ISO AMT: How Many Options You Can Exercise Without AMT

How many ISOs can you exercise without triggering AMT?

There is no safe number of shares. The alternative minimum tax (AMT) is the amount by which your tentative minimum tax passes your regular income tax (Form 6251 instructions). Exercising incentive stock options (ISOs) and keeping the shares past year-end adds the spread (value at exercise minus the price you paid) to the minimum-tax base, not the regular one. So the spread you can exercise before AMT starts is a dollar amount figured from your own income, deductions and filing status, then divided by the spread per share.

What makes a case not simple:

• A large spread. Once alternative minimum taxable income (AMTI) passes $500,000 (single) or $1,000,000 (joint), the exemption shrinks quickly (Rev. Proc. 2025-32).
• Shares you cannot sell. The tax is due with your return even if the company is private and the shares cannot be sold.
• A state with its own AMT, such as California.
• Leaving the company, which can force a deadline on when you exercise.

Gather: Form 3921 for each exercise (or the exercise date, share count, price and value per share), recent pay stubs, last year's return, and your expected other income and deductions for the year.

Why does an ISO exercise trigger AMT when no regular tax is due?

The minimum tax ignores the ISO rule that defers tax at exercise. For regular tax you report nothing when you exercise; for the AMT, 26 U.S.C. 56(b)(3) turns that rule off, so the spread goes on Form 6251, line 2i (IRS Publication 525).

The spread is measured when your rights in the shares first become transferable or are no longer subject to a substantial risk of forfeiture. For shares that vest right away, that is the exercise date. For unvested shares, you can elect within 30 days of exercise to count the spread at exercise instead; see early exercise of startup stock options. For the ISO and NSO basics and Form 3921, see exercising startup stock options.

How is the AMT on an ISO exercise figured?

Form 6251 refigures your income without certain tax breaks, subtracts an exemption, taxes the rest at two rates, and charges AMT only on the part above your regular tax (Form 6251 instructions).

1. Start with taxable income from Form 1040.
2. Add back the standard deduction, or the state and local taxes you itemized (line 2a), plus the ISO spread (line 2i) and any other adjustments. The result is AMTI.
3. Subtract the exemption. It shrinks by 50% of AMTI above the phaseout threshold.
4. Apply the AMT rates to what is left: 26% up to $244,500 ($122,250 if married filing separately) and 28% above (26 U.S.C. 55(b)). This is tentative minimum tax. Capital gains and qualified dividends keep their lower rates in Part III.
5. Compare with your regular tax. AMT is the excess, if any.

Source: Rev. Proc. 2025-32, section 4.10.

How much ISO spread can you exercise this year before AMT starts?

Your room is the gap between your regular tax and your tentative minimum tax before the exercise, converted to spread at the AMT rate. Many people call the point where the two taxes meet the crossover.

1. Estimate the year's regular tax with no exercise.
2. Figure tentative minimum tax with no exercise (steps 1–4 above).
3. Divide the gap by 26%, or by 28% if your AMT base is already above the step 4 threshold. The result is roughly the spread you can add before AMT starts.
4. Divide by the spread per share for a share count.

Inside the phaseout range every extra dollar of spread also removes exemption, so each dollar adds one and a half dollars to the amount taxed. Refigure if your pay, bonus, deductions or the share value change. Itemized state and local taxes added back on line 2a shrink the room, which matters most in a high-tax state.

What changed from 2026: the exemption, the phaseout and its faster rate?

Public Law 119-21 made the higher exemption permanent, reset the phaseout thresholds lower, and doubled the phaseout rate for tax years beginning after December 31, 2025 (section 70107). Smaller exercises see little change; large ones lose the exemption sooner.

Sources: Form 6251 instructions (2025); Rev. Proc. 2025-32. The 2017 law first raised the exemption; the 2025 law kept it and added the faster phaseout.

Does selling the shares in the same year remove the AMT?

Yes. If you exercise and sell the shares in the same tax year, there is no AMT adjustment for those shares (Form 6251 instructions). The sale is a disqualifying disposition, so the spread is usually taxed as ordinary pay for regular tax instead. That can cost more than the AMT it replaces, as the third example shows.

A sale in the next calendar year does not undo the earlier year's AMT. If the shares have already fallen, see taxed on stock options that lost value.

Should you exercise ISOs in December or January?

Exercising in January gives you the whole year to decide whether to sell before December 31 and remove the adjustment, and puts the return that reports it about fifteen months away, though estimated payments may fall due sooner. Exercising in December leaves only days to make that choice, and a sale in January no longer helps.

Splitting a large exercise across two tax years uses two exemptions and can keep each year below the phaseout. The share value can move between dates, and the one-year holding period for a qualifying sale starts at exercise. If you are leaving the company, the exercise window may decide the date; see exercising when you leave a startup.

Do you need an estimated payment for ISO AMT?

Often. No tax is withheld on an ISO exercise, but estimated tax covers the AMT you expect (IRS Publication 505). You generally avoid the underpayment penalty if withholding and timely payments reach 90% of this year's tax or 100% of last year's (110% if last year's adjusted gross income was over $150,000, or $75,000 if married filing separately).

A late-year exercise may need less for the earlier dates under the annualized income installment method, claimed with Form 2210 (Publication 505). Raising wage withholding is another way to cover the gap.

Does California have AMT on ISOs?

Yes. California has its own AMT on Schedule P (540), and the ISO spread is an adjustment on line 10, the same way as federally (FTB Schedule P instructions). The rate is 7% (Schedule P, line 24).

California's exemption starts phasing out at a lower income than the federal one, so the California crossover can differ. Other states follow their own rules; check your state's individual return instructions. Moving before an exit has its own rules; see moving to another state before selling startup shares.

What records keep your AMT basis right for the later sale?

Keep two bases for each lot: regular basis (the price you paid) and AMT basis (that price plus the spread you reported) (Form 6251 instructions). When you sell in a later year, the difference goes on Form 6251, line 2k, so you are not taxed twice on the same spread.

Keep each Form 3921, the Form 6251 for the exercise year, the lot's exercise date and share count, any Form 8801 you file, and the sale records. Getting AMT back through the minimum tax credit is covered in taxed on stock options that lost value.

Example

These examples use US dollars, round illustrative numbers and 2026 rates. Each person takes the standard deduction and has no other income or adjustments.

Single, $180,000 salary, $60,000 spread

Taxable income is $163,900 ($180,000 minus the $16,100 standard deduction), so regular tax is about $31,934. AMTI is $240,000 (taxable income, plus the standard deduction added back, plus the $60,000 spread). After the $90,100 exemption, $149,900 is taxed at 26%: tentative minimum tax of about $38,974. AMT is about $7,040. With no exercise, this person had room for roughly $32,900 of spread before any AMT.

Married filing jointly, $400,000 wages, $700,000 spread

Taxable income is $367,800 and regular tax is about $73,468. AMTI is $1,100,000, which is $100,000 over the $1,000,000 threshold, so the $140,200 exemption shrinks by $50,000 to $90,200. Tentative minimum tax on the remaining $1,009,800 is about $277,854, so AMT is about $204,386. With the same threshold and the old 25% phaseout rate, the exemption would have shrunk by only $25,000, about $7,000 less tax. Before exercising, this couple had room for only about $20,000 of spread.

December exercise, January sale

The single person in the first example exercises in December and sells all the shares in January at the same price.

• Exercise year: AMT of about $7,040 is due with that return.
• Sale year: the $60,000 is ordinary income for regular tax. For the AMT the higher AMT basis means no gain, a negative adjustment on line 2k. The earlier AMT can come back as a minimum tax credit; at these figures, likely all of it.

Had the sale happened in December instead, there would be no AMT adjustment and no AMT. The $60,000 would be ordinary income in the exercise year, raising regular tax by about $16,170. That is more than the AMT, but the January sale brings the same ordinary income a year later anyway.

Different for you?

• You have NSOs, or need the sale and holding-period rules: see exercising startup stock options.
• You paid AMT and the shares fell, or you want the credit back: see taxed on stock options that lost value.
• You exercised before vesting: see early exercise of startup stock options.
• You are leaving the company: see exercising stock options when you leave a startup.
• The shares may be qualified small business stock: see QSBS for founders and early employees.
• Your options are from a Canadian company: see US resident with Canadian startup stock options and cross-border tax help.
• The spread is large, you itemize in a high-tax state, or you must decide before year-end: get individual tax help to model the crossover for both federal and state.