How is AMT calculated? In five steps: compute your Alternative Minimum Taxable Income (AMTI), subtract the AMT exemption, apply the 26% and 28% AMT rates to get your tentative minimum tax, then pay the higher of that or your regular tax. For tech employees, the most common reason AMT exceeds regular tax is the spread from exercising Incentive Stock Options (ISOs) — once you can run this calculation, our guide to how to avoid triggering AMT shows how to keep the spread under your break-even.
This guide walks through every step of the AMT calculation with specific numbers, using a realistic scenario of a $200,000 salary combined with a $300,000 ISO spread.
AMT is primarily an ISO concern — the chart below contrasts how incentive stock options and non-qualified stock options are taxed differently.
ISO vs NSO: Tax Impact at $200K Salary
5,000 options, $10 strike, $30 FMV — single filer, California
| Metric | ISO (USD) | NSO (USD) |
|---|---|---|
| Year 1 Tax | 19600 | 44300 |
| AMT Credits | 19600 | 0 |
| Net Cost (After Credits) | 0 | 44300 |
How Is AMT Calculated? The 5-Step Method
Step 1: Calculate Alternative Minimum Taxable Income (AMTI)
AMTI starts with your regular taxable income and adds back specific deductions and preferences:
AMTI = Regular Taxable Income + AMT Adjustments + AMT Preference Items
The most common AMT adjustments and preferences:
| Item | Effect on AMTI |
|---|---|
| Standard deduction (if claimed) | Added back |
| State and local tax deduction (SALT) | Added back |
| ISO exercise spread | Added (the big one for tech workers) |
| Private activity bond interest | Added |
| Certain depreciation differences | Adjusted |
| Net operating loss deduction | Recalculated under AMT rules |
For most tech employees, the calculation simplifies to:
AMTI = Regular Taxable Income + Standard Deduction + ISO Spread
(If you itemize and deduct state taxes, add those back too.)
Step 2: Subtract the AMT Exemption
The exemption shelters a portion of your AMTI from AMT tax:
2025 AMT Exemption Amounts:
| Filing Status | Exemption | Phase-out Starts | Phase-out Rate |
|---|---|---|---|
| Single | $88,100 | $626,350 | 25 cents per $1 over threshold |
| Married Filing Jointly | $137,000 | $1,252,700 | 25 cents per $1 over threshold |
| Married Filing Separately | $68,500 | $626,350 | 25 cents per $1 over threshold |
Phase-out calculation:
If your AMTI exceeds the phase-out threshold, the exemption is reduced:
Exemption reduction = (AMTI - Phase-out threshold) x 25%
The exemption reaches zero at:
- Single: $978,750 ($626,350 + $88,100 / 0.25)
- MFJ: $1,800,700 ($1,252,700 + $137,000 / 0.25)
Step 3: Apply AMT Tax Rates
The AMT has a flat two-bracket structure (much simpler than the regular tax's seven brackets):
| AMTI Above Exemption | AMT Rate |
|---|---|
| First $239,100 | 26% |
| Above $239,100 | 28% |
(For Married Filing Separately: 28% applies above $119,550)
The AMT rates are lower than the top regular income tax rates (26-28% vs 37%). The AMT catches people not because of high rates, but because it disallows deductions and adds preference items (like ISO spreads) that are excluded from regular taxable income. The broader base, not the rate, is what triggers the tax.
Step 4: Compute the Tentative Minimum Tax
Tentative Minimum Tax = AMT Rate x (AMTI - Exemption)
If your AMTI is above the exemption but below the 28% threshold:
Tentative Minimum Tax = 26% x (AMTI - Exemption)
If above the 28% threshold, it becomes a blended calculation:
Tentative Minimum Tax = (26% x $239,100) + (28% x (AMTI - Exemption - $239,100))
Step 5: Compare to Regular Tax
AMT Liability = Tentative Minimum Tax - Regular Tax (if positive)
- If Tentative Minimum Tax > Regular Tax: You owe AMT (the difference)
- If Regular Tax > Tentative Minimum Tax: No AMT owed
You always pay the higher of the two amounts. The AMT liability is just the excess reported separately on IRS Form 6251.
How Is AMT Calculated in Practice? A $200K Salary + $300K ISO Spread Example
Scenario: Single filer, California resident
- W-2 salary: $200,000
- ISO exercise: 10,000 shares, strike $5, FMV at exercise $35
- ISO spread: 10,000 x ($35 - $5) = $300,000
- Filing status: Single
- Takes standard deduction: $15,000
Regular Tax Calculation
| Item | Amount |
|---|---|
| Gross income (salary only — ISO spread excluded) | $200,000 |
| Standard deduction | -$15,000 |
| Regular taxable income | $185,000 |
2025 Federal Tax on $185,000 (Single):
| Bracket | Rate | Tax |
|---|---|---|
| $0 - $11,925 | 10% | $1,193 |
| $11,925 - $48,475 | 12% | $4,386 |
| $48,475 - $103,350 | 22% | $12,073 |
| $103,350 - $185,000 | 24% | $19,596 |
| Regular federal tax | $37,248 |
AMT Calculation
Step 1: AMTI
| Item | Amount |
|---|---|
| Regular taxable income | $185,000 |
| Add back: Standard deduction | +$15,000 |
| Add: ISO spread | +$300,000 |
| AMTI | $500,000 |
Step 2: AMT Exemption
| Item | Amount |
|---|---|
| Base exemption (Single) | $88,100 |
| Phase-out check: $500,000 < $626,350 | No phase-out |
| Net exemption | $88,100 |
Step 3 & 4: Tentative Minimum Tax
| Item | Amount |
|---|---|
| AMTI minus exemption | $500,000 - $88,100 = $411,900 |
| 26% on first $239,100 | $62,166 |
| 28% on remaining $172,800 ($411,900 - $239,100) | $48,384 |
| Tentative minimum tax | $110,550 |
Step 5: AMT Liability
| Item | Amount |
|---|---|
| Tentative minimum tax | $110,550 |
| Regular tax | $37,248 |
| AMT liability | $73,302 |
Summary
| Tax Component | Amount |
|---|---|
| Regular federal income tax | $37,248 |
| AMT (additional) | $73,302 |
| Total federal tax | $110,550 |
| AMT credit carryforward | $73,302 |
$73,302 in AMT on income you have not actually received. You exercised ISOs but did not sell the shares — no cash came in. Yet you owe $73,302 in additional federal tax. This is the AMT cash flow trap. You need to plan for this before exercising. Our ISO AMT calculator shows you exactly how many shares you can exercise before triggering AMT.
Side-by-Side: Regular Tax vs AMT
| Regular Tax | AMT | |
|---|---|---|
| Starting income | $200,000 (salary) | $200,000 (salary) |
| ISO spread | Not included | +$300,000 |
| Deductions | -$15,000 (standard) | Not allowed |
| Taxable income | $185,000 | $500,000 (AMTI) |
| Exemption | N/A | -$88,100 |
| Tax base | $185,000 | $411,900 |
| Tax rates | 10-24% (graduated) | 26-28% (flat) |
| Tax amount | $37,248 | $110,550 |
| You pay the higher | $110,550 |
The AMT is not an additional tax — you pay the greater of regular tax or AMT. In this case, the AMT of $110,550 is your total federal tax. The "AMT liability" of $73,302 is just the amount by which AMT exceeds regular tax.
How the AMT Credit Carryforward Works
The $73,302 AMT paid is not permanently lost. It becomes an AMT credit carryforward that can reduce your regular tax in future years.
How recovery works:
| Year | Event | Credit Used | Remaining Credit |
|---|---|---|---|
| Year 1 | ISO exercise, pay $73,302 AMT | — | $73,302 |
| Year 2 | Sell ISO shares. Regular tax $50K, tentative minimum tax $38K | $12,000 | $61,302 |
| Year 3 | Normal year. Regular tax $40K, tentative minimum tax $30K | $10,000 | $51,302 |
| Year 4 | Higher income. Regular tax $55K, tentative minimum tax $35K | $20,000 | $31,302 |
| Year 5 | Continue recovery | ... | ... |
The credit carries forward indefinitely until fully used. Most employees recover the full credit within 2-5 years, especially after selling the ISO shares (which removes the preference item).
Finding Your AMT-Free Exercise Limit
The AMT crossover point is the maximum number of ISOs you can exercise without triggering any AMT. At this point, your tentative minimum tax exactly equals your regular tax.
For the example above, working backward:
| Shares Exercised | ISO Spread | AMTI | Tentative Min Tax | Regular Tax | AMT Owed |
|---|---|---|---|---|---|
| 0 | $0 | $200,000 | $29,094 | $37,248 | $0 |
| 2,000 | $60,000 | $260,000 | $44,694 | $37,248 | $7,446 |
| 1,000 | $30,000 | $230,000 | $36,894 | $37,248 | $0 |
| 1,050 | $31,500 | $231,500 | $37,284 | $37,248 | $36 |
In this case, approximately 1,040-1,050 shares is the AMT-free limit — exercising this many shares generates a tentative minimum tax that just barely equals the regular tax, resulting in zero AMT.
Our AMT crossover calculator uses binary search to find this exact number for your specific situation, accounting for your salary, filing status, state, and other income.
Calculate Your ISO AMT
Use our ISO AMT Calculator to find the optimal number of shares to exercise without triggering AMT.
Try Calculator →Key Formulas Summary
| Formula | Equation |
|---|---|
| AMTI | Regular taxable income + Standard deduction + SALT + ISO spread |
| AMT Exemption (with phase-out) | Base exemption - 25% x max(0, AMTI - phase-out threshold) |
| Tentative Minimum Tax | 26% x min(AMTI - exemption, $239,100) + 28% x max(0, AMTI - exemption - $239,100) |
| AMT Liability | max(0, Tentative minimum tax - Regular tax) |
| AMT Credit | AMT paid on deferral items (ISO spread, etc.) |
Quick Reference: AMT Thresholds by Filing Status (2025)
| Filing Status | AMT Exemption | Phase-Out Begins | Exemption Eliminated At | 28% Rate Begins |
|---|---|---|---|---|
| Single | $88,100 | $626,350 | $978,750 | $239,100 above exemption |
| Married Filing Jointly | $137,000 | $1,252,700 | $1,800,700 | $239,100 above exemption |
| Married Filing Separately | $68,500 | $626,350 | $900,350 | $119,550 above exemption |
These are 2025 values from IRS Revenue Procedure 2024-40, indexed to inflation annually. The phase-out reduces the exemption by $0.25 for every $1.00 of AMTI above the threshold. The "Exemption Eliminated At" column shows the AMTI level where the exemption reaches zero — above this point, your entire AMTI (minus zero exemption) is taxed at AMT rates.
For 2026 projected values, see our 2026 federal tax brackets guide.
Multi-Year AMT Strategy
Instead of exercising all your ISOs in one year and triggering a massive AMT bill, spreading exercises across 3-5 tax years can dramatically reduce your total tax burden. The key insight: the AMT exemption ($88,100 for single filers in 2025) absorbs a significant portion of a moderate annual ISO exercise. But exercising everything at once pushes you far beyond the exemption AND into the exemption phase-out zone, where effective AMT rates spike.
Example: 50,000 ISOs with a $20/share spread = $1,000,000 total spread.
Approach 1 — Exercise all at once:
- AMTI: salary + $1M ISO spread = approximately $1.2M
- AMT exemption: $0 (completely phased out at this AMTI level)
- Tentative minimum tax: approximately $315,000
- Regular tax: approximately $37,000
- AMT liability: approximately $278,000
Approach 2 — Exercise 10,000 shares per year over 5 years ($200K spread/year):
- Annual AMTI: salary + $200K ISO spread = approximately $400K
- AMT exemption: $88,100 (no phase-out at this level)
- Annual tentative minimum tax: approximately $81,000
- Annual regular tax: approximately $37,000
- Annual AMT: approximately $44,000 (but in many cases, closer to $0-$15K depending on other income)
- 5-year total AMT: approximately $0-$75,000
Potential savings: $200,000+ over 5 years by spreading exercises. The savings come from three sources: (1) preserving the full AMT exemption each year, (2) avoiding the exemption phase-out zone, and (3) staying in the 26% AMT bracket instead of reaching the 28% bracket.
The chart below illustrates how staging an exercise across multiple years changes the tax picture compared to exercising all at once.
Total Tax by Exercise Strategy
Same employee, 30,000 ISOs — four approaches compared
| Strategy | Total tax (USD) |
|---|---|
| Early 83(b) | 107000 |
| Annual AMT-Free | 115000 |
| Pre-IPO | 141000 |
| Wait (Post-IPO) | 235000 |
One exercise is good. A 5-year plan is $128K better.
The Multi-Year Exercise Planner models Conservative, Balanced, and Aggressive strategies side-by-side — so you can see exactly how spreading exercises across 3-5 years reduces your total tax bill.
- Compare 3 strategies with exact tax projections
- AMT credit carryforward tracking across years
- Exit sensitivity analysis at different valuations
Use our ISO exercise planner to find your exact AMT-free exercise limit for each year based on your projected income.
AMT Credit Recovery Timeline
When you pay AMT, it generates a Minimum Tax Credit (MTC) that you recover in future years via Form 8801 (Credit for Prior Year Minimum Tax). Understanding the recovery timeline helps you evaluate the true economic cost of AMT.
Example: You exercise ISOs in 2025 and pay $40,000 in AMT.
| Year | Regular Tax | Tentative Min Tax | Credit Available | Credit Used | Remaining |
|---|---|---|---|---|---|
| 2025 | $48,000 | $88,000 | — | — | $40,000 generated |
| 2026 | $52,000 | $44,000 | $40,000 | $8,000 | $32,000 |
| 2027 | $54,000 | $45,000 | $32,000 | $9,000 | $23,000 |
| 2028 | $55,000 | $44,000 | $23,000 | $11,000 | $12,000 |
| 2029 | $53,000 | $43,000 | $12,000 | $10,000 | $2,000 |
| 2030 | $54,000 | $43,000 | $2,000 | $2,000 | $0 |
Full recovery took 5 years. The credit carries forward indefinitely — you will not lose it. However, the time value of money means paying $40,000 in AMT today and recovering it over 5 years represents a real economic cost. At a 5% discount rate, $40,000 recovered over 5 years is worth approximately $35,000 in present value — a roughly $5,000 real cost even though you recover the full nominal amount.
This is why avoiding AMT (by staying below the crossover point or using a multi-year exercise strategy) is almost always preferable to paying AMT and relying on credit recovery.
For quarterly payment planning around AMT, see our estimated taxes on ISO exercise guide.
Frequently Asked Questions
What is the AMT rate?
The AMT has two rates: 26% on the first $239,100 of AMTI above the exemption, and 28% on amounts above that threshold (2025 values). These rates apply to married filing separately at half the threshold ($119,550).
How do I know if I owe AMT before filing?
Run the 5-step calculation above using your projected income and ISO exercise spread. Our ISO AMT calculator automates this and can tell you exactly how many shares to exercise before AMT triggers. You can also review our estimated tax guide for ISO exercises for quarterly payment planning.
Does state tax affect the federal AMT calculation?
State income tax deductions are added back to income when calculating AMTI (if you itemize). However, state income taxes you actually pay do not affect the federal AMT calculation — they are separate. Note that California has its own state-level AMT with different rates and exemptions — see our breakdown of the California ISO exercise and state AMT trap for how it stacks on top of the federal bill. Washington has no income tax, but it does levy a capital gains tax that can hit ISO sales, which we cover in our guide to exercising ISOs as a Washington resident.
Can the AMT exemption phase-out affect me?
Yes, if your AMTI exceeds $626,350 (single) or $1,252,700 (MFJ). Each dollar over the threshold reduces your exemption by 25 cents. For very large ISO exercises, this can eliminate the exemption entirely, causing the full AMTI to be taxed at AMT rates.
What are the 2026 AMT exemption amounts?
The IRS announces updated AMT exemption amounts each fall, typically in a Revenue Procedure released in October or November. The 2026 values will be indexed for inflation from the 2025 base amounts. Check our tax brackets guide for the latest published values once available.
Tax Disclaimer: This content is for educational purposes only. Always consult with a licensed tax professional or certified public accountant before making financial decisions related to equity compensation, tax planning, or investment strategies.