Tax & Compliance
AMT Planning for ISO Exercises: When (and How Much) to Exercise
Collated by Aparna Devalla, CPA
Curated by Rubric Financial
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Why ISOs Create an AMT Problem
- Regular tax: ISO exercise has no tax impact, since you don't recognize income until you sell.
- AMT (Alternative Minimum Tax): the bargain element (FMV at exercise minus strike price) is treated as AMT preference income.
- If FMV = $5 and strike = $0.10, exercising 10,000 shares creates $49,000 of AMT preference income, potentially $13,720 in AMT tax owed even though you received zero cash.
- AMT applies if your AMT calculation produces a higher tax than your regular calculation. Many startup employees never hit AMT until ISO exercise.
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