Updated for 2025 and 2026. If you have incentive stock options, you’ve probably heard of the alternative minimum tax (AMT). Essentially, the alternative minimum tax is a prepayment of taxes. In years when not subject to the AMT, you can receive an AMT credit. The credit reduces your tax liability to reflect prepaid tax. Here’s a summary of how exercising ISOs can trigger the alternative minimum tax, with examples.
Article is for informational purposes only and should not be misinterpreted as personalized advice of any kind or a recommendation for any specific financial or tax strategy. This is a general communication should not be used as the basis for making any type of tax, financial, legal, or investment decision.
How exercising incentive stock options can trigger the alternative minimum tax
One major drawback to incentive stock options is the potential to trigger the alternative minimum tax. The AMT is a parallel tax calculation which disallows certain tax deductions and non-taxable items under the regular system. AMT calculation allows just one exemption amount and it phases out with income. Taxpayers pay whichever number is higher: their tax due under AMT or the regular system.
Under the regular tax system, when you exercise ISOs, it’s not a taxable event. But when ISOs are exercised and held through the end of the year of exercise, under the alternative minimum tax calculation, the bargain element (the value of the stock when you exercise minus the strike price) is includable in your alternative minimum taxable income (AMTI) for the year.
This is why it’s sometimes called phantom income.
If incentive stock options are exercised and sold in the same calendar year, then it’s a disqualifying disposition. Early sales of ISOs are only taxed in the regular tax system. But if the shares are kept, you’ll want to track your AMT carryforward credit and dual cost basis.
AMT exemptions and phaseouts
2025
- AMT exemptions: $88,100 for single and $137,000 for joint filers.
- Income phaseout ranges: $626,350 to $978,750 for single filers and $1,252,700to $1,800,700 for joint filers.
- AMT tax rates: 26% for AMT-taxable income under $239,100; then 28% (all filers, except married filing separately)
2026
For workers with incentive stock options, the passing of the OBBB creates some new challenges. While the AMT exemption amounts increase from 2025 levels, the phaseout income thresholds are significantly lower. Further, once income enters the phaseout range, the available AMT exemption will be reduced more rapidly than before.
- AMT exemptions: $90,100 for single filers and $140,200 for joint filers.
- Income phaseout ranges: $500,000 to $680,350 for single filers and $1,000,000 to $1,280,400 for joint filers.
- AMT tax rates: 26% for AMT-taxable income under $244,500; then 28% (all filers, except married filing separately)
Simple hypothetical examples of AMT and AMT credits
For simplicity, all examples below assume the following:
Tax assumptions
- No other sources of income or capital gains
- 15% flat long-term capital gains tax rate for regular tax and AMT
- 26% flat AMT tax rate
- No 3.8% Medicare tax
- No deductions or exemptions: excludes any standard/itemized deduction or AMT exemption
- No state tax
Grant and sale assumptions
- 100,000 incentive stock options
- $1 strike price
- $7 409a value (market value) at exercise
- $10 sale price
AMT at exercise
Regular tax calculation: Exercise of ISOs is not includable in the regular tax calculation so there is no taxable spread or tax due
AMT tax calculation
This fictional example is overly simplified for illustrative purposes. Typically, there’s tax due in the regular system also. In that example, the AMT due would be the excess between the AMT and regular tax due.
Note: If the taxpayer had any income in the regular tax system, it would be reduced by the standard or itemized deduction. The standard deduction would be replace by the AMT exemption (if allowed) in the AMT calculation as well as some itemized deductions.
AMT credits: calculating tax due and credits at sale
There is an AMT silver-lining: in years not subject to the AMT with regular capital gains, an AMT tax credit may be available. To recoup any prepaid tax, taxpayers must track two different sets of cost basis on their incentive stock options.
Dual cost basis
The tax basis for regular income tax is different from the alternative minimum tax cost basis. When ISOs are later sold at a gain above the value at exercise and strike price the two sets of cost basis are:
- Regular tax basis the strike price x number of shares
- AMT tax basis the market value at exercise x number of shares
Notes on AMT credits:
- The maximum credit in a tax year is the difference between the tax due in the regular calculation and tentative minimum tax. But the credit can’t exceed the carry forward credit available.
- The shares that triggered the AMT at exercise don’t have to be sold to take an AMT credit. The two things aren’t directly linked, though the cost basis differentials may come into play. The calculations will include the taxpayer’s entire tax situation, not just incentive stock option activity.
- AMT credits can only be used in years when not subject to the alternative minimum tax.
- Excess or unused AMT credits can be carried forward indefinitely.
Selling exercised ISOs: calculating gains at sale and applying an AMT tax credit (3 steps)
Following on the previous example, assume after meeting the holding period for a qualifying disposition of ISOs the stock is sold for a gain.
IMPORTANT NOTES!
- Despite appearances of these illustrative examples, they are actually quite simplistic. The AMT calculation is very complex. Consulting a qualified tax advisor is strongly recommended.
- Examples assume a very limited set of facts and assumptions, refer to the list above.
- Examples are hypothetical and overly simplified! Not tax advice!
Tax and financial planning with stock options
Not every individual with incentive stock options will have tax planning options to consider. Liquidity constraints have a huge impact on your options. But either way, working with a stock option advisor and CPA can still be a great strategy as you’ll ultimately need to plan your exit and diversify a concentrated stock position.
At the end of the day, all of the tax planning opportunities with ISOs involve risks. There’s a risk the tax laws will change, your tax situation will be different than expected, and of course, the risk that the stock doesn’t perform as you hope. The focus of this article has been on the alternative minimum tax, but the investment implications shouldn’t be overlooked. The exposure is different in each situation.
For more on stock option and IPO planning, please visit our website.
[Last reviewed November 2025]
