Tax
Alternative Minimum Tax (AMT)
A parallel federal tax system that can require additional tax beyond the regular calculation. Post-TCJA it hits far fewer taxpayers, but ISO exercises can still generate a large surprise bill on paper gains.
AMT was created to prevent high-income taxpayers from using too many deductions to avoid tax. It runs in parallel to the regular tax calculation; you owe the higher of the two. Every taxpayer computes AMT on Form 6251 and pays the excess over regular tax as an additional tax.
After 2017's tax law changes, AMT affects far fewer taxpayers because the exemption jumped and the state-and-local-tax deduction was capped in the regular system — removing what used to be the biggest AMT trigger. But ISO (incentive stock option) exercises remain a major trigger. The spread between strike and FMV at ISO exercise is an AMT preference item, even if you don't sell the shares.
For 2026 the AMT exemption is roughly $90,000 (single) / $140,200 (MFJ), phasing out for higher-AGI filers (indexed annually — check the current Rev. Proc. if the number matters to a filing decision). AMT rates are 26% on the first ~$239,100 of AMTI over the exemption and 28% above that, a lower top rate than the regular system but on a much broader base that adds back the standard deduction, personal exemptions, and various regular-tax deductions.
The AMT credit carryforward is the recovery mechanism. Timing-difference AMT (mostly from ISO exercises) generates a credit that offsets regular tax in future years when the regular tax exceeds AMT. Tracking this credit on Form 8801 is essential — an ISO exercise that produced $200k of AMT can throw off $150k of credits over the following 5-10 years, but only if the workpaper survives that long.
Multi-year planning is where AMT is beat. Splitting an ISO exercise across two tax years, timing the sale of AMT-preference shares in a year the regular tax already exceeds AMT, and running a same-year exercise-and-sell (disqualifying disposition — regular tax only, no AMT) on the portion of the option you're least willing to hold are all defensible plays. Every one of them requires modeling both parallel systems for the year AND the following 5+ years of credit recovery.
Common pitfalls
- Owing AMT on a paper gain after exercising ISOs, which is devastating if the stock then drops
- Assuming AMT is dead after 2017; for ISO holders it's very much alive
- Forgetting to track the AMT credit carryforward, which can recover AMT paid in future years
- Ignoring the AMTI phaseout of the exemption at higher AGI; the effective marginal AMT rate reaches ~35% in the phaseout range, not the headline 28%
- Exercising a full ISO grant in a single year to 'start the clock' on long-term capital gains without modeling the AMT bill; the tax hit often dwarfs the LTCG saving
Related service
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Federal, state, and local returns prepared and reviewed by a licensed CPA, with the planning done before year-end rather than after it.