Covered Calls and AMT (Alternative Minimum Tax) 2026

How covered calls interact with the alternative minimum tax in 2026

Covered calls and AMT interact through the alternative minimum taxable income calculation. The alternative minimum tax is a parallel system that computes tax liability using a broader income base and fewer deductions. If the tentative minimum tax exceeds your regular tax, you pay the difference as AMT. Covered call premiums -- taxed as short-term capital gains -- flow into both calculations, but the AMT side disallows certain deductions that reduce regular tax, potentially creating a higher effective rate on your option income.

For most covered call writers, AMT became less of a concern after the Tax Cuts and Jobs Act raised the exemption amounts. However, high-income professionals who write options as a supplemental income source can still be affected, particularly during years when they also exercise incentive stock options, claim large state-and-local tax deductions, or have significant investment interest expense deductions that are treated differently under AMT.

The AMTI calculation and where option income fits

Alternative minimum taxable income starts with regular taxable income and adds back specific adjustments and preference items. The most common adjustment for W-2 professionals who also trade options is the state-and-local tax deduction. Under regular tax, the SALT deduction is capped at US$10,000 for most filers. Under AMT, state and local tax deductions are disallowed entirely. If your state income tax on option gains exceeds the SALT cap, you may already be in AMT territory regardless of options.

Investment interest expense is another adjustment. Under regular tax, investment interest is deductible up to net investment income. Under AMT, the deduction is recomputed using AMT-adjusted income. If you deduct margin interest used to carry covered call positions, the AMT version of that deduction may be smaller. Other adjustments -- such as tax-exempt interest from private activity bonds -- are less common for typical option traders but should be checked.

The exemption phase-out and the hidden marginal rate

The AMT exemption is reduced by US$0.25 for every US$1 of AMTI above the phase-out threshold. This creates an effective marginal rate that is higher than the nominal 26 or 28 percent. During the phase-out range, each additional dollar of income is taxed at the nominal AMT rate plus 25 percent of that rate. The result is an effective rate of 32.5 percent in the 26 percent bracket and 35 percent in the 28 percent bracket.

For a covered call writer adding US$30,000 of annual option income, the question is whether that income lands in the phase-out zone. If your AMTI without option income is already above the phase-out threshold, the additional income faces the elevated rate. If your AMTI is well above the zone where the exemption is fully phased out, the marginal rate drops back to the nominal 26 or 28 percent. The IRS publishes the current exemption amounts and phase-out thresholds annually; check the revenue procedure for the applicable tax year.

When AMT matters most for option traders

The most reliable planning tool is to run Form 6251 as a what-if calculation before December 31. Tax software and many CPA firms offer AMT projections. Compare your tentative minimum tax with and without the planned option income. If AMT applies, the effective after-tax premium from covered calls is lower than the headline rate suggests. In some cases, deferring a December option trade to January can keep one tax year below the AMT threshold.

Long-term capital gains receive preferential treatment under both regular and AMT tax. If your covered call strategy generates mostly short-term gains, those gains are taxed at ordinary rates under both systems. Shifting to longer-duration calls that result in long-term gains through qualified covered call treatment can reduce the AMT impact, although the qualified covered call rules must be satisfied to avoid straddle and constructive sale problems.

• Years when ISO exercises create a large AMT preference item and option income pushes AMTI further into the phase-out range.
• High-state-tax years when state income tax on option gains exceeds the SALT cap, making the AMT base significantly larger than the regular tax base.
• Years with significant investment interest expense deductions from margin borrowing used to carry covered call positions.
• Transition years when legislative changes to exemption amounts or phase-out thresholds have not yet been announced.