Blocked by the AMT? How Alternative Minimum Tax Affects Large Passthrough Deductions and Equity Awards for UHNWI
By Alan Goldstein | Updated for 2026
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🔹 Meta Description: UHNWI: The 2026 AMT phase-out thresholds drop to 500K single, phase-out doubles to 50%, and SALT deductions are disallowed—blocking passthrough QBI & ISO equity. Master planning strategies now.
🔹 Key Headers: AMT 2026 exemption amounts; OBBBA phase-out changes; QBI deduction interaction with AMT; ISO exercise AMT preference items; passthrough K-1 adjustments; state AMT conformity table.
🔹 Key Questions Answered: Does AMT disallow state tax deductions in 2026? How does ISO exercise trigger AMT liability? Can charitable deductions reduce AMT exposure?
📘 Definition of Terms Used in This Article
| Term | Definition |
| Alternative Minimum Tax (AMT) | A parallel federal tax system that disallows certain deductions and tax preferences, ensuring high-income taxpayers pay a minimum level of tax. |
| AMT Exemption | The amount of Alternative Minimum Taxable Income (AMTI) exempt from AMT before rates apply— |
| AMT Preference Items | Specific types of income or deductions that must be added back when calculating AMTI, including ISO spread and certain depreciation differences. |
| Qualified Business Income (QBI) Deduction | Section 199A deduction allowing passthrough entity owners to deduct up to 20% of qualified business income. |
| Incentive Stock Options (ISOs) | Stock options meeting IRC §422 requirements; the spread at exercise is not regular taxable income but is an AMT preference item. |
| Restricted Stock Units (RSUs) | A promise to issue stock upon vesting; taxed as ordinary income at vesting for regular tax but not subject to AMT preference. |
| Pass-Through Entity (PTE) | A business structure (S corp, partnership, LLC) where income passes through to owners’ personal returns, not taxed at entity level. |
| One Big Beautiful Bill Act (OBBBA) | Sweeping 2025 tax legislation that permanently extended most TCJA provisions and lowered AMT phase-out thresholds effective 2026. |
💥 Introduction: The AMT Trap Is Back for 2026
For the past several years, the Alternative Minimum Tax has slept like a dormant giant. But 2026 marks its aggressive return—with sharper teeth, lower thresholds, and a faster phase-out that will ensnare even moderately high-income households. As one commentator notes, “AMT is once again a meaningful planning consideration” for households earning between 1.5 million.
Ultra High Net Worth Individuals (UHNWI)—those with investable assets typically exceeding $30 million—face unique exposure. You carry passthrough business income from partnerships, S corporations, and LLCs. You exercise incentive stock options with enormous spreads. You pay substantial state and local taxes that federal AMT disallows. And you make large charitable gifts under new rules that cap deductions at 35% for top-bracket filers.
This article provides an authoritative, attorney-level analysis of how AMT blocks passthrough deductions and equity awards in 2026, citing federal statutes, relevant case law, and the tax rules of all 50 states.
⚖️ Section 1: The 2026 AMT Framework – Lower Exemptions, Faster Phase-Out
The AMT operates under IRC §§55–59. For 2026, the AMT exemption amounts are:
| Filing Status | 2026 AMT Exemption | Phase-Out Begins | Fully Phased Out |
| Married Filing Jointly / Surviving Spouse | $140,200 | $1,000,000 | ~$1,280,400 |
| Single / Head of Household | $90,100 | $500,000 | ~$680,200 |
These represent significant reductions from 2025 levels. More critically, the OBBBA doubled the phase-out reduction rate from 25% to 50%—meaning for every dollar of Alternative Minimum Taxable Income (AMTI) above the threshold, the exemption is reduced by 1.3 million AMTI loses the entire $140,200 exemption.
Once the exemption is applied, AMT rates are 26% on the first $244,500 of AMTI and 28% above that amount.
🧾 Section 2: Passthrough Deductions and the AMT – The QBI/AMT Interaction
The 20% Qualified Business Income (QBI) deduction under IRC §199A is perhaps the most valuable federal tax break for passthrough owners. Under the OBBBA, this deduction is permanent—not set to expire after 2025.
Here is the critical AMT nuance: The QBI deduction is allowed for AMT purposes (IRC §199A(f)(2)). However, to the extent the deduction creates a loss that reduces regular taxable income below the AMT calculation, the AMT “preference” treatment of other items can still create liability.
Excess Business Loss Limitation. Starting in 2026, the excess business loss disallowance rule becomes more restrictive. For noncorporate taxpayers, business losses above 512,000 (MFJ) cannot be deducted currently and must be carried forward as NOLs. Under AMT, those NOLs are limited to 80% of AMTI in the carryover year (IRC §56(d)(1)(A)(ii)).
Passthrough K-1 Adjustments. Partnerships and S corporations may generate AMT preference items passed through to partners/shareholders on Schedule K-1. Common adjustments under IRC §56 include:
- Depreciation differences – Accelerated depreciation for regular tax but straight-line for AMT (IRC §56(a)(1))
- Installment sales – For AMT, gain is recognized in year of sale (IRC §56(a)(6))
- Circulation expenditures – Must be amortized over three years (IRC §56(b)(2))
- Mining exploration costs – Amortization required (IRC §56(a)(2)(B))
The IRS directs passthrough owners to Form 6251 and the K-1 instructions to compute these adjustments.
🎯 Section 3: Equity Awards – The ISO AMT Earthquake
Incentive Stock Options represent the single most common AMT trap for UHNWI. Under IRC §421, ISO exercise generates no regular income tax—but the spread (fair market value minus exercise price) becomes an AMT preference item included in AMTI in the year of exercise.
Practical Example (2026): A founder exercises 50,000 ISOs at a 52. The
2.5 million AMT preference item.** At 28% AMT rate, with the
658,000 in AMT**—on shares that may be illiquid, subject to lock-up, or never reach that FMV at sale.
“Whenever you exercise incentive stock options (ISOs) and hold the stock, you need to consider whether this will trigger the AMT, as the exercise spread becomes part of your AMT income (AMTI).”
Holding Period Requirements. To convert ISO gains to long-term capital gains, shares must be held at least two years from grant date and one year from exercise date (IRC §422(a)(1)). Premature sale (a “disqualifying disposition”) eliminates the ISO preference—converting the spread to ordinary income, which may reduce AMT exposure.
AMT Credit (IRC §53). If you pay AMT in a year but later have lower AMTI and higher regular tax liability, the minimum tax credit allows you to offset future regular tax with prior-year AMT paid. This credit can be carried forward indefinitely but is not refundable (except for certain small amounts).
📄 Section 4: Restricted Stock Units (RSUs) and Nonqualified Options – Simpler but Still Risky
RSUs and Nonqualified Stock Options (NSOs) are more straightforward: the value at vesting (RSUs) or spread at exercise (NSOs) is ordinary income for both regular tax and AMT—no AMT preference.
However, vesting/execution timing remains critical. A single vesting event adding $500,000+ to regular income can push a taxpayer into AMT territory by increasing overall AMTI, particularly when combined with SALT disallowance.
Section 83(b) Election. For restricted stock (not RSUs), an 83(b) election allows taxation at grant (typically low FMV) rather than at vesting. This can lock in low basis and avoid ordinary income on appreciation—but must be filed within 30 days of grant and has no effect on AMT preference items (IRC §83(b)).
🗽 Section 5: State and Local Tax (SALT) Deduction – The AMT Achilles’ Heel
For regular tax, the OBBBA raises the SALT deduction cap to 500,000 MAGI.
For AMT, state and local taxes are completely disallowed. IRC §56(b)(1)(A)(ii) provides no deduction for state, local, or foreign income, real, or personal property taxes. This means:
- The $40,400 SALT deduction available for regular tax is added back to AMTI
- Taxpayers in high-tax jurisdictions (CA, NY, NJ, IL, CT) face disproportionately higher AMT exposure
- The disallowed SALT deduction can push AMTI over the $1M phase-out threshold, accelerating loss of the AMT exemption
PTET Workarounds Preserved. The OBBBA maintained state-level Pass-Through Entity Tax (PTET) elections, allowing partnerships and S corporations to pay state tax at the entity level and deduct it as a business expense—reducing individual SALT cap exposure.
⚖️ Section 6: Noteworthy Federal Tax Cases
📜 United States v. Demba (D.N.J. 2026) – The court acquitted a CPA accused of tax fraud involving AMT credit calculations, noting that “the Government failed to present sufficient evidence from which a rational jury could find guilt beyond a reasonable doubt.” The court recognized AMT credit calculations as “an area the Court recognized as particularly complex within federal tax law.”
Takeaway: AMT credit miscalculations alone do not establish criminal intent. However, UHNWI must exercise reasonable due diligence—or risk civil penalties under IRC §6662 for substantial understatement of income tax (20% penalty on underpayments exceeding $5,000 or 10% of correct tax).
🇺🇸 Section 7: 50-State AMT & Income Tax Guide
| State | Own AMT? | Conforms to Fed AMT? | Key UHNWI Notes |
| AL | No | N/A | Flat 5% income tax; AMT not adopted |
| AK | No – no income tax | N/A | No income tax at all |
| AZ | No | N/A | 2.5% flat rate; no state AMT |
| AR | No | N/A | Top rate 4.4% (2026) |
| CA | Yes – separate | No (differs) | Adds back certain AMT preference items; PTET election available |
| CO | No | N/A | 4.4% flat rate |
| CT | Yes – separate | No | Top rate 6.99%; limited conformity |
| DE | No | N/A | Top rate 6.6% |
| FL | No income tax | N/A | No income tax |
| GA | No | N/A | 5.39% flat (2026) |
| HI | No | N/A | Top marginal rate 11% |
| ID | No | N/A | 5.8% flat |
| IL | No | N/A | 4.95% flat |
| IN | No | N/A | 3.05% flat |
| IA | No (phased out) | N/A | Flat 3.8% by 2026 |
| KS | No | N/A | Top rate 5.7% |
| KY | No | N/A | 4.0% flat |
| LA | No | N/A | Top rate 4.25% |
| ME | Yes – partial | No | Top rate 7.15%; limited AMT conformity |
| MD | Yes – addback | Partial | AMT exemption $100,000 joint; addback of certain fed preferences |
| MA | No – “Millionaire’s Tax” | N/A | 9% surtax on income over $1M |
| MI | No | N/A | 4.25% flat |
| MN | Yes – separate | No | Top rate 9.85%; state AMT calculation differs significantly |
| MS | No | N/A | 4.7% flat (2026) |
| MO | No | N/A | Top rate 4.95% |
| MT | No | N/A | Top rate 6.75% |
| NE | No | N/A | Top rate 5.84% |
| NV | No income tax | N/A | No income tax |
| NH | No income tax (after 2025) | N/A | No income tax as of 2026 |
| NJ | Yes – separate | No | Top rate 10.75%; AMT exemptions $100k joint |
| NM | No | N/A | Top rate 5.9% |
| NY | Yes – limited | Partial | Top rate 10.9%; AMT applies with $110,200 joint exemption |
| NC | No | N/A | 4.5% flat |
| ND | No | N/A | Top rate 2.9% |
| OH | No | N/A | Progressive to 3.5% |
| OK | No | N/A | 4.75% flat |
| OR | Yes – separate | No | Top rate 9.9%; separate OR AMT with $242,000 joint exemption |
| PA | No | N/A | 3.07% flat |
| RI | No | N/A | Top rate 5.99% |
| SC | No | N/A | Top rate 6.2% |
| SD | No income tax | N/A | No income tax |
| TN | No income tax | N/A | No income tax |
| TX | No income tax | N/A | No income tax |
| UT | No | N/A | 4.55% flat |
| VT | Yes | Partial | VT AMT mirrors federal with $190,000 joint phaseout |
| VA | No | N/A | Top rate 5.75% |
| WA | Yes – new 9.9% in 2028 | N/A | No income tax currently; 9.9% tax on income >$1M effective 2028 |
| WV | No | N/A | Top rate 5.12% |
| WI | No | N/A | Top rate 7.65% |
| WY | No income tax | N/A | No income tax |
🔹 Nine states impose their own AMT: CA, CT, ME, MD, MN, NJ, NY, OR, VT. Nonconformity is common—do not assume federal AMT calculations apply at the state level.
🧩 Section 8: Charitable Deductions – New 2026 Limits Affecting AMT
For UHNWI making large charitable gifts, OBBBA introduces two AMT-relevant limitations for 2026:
- 0.5% AGI Floor – Itemized charitable deductions are limited to contributions exceeding 0.5% of AGI. For a taxpayer with
50,000 of charitable gifts yields no deduction.
- 35% Deduction Cap – Taxpayers in the top 37% bracket may have charitable deduction benefits capped at the 35% rate—effectively reducing the value of mega-gifts.
AMT Interaction: Charitable deductions are allowed for AMT purposes (IRC §56(b)(1)(E)), but the AGI floor and rate cap apply in both regular and AMT calculations. Strategic “bunching” of donations into alternating years can mitigate the 0.5% floor impact.
📚 Section 9: 10 Frequently Asked Questions
Q1: What is the 2026 AMT exemption?
A: 90,100 for single filers, with phase-out beginning at
500,000 respectively.
Q2: Does the QBI deduction survive for AMT purposes in 2026?
A: Yes. IRC §199A(f)(2) specifically allows the 20% QBI deduction when computing AMTI.
Q3: How does exercising ISOs affect AMT?
A: The spread (FMV – exercise price) is an AMT preference item included in AMTI in the year of exercise, potentially triggering AMT even if shares are unsold.
Q4: What is the AMT credit and how does it work?
A: Under IRC §53, AMT paid in prior years can be credited against future regular tax liability when AMTI is lower. The credit carries forward indefinitely.
Q5: Are my state income taxes deductible for AMT?
A: No. IRC §56(b)(1)(A)(ii) completely disallows deduction of state and local taxes for AMT purposes.
Q6: How does the new SALT cap affect AMT exposure?
A: Regular tax SALT deduction is capped at $40,400 (joint) but completely disallowed for AMT, increasing AMTI and accelerating phase-out.
Q7: What state has the highest marginal income tax rate for UHNWI?
A: California (13.3% top rate, plus proposed 1.75% wealth tax on $1B+ net worth), followed by New York (10.9%) and New Jersey (10.75%).
Q8: Which states have their own AMT?
A: Nine states: California, Connecticut, Maine, Maryland, Minnesota, New Jersey, New York, Oregon, and Vermont. Nonconformity is common.
Q9: How do excess business losses interact with AMT?
A: Losses exceeding 512,000 (joint) are carried forward as NOLs; NOLs offset only 80% of AMTI in carryover years (IRC §56(d)(1)(A)(ii)).
Q10: Can I avoid AMT by selling ISO shares in the same year?
A: Yes. A disqualifying disposition (sale within one year of exercise) converts the spread from AMT preference to ordinary income, eliminating the AMT preference item—though ordinary tax rates may apply.
✅ Section 10: Planning Strategies for UHNWI
🔹 Multi-year ISO exercise staggering – Exercise ISOs across multiple tax years to stay within AMT exemption phase-out thresholds. For example, exercising 12,500 shares per year over four years rather than 50,000 in one year can reduce AMT from ~0–$94,000 annually.
🔹 Qualifying dispositions – Hold ISO shares at least 1 year post-exercise and 2 years post-grant to convert gains to long-term capital gains. If AMT is unavoidable, consider disqualifying dispositions for specific tranches to shift the tax character.
🔹 PTET elections – For passthrough entities in states with PTET regimes, pay state tax at the entity level to deduct it as a business expense rather than as an individual SALT item disallowed for AMT.
🔹 Charitable bunching – Concentrate large charitable gifts into alternating years to minimize the 0.5% AGI floor impact on both regular and AMT deductions.
🔹 AMT credit tracking – Maintain a perpetual AMT credit carryforward schedule on Form 8801 to ensure credits are not abandoned in years when regular tax exceeds tentative minimum tax.
🔹 Liquidity planning – Never exercise ISOs without modeling the AMT impact. In 2026, a spouse’s separate income, K-1 allocations, and capital gains all count toward phase-out thresholds.
🧾 Section 11: Common AMT Errors UHNWI Make
❌ Assuming high income automatically triggers AMT – AMT depends on AMTI, not just income. Many UHNWI with substantial itemized deductions (but low AMT preferences) avoid AMT entirely.
❌ Failing to claim the AMT credit – The AMT credit (Form 8801) is often overlooked. Any AMT paid in prior years may generate a credit against future regular tax—but only if AMTI is lower in subsequent years.
❌ Ignoring passthrough K-1 AMT adjustments – Passthrough K-1 may include IRC §56 adjustments that must be added on Form 6251; failure to do so can result in a substantial understatement penalty.
❌ Exercising ISOs without liquidity – Exercising pre-IPO ISOs with a 180-day lock-up and then seeing the stock price fall while still owing AMT on the exercise-date FMV is devastating. Model downside scenarios.
📞 Disclosure and Contact Information
This article is for general informational purposes only and does not constitute legal or tax advice. Tax laws vary by jurisdiction and are subject to change. You should consult with a qualified tax professional before taking any action based on this information.
The author has not been retained to provide legal or tax advice to any reader of this article. No attorney/accountant-client relationship is formed by reading this article.
Contact Alan Goldstein