Alternative Minimum Taxable Income: Federal and California

Alternative minimum taxable income (AMTI) is your regular taxable income recalculated under a parallel set of rules that disallow certain deductions and add back certain excluded income. You owe alternative minimum tax (AMT) when the tax computed on your AMTI, after subtracting an exemption, is higher than your regular income tax. For federal purposes in 2026, AMTI above the exemption is taxed at 26%, and amounts above a statutory threshold at 28%; the exemption is $90,100 for single filers and $140,200 for married couples filing jointly.¹ California applies its own AMT at a flat 7% on a separately calculated AMTI, with lower exemptions that pull in more taxpayers than the federal rules do.²

How AMTI Is Built From Regular Taxable Income

Federal AMTI starts with your regular taxable income. From there, you apply adjustments under 26 U.S.C. § 56 and add preference items under § 57.³⁴ Preferences are always add-backs. Adjustments can move income up or down depending on the item.

The tax on AMTI (called the tentative minimum tax) is then compared to your regular income tax. If it’s higher, you pay the difference as AMT. The statutory threshold that separates the 26% and 28% brackets is $175,000 in the code and is indexed annually.⁵

Incentive Stock Options

This is where most people first meet the AMT. Regular tax rules ignore an incentive stock option exercise. For AMT, the spread between the exercise price and the stock’s fair market value on the exercise date is income, because the statute switches off Section 421’s favorable treatment for AMT purposes. Exercise options on stock worth $50 at a $10 strike, and $40 per share flows into AMTI. On a large grant, that single line can be what puts you into AMT.

Private Activity Bond Interest

Interest from most municipal bonds escapes regular income tax. Private activity bonds are the exception: their interest is added to AMTI as a preference item. Holders of large positions in these bonds are often surprised, because the income is fully sheltered on the regular return.

Depreciation

AMT uses slower depreciation on some business property. For tangible property placed in service between 1987 and 1998, you must use 150% declining balance over the asset’s class life instead of the 200% declining balance and shorter recovery periods regular rules allow. For property placed in service after 1998, you still use 150% declining balance but with the regular recovery period, so the adjustment shrinks. Either way, each asset has to be tracked on a separate AMT depreciation schedule.

Net Operating Losses

The alternative tax net operating loss deduction is capped so that carryforwards cannot zero out AMTI the way a regular NOL might zero out taxable income. You have to track an AMT-specific NOL separately, because the starting income and the adjustments feeding into it are different from the regular NOL.

Federal Exemptions and Phaseouts for 2026

The exemption is subtracted from AMTI before the 26%/28% rates apply, and it phases out at higher incomes. For 2026:

Single or head of household: exemption of $90,100, phaseout beginning at $500,000 of AMTI.
Married filing jointly: exemption of $140,200, phaseout beginning at $1,000,000 of AMTI.

These figures reflect adjustments under the One Big Beautiful Bill Act, which modified several AMT provisions carried over from the Tax Cuts and Jobs Act.¹ Once AMTI crosses the phaseout threshold, the exemption shrinks with every additional dollar of income until it disappears. A single filer at $700,000 of AMTI keeps only a portion of the $90,100; at higher incomes, nothing remains and the full AMTI is exposed to the AMT rate.

How California Calculates AMTI Differently

California’s AMT operates under Revenue and Taxation Code Section 17062, and it does not simply piggyback on the federal number.² You start from California taxable income and make a separate set of adjustments on Schedule P (540). Because the state doesn’t fully conform to federal law, your California AMTI can differ substantially from your federal AMTI, and you can owe state AMT while owing no federal AMT at all.

Depreciation Differences

California often uses different recovery periods and methods than the IRS, so business asset basis has to be tracked separately for state regular tax and for state AMT. These differences accumulate across an asset’s life. Equipment bought in 2026 can still generate a California AMT adjustment on a return filed nearly a decade later.

State and Local Tax Add-Backs

Certain taxes deducted on Schedule CA must be added back for California AMT. The Schedule P instructions specifically call out state and local personal property taxes and state, local, or foreign real property taxes.⁶ For homeowners in high-property-tax areas, this is a large adjustment.

Passive Activity Losses

Passive activity losses have to be recomputed for California AMT. A rental loss that offsets your regular state tax may be partially or fully disallowed at the AMT level.

California Exemptions

The state’s exemptions are lower than the federal ones, which is why the California AMT catches more filers. For 2025, the most recent published figures:

Single or head of household: $92,749, phaseout beginning at $347,808 of AMTI.
Married filing jointly: $123,667, phaseout beginning at $463,745 of AMTI.
Married filing separately: $61,830, phaseout beginning at $231,868 of AMTI.

These amounts are indexed for inflation and 2026 figures will be modestly higher once the Franchise Tax Board publishes them.⁷ A married couple starts losing the California exemption at $463,745, while the federal phaseout doesn’t begin until $1,000,000. That gap is the reason a California household with $600,000 of income can owe state AMT while facing no federal AMT.

Recovering AMT You’ve Already Paid

AMT paid because of timing differences, not permanent exclusions, can come back to you through a credit in later years.

Federal Minimum Tax Credit

Form 8801 computes a credit for prior-year AMT attributable to deferral items, mainly depreciation differences and ISO exercises where the income eventually shows up on a later regular return.⁸ Exercise ISOs in 2025, pay AMT on the spread, sell the stock in 2026 and recognize the gain for regular tax: the credit offsets the 2026 regular tax by the AMT attributable to that timing difference. AMT caused by exclusion items like the standard deduction does not qualify. Unused credit carries forward indefinitely.

California Minimum Tax Credit

California uses Form FTB 3510. You qualify if you had a carryover from the prior year or paid AMT in the prior year on adjustments other than exclusions.⁹ The form separates deferral-driven AMT (creditable) from exclusion-driven AMT (not creditable). Anyone who has paid California AMT should run this form each year; the credit is easy to miss.

Forms and Records You Need to Compute AMTI

Federal AMTI and AMT are computed on IRS Form 6251, attached to Form 1040.¹⁰ California uses Schedule P (540), attached to Form 540.⁶ Each form walks the adjustments and preferences line by line, converts regular taxable income into AMTI, applies the exemption, and produces the tentative minimum tax. Software handles the mechanics, but the inputs still have to be right.

The records that drive the biggest adjustments:

ISO exercise records showing exercise date, share count, exercise price, and fair market value on the exercise date.
Broker statements or 1099-INTs identifying private activity bond interest.
Separate depreciation schedules for regular tax and AMT for every business asset, maintained across the asset’s full life.
Prior-year Form 8801 or FTB 3510 showing any unused minimum tax credit to carry forward.

The depreciation schedules and ISO records are the two items most often missing from what taxpayers hand to a preparer, and they are exactly the items most likely to change the AMTI answer.

1
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
2
California Legislative Information. California Revenue and Taxation Code 17062
3
Office of the Law Revision Counsel. 26 USC 56 – Adjustments in Computing Alternative Minimum Taxable Income
4
Office of the Law Revision Counsel. 26 USC 57 – Items of Tax Preference
5
Office of the Law Revision Counsel. 26 USC 55 – Alternative Minimum Tax Imposed
6
Franchise Tax Board. 2024 Instructions for Schedule P (540)
7
Franchise Tax Board. 2025 Schedule P (540) Alternative Minimum Tax and Credit Limitations
8
Internal Revenue Service. Instructions for Form 8801
9
Franchise Tax Board. 2025 Instructions for Form FTB 3510
10
Internal Revenue Service. About Form 6251, Alternative Minimum Tax – Individuals