differs from regular tax, the next step is understanding who is most likely to pay AMT and what triggers it. Many taxpayers may not realize that they could be affected by AMT, even if their income isn’t considered “high” by traditional standards.

Who Pays the Alternative Minimum Tax in 2025–2026?

The Alternative Minimum Tax (AMT) primarily targets individuals with higher incomes, particularly those who claim significant tax deductions. While it was originally designed to ensure high-income earners paid at least a minimum tax, the reach of AMT has expanded, especially with changes in tax laws. 

While the Tax Cuts and Jobs Act (TCJA) temporarily reduced the number of people affected, these provisions are set to expire in 2025, meaning AMT will likely affect more taxpayers in the future.

Who Is Most Likely to Pay AMT?

• High-Income Earners: In 2022, 9.8% of households earning more than $1 million were affected by AMT. This group is most likely to face AMT due to large deductions (such as SALT), incentive stock options (ISOs), or other complex income sources.
  
• Middle-Income Earners (Post-2025): Once the TCJA provisions expire, more middle-income households earning between $200,000 and $500,000 will be subject to AMT. Projections suggest that over 20% of these households will be impacted due to their use of deductions or income from ISOs or similar sources.
  
• Households Earning Between $500,000 and $1 Million: In 2022, 2.1% of these households paid AMT. This group is particularly vulnerable due to large deductions, stock options, or business-related depreciation.
  (Source of all above pointers)

What Common Triggers Cause Taxpayers to Pay AMT?

Income & equity items

• ISO “exercise-and-hold” spreads: The paper gain at exercise gets counted for AMT.
  Example: You exercise options at $20 when the stock is $70; the $50 spread per share goes into MTI, even if you don’t sell.

Deductions that don’t help under AMT

• SALT & property taxes: These are not deductible for AMT, so big payments won’t lower AMT the way they might lower regular tax.
  Example: Prepaying property tax can reduce regular tax but leaves AMT unchanged.
  
• Home-equity interest (non-improvement use): Interest on a HELOC used for things like debt consolidation is disallowed for AMT.
  Example: Using a HELOC to pay college costs—interest won’t reduce AMT.

Investment & business adjustments

• Private-activity bond (PAB) interest: “Tax-exempt” interest from PABs is added back for AMT.
  Example: A muni fund with PAB exposure can nudge a client into AMT.
  
• Accelerated depreciation on business/rental assets: AMT often requires slower methods, creating an AMT add-back.
  Example: Bonus/accelerated depreciation on a rental may boost AMTI in the early years.
  
• K-1 preference items: Certain pass-through items (e.g., specific depletion or intangible drilling cost preferences) can increase AMTI.
  Example: A limited partnership’s K-1 with preference items triggers an AMT adjustment.

Quick rule of thumb: if something looks “extra helpful” for regular tax (large SALT, aggressive depreciation, ISO deferrals, “tax-exempt” PABs), check its AMT treatment—it may be added back or limited.

How to Project Your AMT Liability for 2026?

Projecting AMT liability involves determining whether you’ll owe AMT in addition to regular taxes. This requires calculating your AMT taxable income (AMTI) and comparing it to your regular taxable income. 

If AMTI exceeds the AMT exemption amount, you’ll owe AMT, typically calculated at a rate of 26% or 28% (depending on your income level). Here’s how you can project AMT for yourself or your clients:

1. Gather Key Documents

The first step in projecting AMT is gathering the necessary tax documents that affect both your regular tax and AMT calculations:

• Prior year tax returns (especially Schedule 6251 for AMT)
• Current income statements (e.g., pay stubs, K-1s, 1099s)
• Records of deductions such as mortgage interest, property taxes, charitable contributions, and any stock options exercised.
• Business expenses or K-1 partnership income for those who might be affected by AMT preference items.

By having these documents ready, you can begin to calculate both regular taxable income and AMTI. This will allow you to see whether the AMT exemption applies and what amount might be taxed under AMT.

2. Using AI for Tax Projection

For most individuals and CPAs, using AI Tax Projection in CPA Pilot is the easiest way to project AMT. These tools automatically calculate your AMTI based on the data you input and apply the AMT tax rates to determine your liability.

For instance, the IRS Form 6251 is the official worksheet for AMT calculations. The software will typically complete these forms for you, calculating whether you owe AMT, based on your total income, deductions, and applicable exemptions. CPAs or tax advisors can use more advanced tools like CPA Pilot for accurate and automated AMT projections across multiple clients.

3. The Role of a CPA in Projections

While tax software can help you estimate AMT liability, a qualified CPA is invaluable for more complex scenarios, especially for business owners, those with stock options, or clients with multiple income sources. CPAs are experts at navigating AMT preference items and adjustments that could affect your liability, especially when deductions, depreciation, and investment income are involved.

By having a CPA involved in the AMT projection process, you can ensure that all the relevant factors (like ISOs or K-1 income) are properly accounted for, potentially reducing your AMT exposure. 

Early tax planning is essential to avoid any surprises at year-end.

What Are the Best Strategies to Reduce AMT Before 2026?

AMT can be a tricky tax to manage, but several strategies can help reduce your AMT liability. Here are the most effective ways to minimize AMT exposure, whether you’re an individual taxpayer or a CPA managing client accounts.

1. Timing of Income and Deductions

• Deferring Income: If you expect to be subject to AMT, deferring income (e.g., delaying a bonus or delaying the sale of appreciated stocks) into the next year can help lower your AMTI. By pushing income into the future, you may reduce your taxable income in the year you’re calculating AMT for.
• Accelerating Deductions: Conversely, accelerating deductions into the current year can help reduce your AMTI. For instance, prepaying state income taxes or charitable donations can help lower your overall taxable income for regular tax and AMT. However, this depends on whether these deductions are allowed under AMT—state and local taxes (SALT) are generally not allowed.

2. Incentive Stock Options (ISOs) Strategy

For taxpayers with ISOs, timing the exercise and sale of stock options is crucial to minimizing AMT exposure. Here are a few strategies:

• Disqualifying Disposition: By selling the shares within the same year as the exercise, you avoid the AMT spread, but you might trigger short-term capital gains tax instead.
• Wait for Long-Term Treatment: If you hold the stock for more than one year after exercise and two years after grant, you’ll benefit from long-term capital gains rates on the profit, though it won’t be counted for AMT. However, this strategy requires careful planning to avoid triggering AMT in the first place.

3. Use of AMT Credit

The AMT Credit can be a helpful strategy to offset AMT paid in prior years. This credit allows taxpayers who paid AMT in a previous year to apply it against regular taxes in future years, reducing overall tax liability.

• Carryforward Option: If you paid AMT last year and didn’t fully utilize the credit, you can carry it forward to future years. This strategy helps reduce your regular tax liability over time, especially if you expect to pay less AMT in future years.
• Maximizing Credit Use: Work with a CPA to track unused AMT credits and strategically apply them to future years, ensuring you get the most benefit.

4. Tax-Efficient Investment Strategies

Certain investments, like municipal bonds or tax-advantaged retirement accounts, can help reduce AMT exposure. For example:

• Municipal Bonds: Interest from private activity bonds is typically not taxable under the regular tax system, but it gets added back for AMT. By investing in non-PAB municipal bonds, you can minimize this risk.
• Retirement Contributions: Contributing to tax-deferred retirement accounts like 401(k)s or IRAs can lower your regular taxable income and AMTI, though it won’t eliminate AMT.

5. Preparing for 2026 Changes

The TCJA changes to AMT exemptions and thresholds are set to expire in 2025, which could result in a significant increase in the number of people subject to AMT in 2026. Here’s what you should do to prepare:

• Start Planning Early: Begin planning your tax strategy for 2026 now. Consider deferring income, accelerating deductions, and reviewing potential ISO exercises to minimize exposure.
• Reevaluate Deductions: With the expiration of TCJA provisions, you may lose certain benefits (like the SALT deduction). Assess your deductions now and work with your tax professional to adjust for these changes.
• Scenario Modelling: Use tax software or consult with a CPA to model future tax scenarios, especially if you are close to income levels that may trigger AMT.

By focusing on timing, tax-efficient strategies, and proactive planning, individuals and tax professionals can better manage AMT liabilities.

How CPAs Can Help Clients Navigate AMT in 2026? 

As a tax professional, navigating AMT can be complex, especially for clients with high incomes, ISOs, or pass-through income from businesses. CPAs play a crucial role in helping clients avoid unexpected AMT liabilities by implementing strategic tax planning and monitoring triggers. Here’s how CPAs can help:

• Proactive Tax Planning: One of the most important roles of a CPA is to help clients understand their AMT exposure well before tax season. By reviewing income projections and deductions, CPAs can spot red flags and suggest strategies to reduce AMT exposure. For example, a CPA can advise on whether to defer income or accelerate deductions to keep clients under the AMT threshold.
• Tracking and Applying AMT Credits: CPAs help clients track AMT credits from previous years and ensure they’re used efficiently in future years to offset regular tax liabilities. Without proper tracking, these credits can be overlooked, leaving valuable tax benefits unused.
• Scenario Modelling: CPAs can model tax scenarios to help clients make more informed decisions about exercising ISOs, prepaying property taxes, or adjusting their retirement contributions. Scenario modelling also becomes crucial when preparing for potential tax law changes, such as the expiration of the TCJA provisions in 2025, which will likely increase AMT liabilities for many clients.

Preparing for 2026: What Taxpayers Should Expect?

CPAs should integrate AMT considerations into their year-round tax planning rather than waiting until the year-end. 

Here are the best practices to keep clients ahead of the game:

• Review AMT Risks in the Off-Season: CPAs can periodically review their clients’ financial situations and tax filings outside of the busy tax season to identify and plan for AMT triggers. This helps clients avoid last-minute surprises.
• Educate Clients About AMT: Many taxpayers are unaware that they could be subject to AMT. CPAs should proactively educate their clients on what triggers AMT and how it works. This knowledge helps clients make informed decisions, such as whether to exercise ISOs or accelerate deductions, and can prevent confusion when they owe more than expected.
• Utilize AI for Tax Projection: Using advanced AI Tax Projection (such as CPA Pilot) can streamline the process of tracking AMT projections, flagging AMT triggers, and applying AMT credits. Automation tools can help CPAs stay on top of their clients’ tax scenarios throughout the year, ensuring that no tax benefits are missed and reducing the risk of errors.
• Consider Future Changes in Tax Laws: As tax laws evolve, CPAs should stay informed about upcoming changes that could impact AMT. For example, the expiration of the TCJA provisions in 2025 will likely cause more taxpayers to face AMT. By staying ahead of changes, CPAs can help clients adjust their tax strategies in advance.

How CPA Pilot Helps You Project, Plan & Stay Ahead of AMT?

AMT can be a complex tax for clients, but with the right guidance and proactive planning, CPAs and tax professionals can help their clients minimize liability, avoid surprises, and take advantage of available credits. By integrating AMT planning into year-round tax strategies, CPAs can provide added value and ensure clients are prepared for both current and future tax challenges.

At CPA Pilot, we offer AI-powered tax assistance specifically designed to help tax professionals manage AMT projections, automate calculations, and optimize client strategies. Whether you’re looking to streamline AMT assessments or enhance tax planning for your clients, CPA Pilot provides the resources and support you need to make AMT manageable.

FAQs About the Alternative Minimum Tax (AMT) 

How do incentive stock options (ISOs) trigger AMT?

Exercising incentive stock options (ISOs) triggers AMT when the spread—the gap between exercise price and market value—is added to AMT income (AMTI). This can create AMT liability even before the stock is sold, impacting cash flow and tax timing.

Can charitable contributions reduce AMT liability?

Charitable contributions to qualified charities are deductible under AMT, but state and local tax (SALT) deductions are not. Donations may slightly lower AMTI, but their effect is limited. A CPA can structure contributions to optimize both regular tax and AMT savings.

How do state and local tax (SALT) deductions affect AMT?

SALT deductions are disallowed under AMT, meaning taxpayers in high-tax states can’t use them to lower AMTI. Losing these deductions often triggers AMT for individuals with large property or state income taxes. Strategic income timing helps reduce this exposure.

How can I avoid AMT when exercising ISOs?

To avoid AMT, sell ISOs immediately after exercising (a disqualifying disposition) so the spread isn’t added to AMTI. Alternatively, exercise smaller lots or time exercises when total income is lower. This limits AMT impact and preserves long-term tax benefits.

Can AMT be avoided with tax planning?

Yes. Tax planning can manage AMT by timing income, adjusting deductions, deferring ISO exercises, and increasing retirement contributions. Strategic year-end planning with a CPA ensures AMTI stays below exemption limits, preventing unexpected AMT bills.

How does the AMT credit work?

The AMT credit lets taxpayers offset future regular tax liability with prior AMT payments. It carries forward until used, reducing tax owed in future years when AMT doesn’t apply. However, it can’t offset future AMT liability itself—only regular tax.

Can business owners be affected by AMT?

Yes. Business owners with pass-through income or large depreciation deductions may face AMT if disallowed items inflate AMTI. AMT often affects S-corp or LLC owners using accelerated depreciation or tax shelters. A CPA can adjust deductions strategically.

How does AMT impact stock options and investments?

AMT impacts stock options and investments when ISO spreads, private activity bond interest, or certain tax-exempt bonds increase AMTI. Balancing these assets and managing exercise timing can prevent unexpected AMT exposure in investment portfolios.

What happens if I don’t pay AMT?

If AMT isn’t paid, the IRS can impose penalties and interest on unpaid amounts. Underpayment occurs when AMT exceeds regular tax. Filing accurate projections and making estimated payments avoids penalties and ensures AMT is settled on time.