How do I know if I'm subject to AMT?

If your regular tax return generates an AMT amount on Form 6251, you owe the higher of regular tax or AMT. Most people subject to AMT discover it through their CPA or tax software. Common triggers include ISO exercise, large SALT deductions (pre-TCJA), depreciation preferences, certain tax credits, and high income with numerous deductions. The TCJA raised the AMT exemption significantly, meaning far fewer people pay AMT than before 2018.

Does the AMT credit help offset future taxes?

Yes — when you pay AMT in one year, you earn an AMT credit (Form 8801) that can offset regular tax in future years when your regular tax exceeds your tentative minimum tax. For ISO exercises that trigger AMT, the AMT paid in the exercise year creates a credit that offsets regular tax in the year you actually sell the shares (when the gain is recognized for regular tax purposes). The credit can take years to fully use.

Is California AMT the same as federal AMT?

California has its own state AMT, calculated under California tax law. California's AMT rate is 7% on California AMTI. California does not conform to the federal TCJA AMT changes as fully as the federal system, so California AMT exposure can differ from federal exposure. Business owners who benefit from California PTET elections need to understand how the credit flows back to the personal return and whether it affects California AMT.

Alternative Minimum Taxable Income (AMTI) is the income base for calculating AMT. It starts with regular taxable income, then adds back AMT 'preferences' and 'adjustments' (items that get favorable treatment under regular tax but not under AMT). The AMT exemption is then subtracted to get the amount subject to AMT. If the AMT on AMTI exceeds your regular tax, you pay the difference as AMT.

My company's stock is still private. How do I estimate AMT exposure from an ISO exercise?

For private company ISOs, the 'fair market value' for AMT purposes is typically the 409A valuation — the board-approved independent appraisal of the company's common stock. If you exercise ISOs when the 409A value is $10/share and your exercise price is $1/share, the spread of $9/share × number of options exercised is your AMT income. At 26–28% AMT rate, a large exercise in a company with a high 409A can create a tax bill due April 15 even though you haven't sold a share.

Tax planning

Alternative Minimum Tax (AMT): When Business Owners and Option Holders Get Caught

The AMT is a parallel tax system with its own rules — it disallows some deductions and requires some income inclusions that the regular tax system doesn't. Business owners encounter it primarily through ISO stock option exercises, depreciation preferences, and California PTET elections.

Written by Matt Reese, CPA · 7 min read · Published April 2026·Share on LinkedIn

Key Takeaways

The AMT is calculated in parallel with regular income tax. You pay whichever is higher. In 2025, the AMT exemption is $137,000 (single) and $126,500 (married filing jointly) — these phase out at higher income levels.
ISO stock option exercises are the most common AMT trigger for employees and founders. The spread between exercise price and fair market value at exercise is income for AMT purposes — but not for regular income tax purposes.
Accelerated depreciation (bonus depreciation, Section 179) can create AMT preferences, though the TCJA largely eliminated these for most small businesses by allowing immediate expensing.
The AMT rate is 26% on AMTI up to $232,600, and 28% above that — lower than the top ordinary income rate of 37%, but it applies to income that the regular tax system exempts.

How the AMT works

The AMT is a separate tax calculation that runs parallel to the regular income tax. You calculate your tax twice:

Regular tax: Normal income tax calculation with all standard deductions and credits
Tentative Minimum Tax (TMT): AMT calculation starting from a modified income base (AMTI), applying different rates

You pay the higher of the two. If your regular tax exceeds the TMT, you pay only regular tax. If the TMT exceeds regular tax, you pay regular tax plus the excess (the AMT).

	Regular income tax (2025)	AMT (2025)
Top rate	37%	28% (above $232,600 AMTI); 26% below
Exemption	Standard deduction ($30,000 MFJ)	Exemption $137,000 single / $126,500 MFJ (phases out at high income)
State and local tax deduction	Yes (up to $10,000 SALT cap)	Not deductible — added back to AMTI
Accelerated depreciation	Full bonus/Section 179 allowed	AMT preference adjustments for certain accelerated methods
ISO spread at exercise	Not taxable until shares sold	Spread included in AMTI at exercise date
Standard deduction	Yes ($30,000 MFJ)	Not allowed — must use exemption instead

The ISO exercise problem

The most common AMT trigger for business owners and employees with equity compensation is incentive stock option (ISO) exercises. The problem:

Under regular income tax, exercising an ISO is not a taxable event — tax is deferred until you sell the shares
Under the AMT, the spread (fair market value − exercise price) at the time of exercise is included in AMTI

This creates a scenario where you owe AMT on income you haven’t recognized for regular tax purposes — and may not have received as cash. You hold shares, but you owe tax dollars now.

ISO exercise — private company, $200,000 spread

Options exercised: 100,000 shares

Exercise price$0.50/share

409A fair market value at exercise$2.50/share

Spread (AMT income)$2.00/share × 100,000 = $200,000 AMTI addition

Regular taxable income (before ISO exercise)$250,000

AMTI (regular income + $200,000 ISO spread)$450,000

Less: AMT exemption ($137,000 single, phases out)≈ $0 (phased out at this income)

AMT at 26–28% on $450,000≈ $122,000

Regular income tax estimate≈ $75,000

AMT owed (excess over regular tax)≈ $47,000

Exercising $200,000 worth of spread creates an AMT bill of $47,000 — cash due April 15 — even though the shares haven't been sold. If the company's stock is illiquid (private), the optionholder may not have the cash to pay. This is the 'ISO AMT trap' that destroyed many early employees in the dot-com era.

The ISO AMT trap is real: you exercise options in a private company, owe AMT by April 15, and can’t sell shares to pay it because there’s no liquidity event. Always model AMT exposure before exercising.

If you exercised ISOs during the year, get an AMT projection before December 31

The AMT impact of ISO exercises can be partially managed by exercising early in the year and then selling disqualifying shares before year-end (converting to a disqualifying disposition, which is then regular income but avoids AMT). Or by carefully timing exercises across years to stay below the AMT exemption. Both strategies require modeling before the year-end deadline. Discovering AMT exposure in April is too late to act.

AMT preferences for business owners

Beyond ISOs, business owners may encounter AMT through depreciation preferences:

Accelerated depreciation on real property: Depreciation deducted faster than the straight-line AMT rate creates an adjustment. However, the TCJA changes largely neutralized this for most equipment by making 100% bonus depreciation allowable under both regular tax and AMT for property placed in service after 2017.
Intangible drilling costs (for oil/gas): A common AMT preference for investors in oil and gas partnerships
Percentage depletion: Natural resource depletion preferences
Tax-exempt interest: Certain private activity bonds are added back to AMTI

The AMT credit: recovering what you paid

When you pay AMT due to ISO exercises or timing preferences, you earn an AMT credit (Form 8801). This credit can offset regular tax in future years when your regular tax exceeds your tentative minimum tax.

The credit is most valuable when:

You sell the ISO shares in a later year (the ISO gain is then regular income, regular tax is high, AMT credit offsets it)
Your income in a future year is moderate enough that regular tax exceeds TMT

The AMT credit doesn’t expire — it carries forward indefinitely until used. It doesn’t earn interest, however, so the economic cost of the AMT includes the time value of money on the early payment.

Model AMT before the year ends — not when filing the return

AMT planning requires knowing your income picture before year-end. ISO exercises, timing of income recognition, and capital gain realizations can all be adjusted before December 31 to optimize the AMT position. By April 15, the tax year is closed and only planning for next year is possible.

You might also read

Tax planning

Capital Gains Tax Rates: Long-Term vs Short-Term, State Tax, and the NIIT Surcharge

Long-term gains are taxed at 0%, 15%, or 20% federally. Short-term gains are ordinary income. Add California's 13.3% and the 3.8% NIIT, and California business owners face effective rates above 37% on long-term gains — and above 54% on short-term.

Tax planning

Net Investment Income Tax: The 3.8% Surtax That Surprises High-Earning Business Owners

The 3.8% NIIT applies to investment income for individuals above $200,000 in modified AGI — on top of regular income tax and capital gains rates. It applies to passive business income, rental income, and gains from selling a business.

Returns

Why Your Business and Personal Tax Returns Need to Be Coordinated

When business and personal returns are handled separately, key decisions get made in the dark — retirement limits, QBI, distribution timing.

Frequently asked

Questions owners actually ask

How do I know if I'm subject to AMT?: If your regular tax return generates an AMT amount on Form 6251, you owe the higher of regular tax or AMT. Most people subject to AMT discover it through their CPA or tax software. Common triggers include ISO exercise, large SALT deductions (pre-TCJA), depreciation preferences, certain tax credits, and high income with numerous deductions. The TCJA raised the AMT exemption significantly, meaning far fewer people pay AMT than before 2018.
Does the AMT credit help offset future taxes?: Yes — when you pay AMT in one year, you earn an AMT credit (Form 8801) that can offset regular tax in future years when your regular tax exceeds your tentative minimum tax. For ISO exercises that trigger AMT, the AMT paid in the exercise year creates a credit that offsets regular tax in the year you actually sell the shares (when the gain is recognized for regular tax purposes). The credit can take years to fully use.
Is California AMT the same as federal AMT?: California has its own state AMT, calculated under California tax law. California's AMT rate is 7% on California AMTI. California does not conform to the federal TCJA AMT changes as fully as the federal system, so California AMT exposure can differ from federal exposure. Business owners who benefit from California PTET elections need to understand how the credit flows back to the personal return and whether it affects California AMT.
What is AMTI?: Alternative Minimum Taxable Income (AMTI) is the income base for calculating AMT. It starts with regular taxable income, then adds back AMT 'preferences' and 'adjustments' (items that get favorable treatment under regular tax but not under AMT). The AMT exemption is then subtracted to get the amount subject to AMT. If the AMT on AMTI exceeds your regular tax, you pay the difference as AMT.
My company's stock is still private. How do I estimate AMT exposure from an ISO exercise?: For private company ISOs, the 'fair market value' for AMT purposes is typically the 409A valuation — the board-approved independent appraisal of the company's common stock. If you exercise ISOs when the 409A value is $10/share and your exercise price is $1/share, the spread of $9/share × number of options exercised is your AMT income. At 26–28% AMT rate, a large exercise in a company with a high 409A can create a tax bill due April 15 even though you haven't sold a share.

Take the next step

Turn tax questions into a plan. Talk with Matt or see how we work with operating business owners.

Talk with Matt See how we work with owners

Educational content only.This article is for informational purposes and does not constitute tax, legal, or investment advice. Every owner’s facts are different; consult a qualified CPA and advisor before acting. Tax and accounting services are provided through Matt Reese, CPA; investment advisory services are provided through Measured Risk Portfolios, a registered investment adviser. Matt Reese, CPA and Measured Risk Portfolios are separate entities; clients are not required to engage both.