2026 AMT Exemption: $140,200 MFJ / $90,100 Single Plus the New Phaseout Zones

The 2026 AMT exemption for married couples filing jointly is $140,200. This amount is subtracted from your alternative minimum taxable income (AMTI) before applying the 26% or 28% AMT rate. The exemption phases out at 25% of AMTI above $1,000,000, and disappears entirely once AMTI exceeds approximately $1,560,800 (the phaseout floor plus four times the exemption). The exemption for surviving spouses uses the same MFJ figure of $140,200. Single and head of household filers get $90,100. Married filing separately gets $70,100. Estates and trusts get $28,400.

The exemption is a buffer between AMTI and the AMT rates. If your AMTI is at or below the exemption amount, you owe no AMT, full stop. For most middle-income married couples, AMTI is close to or below the exemption, which is why AMT exposure dropped so dramatically after the 2017 Tax Cuts and Jobs Act raised the exemption levels. The 2026 figure of $140,200 reflects annual inflation indexing applied to the post-TCJA base, with the One Big Beautiful Bill Act (OBBBA) preserving the higher exemption structure permanently rather than letting it revert to roughly $109,400 as the original TCJA sunset would have required.

Exceptions and edge cases: the exemption isn’t a flat deduction. It interacts with AMTI through both the rate calculation and the phaseout. A joint filer with $1,100,000 of AMTI has lost $25,000 of the exemption to phaseout ($100,000 x 25%), leaving an effective exemption of $115,200. The remaining $984,800 of AMTI is taxed at 26% on the first $244,500 and 28% on the balance, producing TMT of approximately $271,659. Whether that exceeds regular tax depends on the regular tax computation. For a couple in that AMTI range with regular taxable income of $900,000, regular tax is around $260,000, so AMT due would be roughly $11,659.

Common mistakes: confusing the exemption with the AMTI threshold. The exemption is the amount you can have above zero AMTI before AMT starts to apply. The phaseout floor is a separate, higher threshold. We’ve seen taxpayers assume they’re safe from AMT because their income is under $1,000,000, not realizing the exemption applies to all AMTI, but their other preferences and adjustments push the actual TMT calculation above regular tax. The math requires running Form 6251, not just comparing income to the phaseout floor.

Another mistake: assuming AMT applies only to ultra-high earners. The exemption phaseout doesn’t begin until $1,000,000 joint, but AMT can still apply at much lower income levels if specific preferences are large. A couple earning $300,000 with a $200,000 ISO bargain element can easily owe substantial AMT despite being nowhere near the phaseout floor. The AMTI includes the bargain element, the regular tax doesn’t, so the gap (TMT minus regular tax) can be five or six figures.

Dollar example: a married couple has $400,000 of W-2 income, $30,000 of long-term capital gains, $40,000 of state and local taxes (subject to the $10,000 SALT cap for regular tax), and a $250,000 ISO bargain element from an exercise of company stock held through year-end. Regular tax computation: taxable income approximately $390,000 after the standard deduction or capped SALT itemized, regular federal tax roughly $80,000. AMTI: $390,000 (taxable income) + $250,000 (ISO preference) + $0 (SALT addback, since regular tax only deducted $10,000) = $640,000. Exemption phaseout starts at $1,000,000 joint, so the full $140,200 exemption applies. AMTI minus exemption = $499,800. AMT: 26% x $244,500 + 28% x $255,300 = $63,570 + $71,484 = $135,054. AMT due: $135,054 minus $80,000 = $55,054.

Documentation needed: Form 6251 with all preference items identified, supporting documentation for ISO exercises (Form 3921 from the employer), state and local tax payment records, private activity bond 1099-INT statements showing the AMT-preference portion, depreciation schedules for any real estate or business assets with regular-vs-AMT differentials, and the AMT carryover schedule (Form 8801) for the minimum tax credit. ISO clients should also keep the grant agreement, exercise notice, and brokerage confirmation of the exercise transaction.

Audit considerations: the IRS specifically targets ISO transactions because the AMT preference is a common error site. Brokerages report ISO exercises via Form 3921 to both the taxpayer and the IRS. Failing to report the bargain element on Form 6251 generates a CP2000-style notice with proposed AMT. We respond to these by recomputing the AMT correctly with all preferences, often reducing the proposed deficiency once we account for other adjustments and the minimum tax credit carryforward.

Where The Reed Corporation adds value: we model AMT exposure before any major exercise or transaction. For ISO clients, we run multi-year scenarios that compare exercising all at once, spreading over multiple years, doing a same-year sale to convert to ordinary income, or letting options expire if the AMT cost would exceed the after-tax value. For real estate and business clients with significant depreciation, we model the regular-vs-AMT depreciation differential and track the AMT basis separately. The minimum tax credit carryforward is one of the most-missed items on returns we review for new clients.

Our [Tax Strategy Consulting](/services/tax-strategy-consulting/) engagement includes a multi-year AMT projection for clients with ongoing exposure. The credit carryforward mechanics under [IRC Section 53](https://www.law.cornell.edu/uscode/text/26/53) recover the prior-year AMT against future regular tax when TMT drops below regular tax, but the recovery can take years. Tracking the AMT basis differential on appreciated assets (especially ISO shares) is the only way to fully recover the prepayment when the assets eventually sell.

A final note on the OBBBA change: clients who exercised ISOs in 2017-2019 (when the original TCJA was in effect) and were planning around an assumed 2026 sunset of the higher exemption now have a different decision tree. Some had been deferring exercises in anticipation of a lower-exemption environment that would make exercises more expensive. With OBBBA preserving the higher levels, the tax cost of incremental exercises remains favorable. We’ve been updating multi-year exercise plans for affected clients since the OBBBA passed, recalibrating the optimal exercise pace based on the locked-in exemption levels rather than the prior assumed sunset. The locked-in OBBBA exemption simplifies that math considerably for clients who plan multi-year exercise schedules.

The 2026 AMT exemption phaseout begins when alternative minimum taxable income (AMTI) exceeds $1,000,000 for married filing jointly and surviving spouses, $500,000 for single, head of household, married filing separately, and estates/trusts. Above those thresholds, the exemption is reduced by 25 cents for every dollar of AMTI exceeding the floor. The full phaseout (exemption reduced to zero) completes at AMTI of $1,000,000 + ($140,200 x 4) = $1,560,800 for joint filers, and $500,000 + ($90,100 x 4) = $860,400 for single filers. Above those upper limits, the exemption provides no benefit.

The mechanics: if a joint filer has AMTI of $1,300,000, the excess over the $1,000,000 floor is $300,000. The phaseout reduces the exemption by 25% x $300,000 = $75,000. The remaining exemption is $140,200 – $75,000 = $65,200. The taxpayer subtracts $65,200 from AMTI before applying the AMT rate. The effective marginal rate inside the phaseout zone is higher than 28% because each additional dollar of AMTI costs the 28% rate plus the loss of 25 cents of exemption (which itself would have shielded income from the 28% rate). Inside the phaseout zone, the effective marginal AMT rate is 28% + (28% x 25%) = 35%.

Why the threshold is at $1,000,000: the TCJA dramatically raised the phaseout floors from their pre-2018 levels (which were $160,900 joint and $120,700 single in 2017, indexed). The four-fold increase pushed the AMT phaseout out of reach for most taxpayers and eliminated the ‘AMT trap’ that previously caught upper-middle-income households in high-tax states. OBBBA preserved the higher floors permanently. The IRS adjusts the floor annually for inflation under IRC Section 55(d)(4).

Exceptions and special cases: estates and trusts have a sharply compressed AMT phaseout. The exemption begins at $28,400 for 2026 and phases out starting at $94,650 of AMTI. Above $188,250 of AMTI, the trust’s AMT exemption is gone. Distributing income out to beneficiaries via DNI mechanics often avoids the trust-level AMT compression, since the income lands at the beneficiary’s brackets where the larger individual exemption applies.

Common mistakes: assuming the phaseout floor is the AMT trigger. It’s not. AMT applies once your TMT exceeds regular tax, regardless of whether your AMTI is at or above the phaseout floor. A married couple with $500,000 of AMTI and a large ISO preference can owe substantial AMT despite being only halfway to the phaseout floor. The exemption fully shields the first $140,200 of AMTI, then AMTI between $140,200 and $244,500 + $140,200 = $384,700 is taxed at 26%, and AMTI above that gets the 28% rate. The phaseout floor matters only above $1,000,000.

Dollar example: a joint filer has $1,400,000 of AMTI, comprising $1,100,000 of regular taxable income plus $300,000 of AMT preferences (ISO bargain element, depreciation differential, private activity bond interest). The phaseout reduces the exemption by 25% x $400,000 = $100,000, leaving an effective exemption of $40,200. AMTI minus exemption = $1,359,800. AMT computation: 26% x $244,500 + 28% x $1,115,300 = $63,570 + $312,284 = $375,854. Regular tax on $1,100,000 of taxable income (assuming standard brackets, MFJ): approximately $310,000. AMT due: $375,854 minus $310,000 = $65,854.

Documentation needed: complete Form 6251 with the exemption phaseout worksheet (Lines 5 through 7 on the form compute the phaseout). Supporting documentation for the AMTI components: K-1s with passthrough adjustments, 1099-INT showing private activity bond interest, brokerage statements with ISO Form 3921 details, depreciation schedules showing both regular and AMT depreciation amounts.

Audit considerations: the IRS targets returns where reported AMT is implausibly low for the income level. If your AGI is $1,500,000 and your AMT is zero, that’s not impossible but it raises a flag. We document the exemption phaseout calculation on the return and maintain backup for every preference and adjustment. The carryforward of disallowed AMT NOLs and the alternative tax NOL deduction calculation are also common audit areas, since the mechanics differ from the regular NOL rules.

Where The Reed Corporation adds value: for clients in or near the phaseout zone, we model the marginal AMT rate to inform timing decisions on additional income. A client deciding whether to accelerate a $200,000 bonus or defer it to the next year benefits from knowing the marginal cost of that income inside the phaseout zone (potentially 35% AMT + state) versus outside it. Similarly, charitable giving decisions become more compelling when the marginal rate is elevated. We coordinate with clients’ investment advisors and attorneys to optimize the timing of liquidity events relative to the phaseout zone.

Our [Tax Strategy Consulting](/services/tax-strategy-consulting/) service includes phaseout-aware modeling for clients with AMTI in the $800,000-$1,500,000 range, where the phaseout interactions matter most. The strategic objective is often to compress AMTI in a single year (using charitable giving, retirement contributions, and deduction timing) to keep the exemption intact, then accept higher AMTI in a low-other-income year. Multi-year planning compresses the total tax cost across the planning horizon.

Practical implication for high-income filers: if your AMTI is approaching the phaseout floor, an additional dollar of income inside the phaseout zone costs more than the headline 28% rate suggests. The marginal AMT cost is the 28% on the dollar itself, plus 28% times 25 cents of lost exemption, which works out to a 35% effective marginal rate inside the phaseout zone. Combine that with state taxes (no AMT preference there since states don’t typically have AMT) and the combined marginal rate on AMTI inside the phaseout can exceed 45% in high-tax states. That elevated rate is the reason we recommend compressing AMTI into a single year when possible: pay 35-45% on the marginal dollar once, then drop back to lower rates in subsequent years, rather than spreading the AMTI exposure across multiple years.

Trusts and estates face a much earlier phaseout. The 2026 trust AMT exemption is $28,400, with the phaseout starting at $94,650 of AMTI. The phaseout completes at $94,650 + ($28,400 x 4) = $208,250 of AMTI. Trusts with substantial undistributed income routinely hit the trust AMT, which is why trustees and beneficiaries coordinate distributions out of the trust under DNI rules. A distribution shifts the income (and the AMT preference) to the beneficiary, where the individual exemption is much larger. We’ve helped trustees of complex grantor and non-grantor trusts model the distribution-vs-retention decision in years where AMT preferences are significant inside the trust.

Yes, the AMT exemption directly affects the tax cost of incentive stock option (ISO) exercises. When you exercise an ISO and hold the shares through year-end, the bargain element (fair market value at exercise minus strike price) is an AMT preference item under [IRC Section 56(b)(3)](https://www.law.cornell.edu/uscode/text/26/56). It gets added to AMTI in the year of exercise even though no cash changed hands and no regular tax is due. The AMT exemption is what shields the first $140,200 (joint) or $90,100 (single) of AMTI from the 26%/28% AMT rate.

For small ISO exercises, the exemption can fully absorb the preference. A single filer with $50,000 of regular taxable income and a $30,000 ISO bargain element has AMTI of $80,000, fully within the $90,100 exemption. AMT due is zero. For larger exercises, the exemption gets quickly overwhelmed. A bargain element of $300,000 added to regular taxable income of $150,000 produces AMTI of $450,000. After the $90,100 single exemption, AMTI subject to AMT rates is $359,900. AMT computed: 26% x $244,500 + 28% x $115,400 = $63,570 + $32,312 = $95,882. Regular tax on $150,000: approximately $25,000. AMT due: $70,882.

Exceptions: a same-year disposition of the ISO shares (selling them in the same calendar year you exercised) eliminates the AMT preference. The exercise becomes a ‘disqualifying disposition,’ and the bargain element is taxed as ordinary income on your regular return (typically reported as compensation on Form W-2 if you’re still employed, or as ‘other income’ if you’ve separated). The AMT and regular tax converge in that case. For private company ISO holders without a liquid market, same-year disposition isn’t an option, which is why pre-IPO employees face the largest AMT risks.

The minimum tax credit recovery mechanism: AMT paid on ISO exercises isn’t permanently lost. It generates a minimum tax credit under [IRC Section 53](https://www.law.cornell.edu/uscode/text/26/53) that can be claimed against regular tax in future years when regular tax exceeds TMT. When you eventually sell the shares, the AMT basis is the FMV at exercise (the inclusion amount), while the regular tax basis is the strike price. The difference between the two bases generates a ‘negative AMT adjustment’ in the sale year that reduces TMT relative to regular tax, allowing the credit to be used.

Common mistakes: failing to report the ISO bargain element on Form 6251 because no 1099 was issued. Form 3921 is issued by the employer for ISO exercises, but it’s an informational form, not the same as a W-2 or 1099. Many taxpayers miss it, especially if they exercised through a third-party platform. The IRS gets a copy of Form 3921 and runs matching, so unreported ISO exercises trigger CP2000 notices reliably. Another common mistake: assuming the regular-tax cost basis is the AMT basis when computing gains on the sale. Maintaining two basis records is essential.

Dollar example: a software engineer at a Series B startup exercises 50,000 ISOs at a $0.50 strike when the most recent 409A valuation shows $4.50 per share. Bargain element: $200,000. The engineer is single, with W-2 income of $200,000 and standard deduction. Regular taxable income: $185,000, regular tax approximately $36,000. AMTI: $185,000 + $200,000 = $385,000. Exemption: $90,100 (no phaseout, since AMTI is well under $500,000). AMTI minus exemption: $294,900. AMT rate: 26% on first $244,500 = $63,570, plus 28% on $50,400 = $14,112. TMT: $77,682. AMT due: $77,682 minus $36,000 = $41,682.

Documentation needed: Form 3921 from the employer showing exercise details, brokerage records of share holding through year-end, 409A valuation or company-issued FMV documentation supporting the bargain element calculation, and the AMT basis tracking for future sales. We maintain a running spreadsheet for ISO clients that tracks regular basis, AMT basis, exercise dates, holding period, and minimum tax credit accumulation year over year.

Audit considerations: ISO exercises are an IRS focus area because of the high frequency of error and the large dollar amounts involved. We’ve seen audits where the IRS questions the FMV at exercise (especially for private companies with stale or disputed 409A valuations), the timing of the bargain element inclusion (the year of exercise, not the year of sale), and the proper application of the holding period for capital gains treatment on subsequent sale. Documentation of the company’s contemporaneous FMV determination is essential.

Where The Reed Corporation adds value: ISO planning is one of our highest-impact specialties. We model exercise scenarios across multiple years, coordinate with the client’s 409A consultant and legal team on FMV timing, and structure cashless exercises or partial sales to fund the AMT liability. For pre-IPO clients, we often recommend exercising shares incrementally over multiple years as the 409A grows, smoothing AMT exposure rather than concentrating it. For clients with substantial appreciation already accumulated, we run side-by-side scenarios comparing ‘exercise and hold’ (potential long-term capital gains, large AMT) versus ‘exercise and same-year sell’ (ordinary income, no AMT) to identify the optimal path.

Our [Tax Strategy Consulting](/services/tax-strategy-consulting/) engagement includes ISO modeling as a standalone deliverable for clients in pre-liquidity stages. The cost of an ISO planning mistake routinely runs into six figures, and the recovery (via the minimum tax credit) can take a decade. The planning needs to happen before exercise, not after. Once the exercise is done and the calendar year closes, the AMT is owed regardless of what happens to the stock price afterward.

One additional planning point: the minimum tax credit isn’t a refundable credit. It can only offset regular tax, not generate a refund of its own. If the engineer in the example above stops working, goes on a sabbatical, or shifts to a low-income year, the regular tax in that year may be too low to use the AMT credit. The credit carries forward indefinitely, so it doesn’t disappear, but it sits unused until regular tax exceeds TMT again. For high earners with steady incomes, the credit recovers relatively quickly. For clients whose careers include planned breaks (medical residency, fellowship, sabbatical, early retirement), we map the recovery timeline to ensure the credit isn’t lost to inability to use it. We map the credit recovery timeline alongside the original exercise plan, so the full cycle is visible.

You owe AMT if your tentative minimum tax (TMT) exceeds your regular tax liability. The difference is the AMT amount. To find out, you need to complete [Form 6251](https://www.irs.gov/forms-pubs/about-form-6251), which walks through the AMTI computation, applies the exemption (with phaseout if applicable), computes TMT, and compares to regular tax. Tax software does this automatically as part of every return preparation, but the practical answer is: you owe AMT if you have material AMT preferences (ISO exercises, large state tax deductions before the SALT cap, depreciation differentials, private activity bond interest) and your income lands in the right range.

The IRS provides a worksheet at the start of the Form 6251 instructions that helps taxpayers determine whether they need to file the form. It asks about specific preference items: did you exercise ISOs and hold the shares, did you have depreciation differences on rental real estate, did you have private activity bond interest, are you in certain filing situations. If you answer no to all the screening questions and your income is below certain thresholds, you likely don’t owe AMT. The screening is conservative, so anyone uncertain should complete the form.

Practical screening for individuals: check your last three years of tax returns to see if AMT applied. If yes, review whether the underlying preferences are still present. ISO exercises that triggered AMT in a prior year generate a minimum tax credit on Form 8801 that should be tracked going forward. Real estate depreciation that created an AMT preference continues to do so until the property is sold and the basis differential reverses. Once you know which preferences applied historically, you can monitor for changes in the current year.

Exceptions and edge cases: the AMT exemption fully absorbs AMTI for most middle-income filers, so even if Form 6251 starts to be relevant, the tax often comes out at zero. A married couple with AMTI of $130,000 has no AMT because the full $140,200 exemption shields it. Estates and trusts have a much lower threshold ($28,400 exemption) and compressed brackets, so AMT applies to trust returns far more often than to individual returns of comparable nominal income.

Common mistakes: assuming you don’t owe AMT because the regular tax calculation looks reasonable. The whole point of AMT is that it operates as a parallel system. You can have a clean Schedule A, no unusual preferences, and still owe AMT if your AMTI puts you in the right zone with the right adjustments. We’ve seen clients whose tax software claimed AMT was zero when in fact the form had been left out because of an input error or because the software didn’t pick up an ISO Form 3921. Always cross-check Form 6251 manually when ISOs, real estate depreciation, or private activity bonds are involved.

Dollar example: a single filer with $250,000 of W-2 income, $20,000 of investment income, $50,000 of state and local taxes (capped at $10,000 for regular tax), $50,000 of private activity bond interest from a municipal bond fund, and no ISOs. Regular taxable income: approximately $258,000 after the standard deduction. Regular tax: approximately $58,000. AMTI: $258,000 + $50,000 (private activity bond interest) + $10,000 (SALT addback for the regular tax deduction taken) = $318,000. Wait: the SALT addback is the amount actually deducted, which was capped at $10,000. So AMTI is $258,000 + $50,000 + $10,000 = $318,000. AMT exemption: $90,100 (no phaseout since AMTI is below $500,000). AMTI minus exemption: $227,900. AMT computed: 26% x $227,900 = $59,254 (since under the $244,500 breakpoint). AMT due: $59,254 minus $58,000 regular tax = $1,254.

Documentation needed: Form 6251 from current and prior years, Form 8801 (minimum tax credit carryforward), Form 3921 (any ISO exercise reports), brokerage 1099-INT (especially for private activity bond interest broken out separately), 1099-DIV, K-1 forms with AMT adjustments noted (Boxes 12-17 typically), and depreciation schedules for real estate showing both regular and AMT depreciation.

Audit considerations: the IRS automated matching system compares preference items reported to brokers and employers against amounts shown on Form 6251. ISO exercises (Form 3921), depreciation on certain assets, and private activity bond interest are all subject to information reporting that the IRS cross-checks. Missing Form 6251 when preferences exceed the screening threshold generates a CP2000 notice. We respond to these by completing the missing form, often demonstrating that no AMT was actually due once all adjustments were correctly applied (positive adjustments offset by negative ones).

Where The Reed Corporation adds value: we run AMT projections for every client with potential exposure during our mid-year planning conversations. The forward-looking projection lets us avoid surprises at filing time and time additional transactions (ISO exercises, large state tax payments, charitable contributions) to optimize the AMT-vs-regular tax outcome. For clients with multi-year AMT exposure (rolling ISO exercises, ongoing real estate depreciation differences), we track the minimum tax credit accumulation and project the recovery timeline.

Our [Individual Tax Returns](/services/individual-tax-returns-1040/) service includes Form 6251 preparation as standard for any return where AMT screening flags potential exposure. The form is completed even when AMT comes out at zero, because the calculation itself confirms the position. For complex AMT situations (multi-year credit carryforwards, divorced spouses with joint ISO exercises in prior years, estate returns), we run the full reconciliation rather than relying on the software default.

The IRS Form 6251 instructions include a screening worksheet at the front that asks targeted yes/no questions about preference items. If you answer no to all of them and your income is below certain thresholds, the IRS effectively tells you that you can skip the form. The screening is conservative, designed to err on the side of completing the form when in doubt. We treat the screening as a starting point rather than a final answer. For any return with ISO exercises, real estate depreciation, K-1 passthrough income with AMT adjustments, or substantial private activity bond interest, we complete the full Form 6251 even if the AMT comes out at zero. That documentation prevents downstream issues when prior-year carryforwards interact with current-year exposures. That extra documentation also helps when responding quickly to any future IRS correspondence on the return.

The AMT applies a 26% rate to the first $244,500 of AMTI above the exemption, and a 28% rate to AMTI in excess of that amount. The breakpoint is $244,500 for all filing statuses except married filing separately, which uses $122,250. The rates are flat above each breakpoint, so the AMT structure is functionally a two-bracket system, much simpler than the seven-bracket regular tax system. For 2026, the $244,500 breakpoint reflects annual inflation indexing from the prior year’s $238,500.

The mechanics: a single filer with $400,000 of AMTI subtracts the $90,100 exemption (no phaseout since AMTI is under $500,000) to get $309,900 of AMTI subject to rates. The first $244,500 is taxed at 26% = $63,570. The remaining $65,400 is taxed at 28% = $18,312. Total TMT: $81,882. This compares to the regular tax computation, and the higher of the two is owed. The 2-percentage-point gap between 26% and 28% doesn’t sound like much, but at the marginal level inside the phaseout zone it compounds with the exemption loss to create effective rates north of 35%.

Why two rates and not one: the AMT was originally designed in 1969 as a single-rate add-on tax targeting wealthy taxpayers who paid little or no regular tax through aggressive deductions. The structure evolved over decades, with the 26%/28% split added to balance the AMT base against the regular tax progression. The current structure is a 1986 Tax Reform Act legacy modified by subsequent inflation adjustments. The IRS publishes the breakpoint annually in the inflation adjustment revenue procedure, currently [Rev. Proc. 2025-32](https://www.irs.gov/irb/2025-16_IRB) for 2026.

Exceptions and special cases: long-term capital gains and qualified dividends inside AMTI retain their preferential 0%/15%/20% rates, even though they’re part of the AMTI base. The Schedule D Tax Worksheet and Qualified Dividends and Capital Gain Tax Worksheet flow through to the AMT calculation as well, so a taxpayer with substantial long-term gains and modest other income doesn’t pay 26% or 28% on those gains. The AMT-specific rates apply only to ordinary AMTI components: wages, interest, ISO bargain element, business income, rental income, and similar items.

Common mistakes: applying the 28% rate to the entire AMTI rather than only the portion above the $244,500 breakpoint. The structure is layered, not flat. A taxpayer with $300,000 of AMTI above the exemption pays 26% on the first $244,500 and 28% on the next $55,500, not 28% on the full $300,000. The DIY software handles this correctly, but we see manual computations get it wrong, particularly for taxpayers building spreadsheet models to compare exercise scenarios.

Another mistake: forgetting that long-term capital gains inside AMTI are taxed at the capital gains rates, not the 26/28%. A taxpayer with $300,000 of AMTI consisting of $200,000 of long-term gains and $100,000 of ordinary AMTI items, with a $90,100 exemption, has $9,900 of ordinary AMTI subject to AMT rates (after applying the exemption to ordinary AMTI first) and $200,000 of long-term gains taxed at the 15% rate. The mechanics are detailed in Part III of Form 6251.

Dollar example: a joint filer with $700,000 of AMTI consisting of $500,000 of W-2 income, $50,000 of ordinary investment income, and $150,000 of long-term capital gains. Exemption: $140,200 (no phaseout since AMTI under $1,000,000). The exemption is applied against the ordinary AMTI first. Ordinary AMTI: $550,000 (wages + investment income). Less exemption: $550,000 – $140,200 = $409,800 of ordinary AMTI subject to AMT rates. AMT on ordinary: 26% x $244,500 + 28% x $165,300 = $63,570 + $46,284 = $109,854. AMT on long-term gains: 15% x $150,000 = $22,500 (since taxable income at this level falls in the 15% capital gains bracket). Total TMT: $132,354. Regular tax on the same income: approximately $124,000. AMT due: roughly $8,354.

Documentation needed: Form 6251 with Part III completed if the taxpayer has long-term capital gains or qualified dividends. The worksheet in Part III applies the capital gains rates to the appropriate portions of AMTI while applying the 26%/28% rates to the ordinary portions. K-1 forms with AMT adjustments noted should be cross-checked against the Form 6251 entries to ensure all preferences flow through correctly.

Audit considerations: the IRS rarely audits the 26%/28% computation directly because tax software gets the mechanics right. Audits in this area focus on the AMTI components, particularly whether all preferences were correctly identified and included. Once AMTI is correctly computed, applying the rates is mechanical. Common audit findings involve missed preferences (especially ISO bargain elements and private activity bond interest) or incorrect treatment of K-1 adjustments, not the rate application itself.

Where The Reed Corporation adds value: for clients near the $244,500 breakpoint, we model income timing decisions to minimize exposure to the 28% rate. Pulling income into the next year (when AMTI might be lower) or accelerating deductions into the current year (to reduce AMTI) can keep the marginal AMT rate at 26% rather than 28%. For clients with substantial long-term capital gains alongside AMTI exposure, we coordinate the timing of gains realization with the ordinary AMTI components to minimize the total tax cost across both systems.

Our [Tax Strategy Consulting](/services/tax-strategy-consulting/) service includes AMT rate-aware modeling for the small subset of clients who actually owe AMT each year. The strategic moves are different from the moves for regular tax. Accelerating SALT into a non-AMT year (when the deduction is fully usable) versus an AMT year (when it’s added back) can shift the cost meaningfully. Charitable giving timing, retirement contribution timing, and ISO exercise timing all interact with the AMT rate brackets. The planning happens during the year, not at filing time.

For married filing separately, the 28% breakpoint kicks in at $122,250 (half of the $244,500 threshold), and the AMT exemption is half the joint amount at $70,100. The compressed brackets for MFS filers can make this filing status more punitive under AMT than under regular tax, since the regular brackets for MFS are also half of MFJ but the rate progression is the same. Couples considering MFS for tax separation reasons should run the AMT comparison alongside the regular tax comparison, particularly if one spouse has significant ISO exercises or other preference items that would push their separate AMTI into the higher rate zone faster than a joint filing would.