The Alternative Minimum Tax (AMT) continues to amaze me as I work with it.  Although I work with it a lot, in many ways I consider myself a student rather than an expert.

In some ways, the AMT is a prepayment of tax.  When the AMT arises from a timing difference, the most significant one for our clients being the tax preference (excess of the fair market value of the stock at exercise or the vesting date over the option price) from exercising incentive stock options, it results in a tax credit becoming available to apply against a future year’s regular tax liability.  The general rule is the AMT credit may be applied up to the excess of the regular tax liability over the tentative minimum tax liability.

The Federal AMT Credit is computed and the limitation determined on IRS Form 8801.

For incentive stock options, the credit typically is not all recovered in the year the stock is sold because the maximum regular tax rate for long-term capital gains is 20% while the AMT rate for the tax preference is 26% or 28%.  Thus, there is about 6% or 8% of unused credit to be used against other taxable income.

Does this additional credit have much value?  As usual, the answer is “that depends…”

In states that have an income tax, like California, I think the taxpayer should discount the value of the credit carryover.

Notice that the Net Minimum Tax on Exclusion Items for the previous year is computed at Part I of the form.  The net minimum tax on exclusion items is computed “as if” the only minimum tax adjustments included items deductible for the regular tax, but not for the alternative minimum tax.  The most common exclusion items are state income taxes and real estate property taxes.  (After being temporarily repealed by the Tax Cuts and Jobs Act of 2017, 2% miscellaneous itemized deductions and personal exemptions have been permanently repealed by the One Big Beautiful Bill Act of 2025 (OBBBA).)

(For 2018 through 2024, the Tax Cuts and Jobs Act of 2017 limited the itemized deduction for state and local taxes (SALT) to $10,000 ($5,000 for married persons filing a separate return.)  OBBBA raises the limit to $40,000 ($20,000 for married persons filing a separate return) for 2025 and $40,400 ($20,200 for married persons filing a separate return) for 2026.  Suddenly, the impact on the minimum tax credit will become more significant for more taxpayers, starting in 2025.  The ceiling will be increased to 101% of the amount for the previous year from 2027 through 2029.  After 2029, the ceiling will revert to $10,000.  The SALT cap is reduced to the lesser of the state and local tax or $10,000 ($5,000 for married persons filing a separate return) by 30% of the excess of the taxpayer’s modified adjusted gross income over $500,000 ($250,000 for married, filing separately) for 2025 and $505,000 ($252,500 for married, filing separately) for 2026.  The SALT cap phaseout will be increased to 101% of the dollar amount in effect for the previous year for 2027 through 2029 and will no longer apply after 2029.)

(The 2025 exemption phaseout thresholds at Part I, line 5 of Form 8801 is $1,252,700 for married, filing joint returns and surviving spouses and $626,350 for singles and heads of household.  OBBBA reduces the thresholds for 2026 to $1,000,000 for married, filing joint returns and $500,000 for singles and heads of households.  The phaseout percentage reducing the alternative minimum tax exemption for tentative minimum taxable income exceeding the thresholds will increase under OBBBA from 25% before 2026 to 50% for 2026 and thereafter, so the exemption will be phased out twice as fast.)

Also notice that the minimum tax on exclusion items (from line 15) is subtracted from line 16 to arrive at an adjustment amount to the minimum tax credit carryforward.  If the minimum tax on exclusion items exceeds the alternative minimum tax from the previous year’s tax return, the adjustment at line 18 is entered as a negative amount.  This will typically happen when there is a negative adjustment on the previous year’s tax return for an ISO disposition, resulting in a zero AMT.

The result is if the AMT credit isn’t used on the previous year’s tax return, it will be reduced on the current year’s tax return.

The minimum tax credit carryforward to 2025 at line 26 of the form is not the amount that will be available to reduce the next year’s regular tax.  It will be reduced by the net minimum tax on exclusion items in the 2024 income tax return, computed at Part I of Form 8801 for 2025.

Apparently, Congress is determined that taxpayers should not receive a tax benefit for their state income taxes and other exclusion items when determining the availability of the AMT credit carryover.

So, plan on paying the 26% or 28% federal tax with respect to the tax preference for ISOs.  Any benefit that you receive for the AMT credit is gravy.

The tax law has become even more complex with the enactment of OBBBA, with multiple phaseouts.  Be sure to work with a tax advisor who is familiar with the new rules to make tax projections using tax projection software that has been updated for OBBBA and computes federal and state tax estimates.

For more information about incentive stock options, request our special report, Incentive Stock Options – Executive Tax and Financial Planning Strategies