AMT Exemption Now Vanishes by About $1.28 Million for Couples, Raising the Stakes on ISO Exercises

A change buried in the One Big Beautiful Bill Act is set to make the alternative minimum tax a live issue again for employees with incentive stock options. As wealth manager Crestwood Advisors outlined on December 17, 2025, the law keeps the higher AMT exemption amounts but, starting in 2026, lowers the income at which the exemption begins to shrink and doubles the speed at which it disappears. Because the spread on an ISO exercise counts toward AMT income, households planning exercises now face a narrower safe zone.

What changed

For 2026, the IRS inflation adjustments set the AMT exemption at $140,200 for married couples filing jointly and $90,100 for single filers. The exemption begins phasing out once AMT income exceeds $1,000,000 for joint filers and $500,000 for single filers. The phaseout rate rises to 50 cents per dollar, up from 25 cents under the 2017 law.

The effect is that a joint filer's exemption is completely gone at about $1,280,400 of AMT income. Wealthspire estimates that under 2025 rules the exemption for a married couple did not fully phase out until roughly $1.8 million. The AMT rates themselves, 26% and 28%, are unchanged.

Why ISOs are exposed

When an employee exercises an ISO and keeps the shares, no regular income tax is due on the spread, the difference between the market value and the strike price. The IRS notes that the same exercise may, however, create alternative minimum tax. The spread is added to AMT income, and a large exercise can push a household through the phaseout range in one step.

A second interaction adds pressure. The law raises the cap on the state and local tax deduction for regular tax purposes, but SALT is not deductible for AMT. As Crestwood notes, a bigger SALT deduction widens the gap between regular tax and AMT, making it easier for an ISO exercise to tip the balance.

The after-tax math

Wealthspire offers a clean illustration of the marginal effect. A married couple with $1 million of income in 2026 adds $100,000 more. Under the 50% phaseout, the exemption shrinks by $50,000, so AMT income rises by $150,000 in total. At the 28% AMT rate, that is roughly $14,000 more tax than the extra income alone would suggest, pushing the effective marginal rate to about 42% on ordinary income and about 34% on capital gains.

Example: a couple expects $900,000 of AMT income in 2026 before any option activity and exercises ISOs with a $400,000 spread. The simplified comparison below shows how the exemption behaves.

Whether AMT is actually owed depends on the couple's regular tax, deductions and other items, so the table shows exposure rather than a final bill.

Moves to discuss with your advisor

Crestwood's suggestions track what planners commonly model: projecting AMT before each exercise, considering whether some exercises belong in 2025 while the older phaseout rules still apply, and watching how large state tax payments interact with AMT. Households that do pay AMT because of an exercise may generate a minimum tax credit that can be recovered in later years, which affects the long-run cost. Splitting exercises across several tax years is another approach families often compare.

What to watch

Year-end 2025 is the last chance to exercise under the 25% phaseout rate. The 2026 thresholds are indexed for inflation, so the IRS's annual adjustments will set the precise figures for 2027 and beyond.

After TAX is an independent publication. Articles are general information, not tax, legal or investment advice. Consult a licensed professional about your situation.