The 2026 AMT Cliff: Lower Phaseout Thresholds, Twice the Clawback

If your income crossed $600,000 in 2025, you probably didn't think twice about the Alternative Minimum Tax. For most business owners, the AMT had quietly faded into the background since 2018. That changes in 2026.

Under the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, the AMT exemption itself stays generous — but the income level where that exemption starts disappearing drops sharply, and it disappears twice as fast. The result is a hidden cliff: you could earn the same income in 2026 as you did in 2025 and owe AMT for the first time in years.

This guide breaks down what the AMT is, exactly what changes next year, who is most exposed, and the planning moves to make before December 31.

What the Alternative Minimum Tax Actually Does​

The regular federal income tax lets you reduce taxable income with deductions, exclusions, and special timing. The AMT is a parallel system that takes many of those preferences back.

You calculate both:

1. Regular taxable income — your normal Form 1040 computation.
2. Alternative Minimum Taxable Income (AMTI) — regular taxable income plus specific adjustments and preferences.

If your tentative AMT exceeds your regular tax, you pay the difference. You never pay both — you pay whichever is higher.

Common adjustments that increase AMTI include:

• Incentive stock option (ISO) bargain element at exercise (not taxed for regular purposes until you sell)
• Certain accelerated depreciation differences (especially for older property)
• Tax-exempt interest from private activity bonds
• Net operating loss limitations
• Standard deduction and certain itemized deductions that are disallowed for AMT — notably state and local taxes (SALT), even though the OBBBA raised the SALT cap for regular tax purposes

AMT uses its own rates: 26% on the first portion of AMT income above the exemption (about $239,500 to $244,500 depending on filing status for 2026) and 28% on the rest. That sounds lower than the 32% or 35% regular brackets, but it applies after you lose deductions you were counting on.

The Two Numbers That Matter: Exemption and Phaseout​

The AMT exemption is the amount of AMTI you can shelter before the 26%/28% rates kick in.

For 2025, the numbers were:

• Single / head of household: $88,100 exemption, phaseout starts at $626,350
• Married filing jointly: $137,000 exemption, phaseout starts at $1,252,700

Inflation adjustments under the Tax Cuts and Jobs Act (TCJA) had pushed those phaseout thresholds steadily higher from their 2018 starting points.

For 2026, the OBBBA makes two simultaneous changes:

1. Phaseout thresholds reset to 2018 levels​

• Single: $500,000 (down from $626,350 in 2025)
• Married filing jointly: $1,000,000 (down from $1,252,700 in 2025)

The thresholds will be indexed for inflation again beginning in 2027, but the 2026 reset removes seven years of inflation adjustments in one step. Unlike the exemption amount itself — which continues to rise with inflation ($90,100 single / about $140,200 joint for 2026) — the phaseout starting line moves backward.

2. The phaseout rate doubles from 25% to 50%​

Previously, you lost 25 cents of exemption for every dollar of AMTI above the threshold. Starting in 2026, you lose 50 cents per dollar.

Practically, that cuts the income window where you get a partial exemption in half.

2026 window calculated as threshold + (exemption × 2) at 50% rate; 2025 as threshold + (exemption × 4) at 25% rate. Exact IRS inflation numbers for joint exemption vary by source; figures rounded.

If your AMTI lands inside that narrower 2026 window, your exemption shrinks fast — and your tentative AMT jumps even though your regular tax hasn't changed.

A Simple Example: Same Income, Different AMT​

Consider a single filer who is a founder with a $550,000 salary plus a large ISO exercise:

• Regular taxable income: $475,000 after deductions
• Add back ISO bargain element for AMT: $120,000
• AMTI: $595,000

Under 2025 rules: $595,000 is below the $626,350 phaseout threshold, so she keeps the full $88,100 exemption. Taxable AMT base = $506,900. Tentative AMT is below regular tax — no AMT due.

Under 2026 rules: $595,000 exceeds the new $500,000 threshold by $95,000. At 50 cents per dollar, she loses $47,500 of her $90,100 exemption, leaving only $42,600. Taxable AMT base = $552,400. That $45,500 increase in the AMT base can easily create a five-figure AMT bill that did not exist the year before, even though her economics are identical.

That is the cliff: not a rate increase, but exemption evaporation.

Who Is Most Exposed in 2026?​

Not everyone with high income pays AMT. The Tax Policy Center estimated only about 0.1% of households paid AMT in recent years thanks to the TCJA's high thresholds. The OBBBA reversion will push that share up, but unevenly.

1. Business owners and employees who exercise incentive stock options​

ISOs are the classic AMT trigger. For regular tax, you owe nothing at exercise; for AMT, the spread between exercise price and fair market value is income immediately. In a year with a large exercise — especially if you hold the shares through year-end — that spread can dominate AMTI.

If you are a founder, early engineer, or key employee with ISOs vesting into 2026, the lower thresholds mean exercises you previously spaced out to stay under $626,350/$1.25M may now breach $500,000/$1M much earlier.

2. Owners with large capital gains and depreciation preferences​

Long-term gains still get preferential rates for both systems, but they increase AMTI and can push you into the phaseout zone where your exemption shrinks. Similarly, if your business claimed aggressive bonus depreciation or other timing preferences that create AMT adjustments, those adjustments add directly to AMTI.

3. High earners in high-tax states​

The OBBBA raised the SALT deduction cap for regular tax (to $40,000 for many filers through 2029, with phaseouts), but SALT remains completely disallowed for AMT. If you deduct $40,000 of state taxes for regular purposes, that entire $40,000 is added back for AMTI. The same income that now gets a bigger regular-tax deduction can paradoxically have higher AMTI.

4. Holders of private activity bonds and other preferences​

Tax-exempt interest from private activity bonds, certain intangible drilling costs, and other specified preferences are tax-free for regular purposes but taxable for AMT. These are less common for operating businesses but frequent in investment portfolios of owners who parked cash in municipal bonds.

How to Estimate Whether You Are in the Zone​

You don't need to complete Form 6251 to get a quick read. Try this four-step check in October, while you still have time to adjust:

Step 1: Start with your projected regular taxable income for 2026. Use your year-to-date P&L and Q4 forecast, not last year's return.

Step 2: Add back your AMT preferences. At minimum, add: ISO bargain elements you plan to exercise in 2026, private activity bond interest, and any SALT you deducted for regular tax. If you have depreciation adjustments from a CPA, include those.

Step 3: Compare the total to the new thresholds. If single AMTI is approaching $500,000 or joint AMTI is approaching $1,000,000, you are entering the 50% phaseout zone.

Step 4: Estimate your exemption. Quick math: exemption remaining = full exemption − [0.50 × (AMTI − threshold)], floored at zero.

• Single: $90,100 − 0.50 × (AMTI − 500,000)
• Joint: ~$140,200 − 0.50 × (AMTI − 1,000,000)

If that number is well below the full exemption, you should run a formal AMT projection.

This is also why bookkeeping timing matters. Invoices you accelerate into December, equipment purchases, or a second ISO exercise tranche can be the dollars that push you over the threshold — and at a 50% phaseout rate, every extra $10,000 of AMTI costs you $5,000 of exemption, effectively taxed at 26% or 28% on top of regular tax.

Five Planning Moves Before Year-End 2026​

The OBBBA is law, so you cannot plan around whether it happens — only how you respond. These strategies work best when coordinated with a tax advisor in Q4, with clean books to model scenarios.

1. Time ISO exercises across calendar years​

If you planned to exercise a large block in early 2026, consider splitting it between late 2025 and early 2026, or between 2026 and 2027. Because the phaseout window is half as wide, spreading the bargain element across two tax years can keep each year's AMTI below the point where exemption evaporates entirely.

Also weigh a same-year disqualifying disposition: selling ISO shares in the same calendar year as exercise generally eliminates the AMT adjustment (you pay regular tax on the gain instead). That is not always optimal — you lose the ISO's long-term capital gains benefit — but it can cap an outsized AMT bill if the stock has not appreciated further.

2. Model the SALT trade-off​

If you benefit from the higher SALT cap for regular tax, that benefit inflates your AMTI. Ask your preparer to run two projections: one claiming the full SALT deduction, one without. In rare cases near the phaseout zone, the regular-tax savings from claiming SALT are partially offset by higher AMT. Knowing the crossover helps you avoid surprise.

3. Accelerate or defer deductions based on where you sit​

AMT disallows some deductions and allows others. For preferences that are AMT-neutral — such as charitable cash contributions or qualified business deductions — timing can help manage AMTI. If you are already deep in the phaseout zone, accelerating a charitable gift into 2026 reduces both regular taxable income and AMTI. If you are just below the threshold, deferring income into 2027 might be more valuable than bunching deductions.

4. Revisit depreciation and expensing elections​

Section 179 expensing and bonus depreciation have different AMT implications depending on the asset and when it was placed in service. For new equipment in 2026, the regular-tax benefit may still be compelling, but confirm whether the depreciation adjustment will add to AMTI. A cost segregation study or Section 179 decision made without an AMT check can create a preference you did not expect.

5. Track your Minimum Tax Credit​

AMT triggered by deferral preferences like ISOs is not necessarily lost forever. The portion attributable to deferral (versus exclusion preferences like SALT) generates a Minimum Tax Credit you can carry forward and recover in future years when your regular tax exceeds tentative AMT. Your CPA tracks this on Form 8801, but only if your books clearly separate the adjustment sources. Keep exercise confirmations, 3921 forms, and sale confirmations in one place — reconstructing them three years later is expensive and error-prone.

What This Means for Your Recordkeeping​

The 50% phaseout rate punishes fuzzy estimates. A $20,000 error in year-end AMTI — easy to make if owner draws, distributions, or contractor payments are miscoded — translates into a $10,000 swing in your exemption. Three habits make AMT season less painful:

• Separate AMT-sensitive accounts. Tag ISO exercises, private activity bond interest, and SALT payments in your chart of accounts so they are not buried in generic income or tax expense lines. In plain-text ledgers, a dedicated Income:Adjustments:AMT or Expenses:Taxes:SALT structure makes year-end exports trivial.
• Reconcile equity compensation monthly. Broker statements and cap table exports drift from payroll records. Reconcile ISO exercises, RSU releases, and withholding within 30 days so Q4 projections use real numbers.
• Keep a rolling 13-week AMTI forecast. Most owners forecast cash flow but not taxable income. A simple spreadsheet that adds projected AMT adjustments to forecasted taxable income flags threshold breaches while you can still shift a transaction by weeks, not months.

Owners who run on version-controlled books — where every transaction is plain text and every correction is a transparent commit — find this far easier than those digging through a closed system's year-end reports.

The Bottom Line​

The OBBBA did not raise AMT rates, but it made the exemption much easier to lose. Lower thresholds ($500,000 single / $1,000,000 joint) plus a doubled clawback rate (50%) mean more business owners with stock compensation, high state taxes, or timing preferences will owe AMT on income levels that were safe in 2025.

The window to act is the same window where good bookkeeping pays off: a clean Q4 close, a credible AMTI projection, and a conversation with your advisor before you exercise options, sign a lease, or time a large invoice.

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