What is Alternative Minimum Tax (AMT)?

The Alternative Minimum Tax (AMT) can apply to current and former employees of privately held companies when they exercise their incentive stock options (ISOs). If the fair market value is higher than the strike price the spread between the two values is treated as taxable gain. This can have a significant cash impact on those who exercise their ISOs.

The purpose of AMT is to ensure higher income taxpayers pay their fair share of taxes despite certain preferential deductions that may be available. The three main triggers are having high household income with a significant number of deductions, realizing a large capital gain, or most commonly exercising stock options, specifically ISOs. Exercising ISOs causes taxation if there is a significant on-paper gain aka (FMV - Strike Price) * Total ISOs Exercised.

How does AMT work?‍

Alternative Minimum Tax per its name sets a minimum level of taxation that people must pay. To determine if you owe AMT, you must calculate your taxes 2 ways:

• Regular federal income tax – Based on your income, tax bracket, and filing status, excluding any ISO exercises.
• AMT calculation – This includes your income plus the ISO spread (i.e., (FMV – Strike Price) × ISOs Exercised). This total is known as Alternative Minimum Taxable Income (AMTI). After applying an AMT exemption, the result is taxed at either 26% or 28%, depending on income level.

The IRS then compares both methods and requires you to pay whichever is higher.

A simple example

Suppose you're a single filer earning $150,000 in W-2 income. You exercise 10,000 ISOs with a $1 strike price when your company's 409A value is $10 per share.

• ISO spread: ($10 − $1) × 10,000 = $90,000
• Regular federal income tax: calculated on your $150,000 salary only, the ISO exercise is not a taxable event under the regular system
• AMT calculation: $150,000 + $90,000 = $240,000 AMTI − $90,100 exemption = $149,900 × 26% = ~$38,974 tentative minimum tax
• Your regular tax on $150,000 (single filer, standard deduction) is approximately $26,000
• AMT owed: $38,974 − $26,000 = ~$12,974, due at filing, even though you haven't sold a share

This is the phantom income problem: a five-figure tax bill on gains that exist only on paper.

Note: This is a simplified illustration. Your actual AMT will depend on your full income picture, deductions, state taxes, and filing status. Use ESO Fund's AMT Calculator to estimate your specific exposure.

Learn how the IRS defines and calculates AMT ->

2026 AMT Rates, Exemptions, and OBBB Changes

AMT Exemptions

The 2026 AMT Exemptions are as follows: $90,100 for single filers and $140,200 for married filers. This is the amount your subtract from your AMTI when calculating AMT.

What these exemptions mean for the year 2026 is that if the spread from your ISO exercise is less than $90,100 for individuals (or $140,200 for married filing jointly), you may not owe any AMT.

AMT Rates

The Federal AMT rate is 26% or 28% depending on where your AMT income level falls (26% if below $239,100 or 28% if above). The income calculation includes normal income plus any ISO exercise gain minus the exemption amount. This creates your adjusted gross income (AGI). State rates vary, but most states have none. California for example has a rate of 7%. Other states that have AMT rates are: Iowa (7%),Minnesota (5.8%), and Colorado (3.47%).

AMT Phaseout Thresholds

A less important factor in AMT is the phase out thresholds. The exemptions mentioned above are only available to lower income filers. Anyone above the phaseout threshold lose 25 cents of exemption for every dollar they exceed the threshold level. In 2026, those levels are $500,000 for single filers and $1,000,000 for married filers. For most people, the phaseout threshold does not come into play.

OBBB Changes to AMT (Effective 2026)

The One Big, Beautiful Bill (OBBB) made several permanent changes to the Alternative Minimum Tax.

• Exemptions stay high: The higher exemption levels from the 2017 TCJA are now permanent and continue to adjust annually for inflation.
• Phase-out starts sooner: Beginning in 2026, exemptions start phasing out at $500K (single) and $1M (joint).
• Phase-out hits harder: The phase-out rate doubles from 25% to 50%, meaning higher earners lose the exemption more quickly.

These changes are positive for most employees exercising ISOs, since the higher exemption levels are locked in. But for high earners, the lowered thresholds and faster phase-out may trigger AMT sooner.

Note: Exemption dollar amounts are indexed for inflation; check the latest IRS figures for your filing year.

How to Calculate Alternative Minimum Tax (AMT)

The easiest way to calculate AMT is to use ESO Fund's AMT Calculator!

If you want to calculate AMT on your own here is how: First calculate your taxes without the ISO exercise. You can use a tax software program such as Turbo Tax for free as long as you don't file the return. If you use Turbo Tax, there will be a question similar to, "Did you exercise and hold Incentive Stock Options During the Tax Year?" You should answer "No" to this question for now. Now take the following steps:

1. Note your total tax amount $ for both state and federal. This is your baseline tax aka Regular Federal Income Tax.
2. Now enter an ISO exercise by going back to the question where you initially said No. This time say Yes.
3. Enter the number of shares, strike price, and Fair Market Value at the time of the exercise. Normally, you would be entering this information from IRS Form 3921 which your company would have sent you in January of the year following your exercise.
4. Upon submitting the ISO exercise event, your total taxes for both Federal and State should immediately update.
5. The difference, if any, between this updated tax figure and your baseline taxes noted earlier (1) is the AMT tax associated with your ISO exercise.
 

When you file, AMT is calculated and reported on IRS Form 6251, your tax software will generate this automatically if you enter an ISO exercise.

To calculate how many ISOs you can exercise each year without triggering AMT tax, enter a smaller number of shares in (3) and gradually increase it until your tax due actually increases over the baseline calculation.

Note that tax rates can change between the time you do this exercise and the time you actually file your return. Moreover, many other factors such as deductions, your tax bracket, state income taxes, and capital gains will also impact your final AMT tax calculation. Since ESO Fund has no way of knowing how your final taxes will look, you are advised to work with a tax professional to minimize your risk of not having sufficient funds when you finally file your tax return. ESO Fund is not obligated to increase its funding to you at a later date.

Disqualifying Disposition

If you exercise and sell ISOs in the same tax year, this is called a Disqualifying Disposition. In this case you no longer owe any AMT on the ISOs sold, but only pay income tax on the sale sale process minus your cost to exercise. This eliminates any double taxation for sales that occur in the same calendar year as the option exercise.

If you've already exercised ISOs and you're facing an AMT bill on stock you can't sell yet, this is exactly the situation ESO Fund was built for. We cover 100% of the exercise cost and related taxes, including AMT, with no out-of-pocket cost to you. If the company never exits, you owe us nothing. See how ESO Fund works →

How to Reduce or Avoid AMT on ISO Exercises

Knowing what AMT is doesn't help much if you don't know what to do about it. Here are the most effective strategies for startup employees, each covered in more depth in the links below.

Exercise just enough ISOs each year. You don't have to exercise all your options at once. By limiting how many shares you exercise in a given year, you can keep your ISO spread below the AMT exemption threshold and potentially owe nothing. See: How to exercise just enough ISOs to avoid AMT →

Split your exercise across December and January. If your spread is close to the exemption limit, exercising some shares in late December and the rest in early January lets you apply the exemption in two separate tax years, effectively doubling your headroom. See: Split ISO exercises between December and January →

Exercise early in the company's life, when the spread is small. The AMT calculation is driven by the gap between FMV and your strike price. The earlier you exercise relative to the company's growth, the smaller that spread, and the smaller (or nonexistent) your AMT exposure.

Exercise in a high-income year. This is counterintuitive, but because AMT rates (26–28%) are lower than the top ordinary income rate (37%), in years where your regular income tax already exceeds your tentative minimum tax, you may owe no additional AMT at all. Run the numbers both ways before writing off a high-income year.

For a complete breakdown of all available strategies, including QSBS timing, 83(b) elections, and disqualifying dispositions, see our full guide: 17 ways to reduce stock option taxes →

AMT Credits and Double Taxation

But what if you hold the shares longer than 1 year and sell them, are you double taxed?

The answer is no, but with a catch. When you finally sell shares that were formerly ISOs, you pay either income tax or long-term capital gains on the difference between the sale price and your strike price, even though you already paid AMT on the spread at exercise. The way to recoup this is through the AMT Credit process.

The credit exists because of dual cost basis. After exercise you carry two different bases: your regular tax basis (the strike price) and your AMT basis (the FMV at exercise). The IRS recognizes that you prepaid tax on part of the gain, and the credit lets you recoup that over time, assuming you don't owe additional AMT in the recovery year. See the link above for more on the AMT Credit process.

Written by Jordan Long, Marketing Lead at ESO Fund