7 Mistakes That Turn an ISO Exercise Into an AMT Bill You Did Not Plan For

Sam's List Editorial | 2026-08-07

7 Mistakes That Turn an ISO Exercise Into an AMT Bill You Did Not Plan For An ISO exercise AMT bill is the only tax bill people get for a transaction where no money changed hands and no income showed up on a W-2. That is the whole problem in one sentence. When you exercise an incentive stock option, the spread between your strike price and the fair market value of the shares is not wages and is not regular taxable income. It is an adjustment for alternative minimum tax purposes. Regular tax does not see it. AMT sees all of it. So the exercise feels free in October and produces a wire request in April. Here are seven ways that happens, and 2026 makes several of them worse. 1. Not Knowing That 2026 Changed the AMT Math This is the one to read even if you skip the rest. The One Big Beautiful Bill Act kept the higher AMT exemption amounts permanent, which sounds like good news, and then changed two things that matter more. Starting in 2026, the income level where the exemption begins to phase out resets to $500,000 for single filers and $1,000,000 for joint filers, indexed going forward. And the rate at which the exemption phases out doubles, from 25 percent to 50 percent. The 2026 exemption amounts themselves are $90,100 for single filers and $140,200 for married filing jointly. Put those together and the practical effect is that the exemption disappears faster and starts disappearing at a lower income than it did in 2025. An exercise that generated a tolerable AMT number last year can generate a materially larger one this year with no change to the option, the strike, or the share price. If your plan for exercising was built on a 2024 or 2025 model, the model is stale. That is not a reason to do anything in particular. It is a reason to rerun the number before you act. 2. Treating the ISO Exercise Bargain Element as Theoretical The AMT adjustment is strike price subtracted from fair market value at exercise, multiplied by shares. For a private company, fair market value generally comes from the most recent 409A valuation. People discount this because the shares are illiquid and the valuation feels like a paper number. The IRS does not discount it. The adjustment is computed on that number whether or not there is any market to sell into. Ten thousand options at a $1 strike with a $9 valuation is an $80,000 AMT adjustment on a transaction that cost you $10,000 in cash and produced zero dollars of proceeds. 3. Exercising in December Instead of January Timing inside the calendar year changes your options later, and December is usually the worst month for it....

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