AMT (Alternative Minimum Tax)

The Alternative Minimum Tax (AMT) ensures that individuals with high incomes who use large tax preferences — such as the capital gains inclusion rate, stock option deductions, LCGE, or significant carrying charges — still pay at least a minimum amount of federal tax.

The AMT works by recalculating your tax using a broader income base (adding back certain deductions and preferences) and applying a flat rate of 20.5% to adjusted taxable income above the exemption — $181,440 for 2026 (up from $177,882 in 2025), which tracks the 4th federal bracket threshold and is indexed annually. If the AMT amount exceeds your regular tax, you pay the higher AMT amount instead.

AMT paid in a given year is not lost — it creates a carry-forward credit that can be applied against regular tax in the following 7 years (to the extent regular tax exceeds AMT in those years). This means AMT is often a timing issue rather than a permanent additional tax. However, it can create cash flow challenges in years when large capital gains or option exercises occur.