The Parallel Tax That Blindsides People Who Did Everything Right
Maria exercised her startup's incentive stock options in March. On paper, she paid the strike price and held the shares. No cash changed hands beyond the purchase, and she didn't sell a single share. Then her accountant ran the numbers and showed her a tax bill of tens of thousands of dollars on income she never actually received in cash. She hadn't made a mistake. She hadn't cheated anything. She got caught by the Alternative Minimum Tax, a rule most people never hear about until it lands on them.
The AMT is a second, parallel tax system that runs alongside the regular one. The federal government created it decades ago to stop the highest earners from stacking enough deductions and special tax breaks to owe almost nothing. The catch: you calculate your tax two ways. First the ordinary way, with all the usual deductions and credits. Then a second way that strips out a long list of those breaks. You pay whichever number is higher. Most years the regular calculation wins and the AMT never enters the picture. In the wrong year, it quietly overtakes your regular bill.
Here is what makes it sting. The regular system rewards you for things like exercising stock options without selling, deducting large state and local taxes, or claiming certain credits and write-offs. The AMT system says: not so fast. It adds many of those benefits back into your income, applies its own exemption, and taxes the result at 26% on the first slice and 28% on the rest (the 28% bracket kicks in above roughly $244,500 of AMT income in 2026).
The shield against this is the AMT exemption. For 2026 it is $90,100 for single filers and $140,200 for married couples filing jointly (about $70,100 if married filing separately). That exemption is the floor that protects the vast majority of filers. As long as your AMT income stays under it after the exemption is applied, the AMT calculation comes out smaller than your regular tax and you owe no extra. The trouble starts only when your income and add-backs push past that floor.
But the exemption does not last forever. Once your AMT income climbs past $500,000 (single) or $1,000,000 (married filing jointly) in 2026, the exemption begins to disappear. And starting in 2026 it phases out twice as fast as before: 50 cents of exemption vanishes for every dollar above the threshold, up from 25 cents in prior years. Push far enough past it and the exemption is gone entirely, leaving every dollar of AMT income exposed to the 26% and 28% rates. That single change, written into the 2025 tax law and effective for 2026, pulls more high earners into AMT territory than the old rules did. Someone who was comfortably clear two years ago can land inside the zone this year on identical income.