The Second Set of Books

How this works

The whole idea, from the beginning

The calculator above compresses a parallel tax system into two lines and a dot. This is the long version: what the alternative minimum tax actually is, why exercising stock options wakes it up, and what every number up there is assuming.

1. The two calculations

Every year, the IRS calculates your income tax twice. The first calculation is the one you know: brackets, deductions, the refund or the bill. The second, the alternative minimum tax, runs quietly in parallel under different rules, with its own exemption and its own rates; the answer it produces is called the tentative minimum tax. The rule for reconciling them is blunt: you pay whichever number is higher. Most people never see the second calculation because the first one wins every year of their lives.

2. Why exercising options wakes it up

Exercise an incentive stock option and the regular calculation agrees that nothing happened, because exercising one creates no regular income at all. The AMT calculation disagrees. It counts the spread, the gap between your strike price and what the shares are worth the day you exercise, as income you earned the moment you exercised, even though you sold nothing and received nothing. A large enough exercise pushes the second calculation past the first, and the difference is a real check, due in cash next April, on a gain that exists only on paper.

3. The exemption, and how it disappears

The AMT starts with your income, adds the spread, and subtracts an exemption, a band of income it taxes at 0%: $90,100 for single filers in 2026, $140,200 married. It isn't a freebie everyone keeps: past $500,000 of AMT income ($1,000,000 married), the band shrinks by fifty cents for every extra dollar, and a large enough exercise erases it entirely. Whatever survives is taxed at 26%, stepping up to 28% for the largest exercises.

4. Your limit: the crossover on the chart

Because the regular calculation usually starts out higher, there is a tax-free limit: an amount of spread you can recognize before the AMT calculation finally overtakes the regular one. That is the crossover on the chart. Stay left of it and nothing happens. Go past it and only the excess is taxed, at about 26 cents on the dollar, not the whole exercise. The limit moves with your filing status, your income, and the spread on your specific grant, which is why the calculator asks for all three. Add a bonus or some interest and the limit grows with your regular tax; a long-term gain barely moves it, until it is large enough to start eating the exemption. Deducting your state and local taxes cuts the limit hard, and in the one direction people don't expect: the deduction lowers your regular tax, the AMT disallows every dollar of it, and the gap between the two calculations closes from the top. A California engineer at $220,000 who claims the full $40,400 watches a 1,525-share limit fall to 370.

5. Midnight on December 31

The AMT is an annual calculation, and it resets at midnight on New Year's Eve. December 31 and January 1 sit one day apart on the calendar and a full tax year apart in the eyes of the AMT. An exercise split across that boundary lands on two separate returns, each with its own fresh limit. Two years' worth of room always sit one midnight apart. And the limit doesn't carry forward: whatever you leave unused expires with the year.

6. Getting it back

AMT paid on an ISO exercise is closer to a forced prepayment than money burned. The excess becomes a minimum tax credit that flows back in later years, whenever your regular tax is once again the higher number. Form 8801 keeps the ledger. The dangerous word is later: the credit returns slowly, capped each year by the gap between your two calculations, and it only helps if there is a future gap to apply it against. Exercising blind and waiting for the credit is not a plan; sizing the exercise to the limit is.

7. What the calculator assumes

The math uses 2026 federal brackets, the larger of the standard deduction or your capped state and local taxes on the regular side, and the AMT exemption with its phase-out on the other, the same parameters as the letter. The exercise slider reaches $200,000 of strike value, so a $2 strike tops out at 100,000 shares. The ISO rules cap what can first become exercisable in a single year at $100,000 of strike value, but they say nothing about what you exercise, so if you hold two years of vested grants you can put both on the table at once. Interest, short-term gains, freelance and other income are taxed like wages; long-term gains and dividends are assumed qualified and get the capital-gains rates in both calculations. State and local taxes are capped at $40,400 for 2026, the same figure single or married, falling thirty cents per dollar of income past $505,000 and never below $10,000; mortgage interest and charitable giving are not modelled, and unlike SALT they would lower both calculations rather than pulling them apart. Capital losses net against gains first, then up to $3,000 of what's left comes off ordinary income and the rest carries forward. It skips self-employment tax, the net investment income tax and the state tax bill itself, which you tell it, and assumes a 409A that holds still while you decide.

It is an illustration, not advice. Run the real numbers before you write either check.