ISO AMT Calculator

Exercising incentive stock options (ISOs) doesn't trigger regular income tax — but it does add the spread (FMV minus strike price) to your Alternative Minimum Tax income. If that pushes your tentative minimum tax above your regular tax, you owe the difference in April. This calculator estimates that exposure for 2026.

How the ISO AMT calculation works

ISOs have a preferential structure under the regular income tax: you owe no ordinary income tax when you exercise. But the IRS runs a parallel tax system — the Alternative Minimum Tax — and ISO spreads are a key AMT preference item. Here's the mechanics:

1. ISO spread at exercise = (FMV − strike price) × shares. This amount is invisible to regular income tax but is added directly to your AMT income (AMTI).
2. AMTI is roughly your regular income plus the ISO spread plus a few other add-backs. Notably, the standard deduction is not allowed for AMT, and state income taxes are not deductible. This calculator uses a simplified AMTI = W-2 income + ISO spread.
3. AMT exemption is subtracted from AMTI. For 2026: $90,100 (single) or $140,200 (MFJ) — but it phases out at 50 cents per dollar of AMTI above $500,000 (single) or $1,000,000 (MFJ). These lower phaseout thresholds are an OBBBA change effective 2026.¹
4. Tentative minimum tax = 26% on the first $244,500 of taxable AMTI, 28% above that (2026, IRS Rev. Proc. 2025-32).²
5. AMT owed = max(0, tentative minimum tax − regular income tax). You only pay AMT if it exceeds your regular tax.

The California AMT problem

California does not follow federal ISO rules. CA taxes ISO spreads as ordinary income at exercise under its own AMT framework, and the California AMT credit recovery mechanism is limited compared to federal. For many California residents, the state AMT cost from exercising ISOs is closer to a permanent tax than a prepayment. The federal AMT credit will recover — the state piece may not, or may recover over many years depending on income.

At a California marginal rate of 13.3% on $200,000 of spread, that's $26,600 of state tax at exercise — on top of the federal AMT. If you're a California resident with significant ISOs, model both exposures before exercising.

When exercising ISOs makes sense despite AMT

The AMT is painful in the exercise year, but the federal piece typically recovers when you sell. The decision comes down to whether expected appreciation justifies the AMT cash cost and the holding-period risk.

• Pre-IPO with a visible liquidity event: If IPO is 12–18 months out and you expect the price to rise significantly, exercising now (at a lower FMV, lower spread, lower AMT) while starting the 1-year clock for long-term capital gains treatment is often worth it.
• If the stock could fall: AMT is calculated on FMV at exercise. If you exercise at $25/share and the stock drops to $10, you've paid AMT on gains that no longer exist. This is the AMT trap that destroyed tech employees in 2001–2002. The AMT credit still carries forward, but you need to sell at a high enough price to recover it.
• QSBS (Section 1202) interaction: For qualifying startup stock (C-corp, under $50M gross assets at issuance), exercising ISOs early — combined with an 83(b) election if applicable — can start the 5-year holding clock for the $15M QSBS federal exclusion under the post-OBBBA rules. If the company qualifies, this changes the math entirely.³
• Partial exercise to stay under AMT: You can often exercise enough shares to consume your regular tax "headroom" (the gap between regular tax and tentative minimum tax) without triggering incremental AMT. The calculator shows when that threshold is crossed.