ISO AMT Trap Stock Option Exercise 2027 Calculator
Incentive Stock Options (ISOs) appear tax-free at exercise — until the Alternative Minimum Tax (AMT) bill arrives. The bargain element (spread between strike and FMV) is added to AMT income, and once AMT exceeds regular tax, you owe the difference even though you haven't sold a single share.
| Bargain Element (FMV - Strike) | — |
| Cost to Exercise Strike | — |
| AMT Income (regular income + bargain) | — |
| AMT Exemption (after phaseout) | — |
| Tentative AMT | — |
| Regular Tax (comparison) | — |
| AMT Owed (excess over regular) | — |
| State Tax on Bargain (most states) | — |
| Total Cash Required | — |
The Alternative Minimum Tax (AMT) was designed to ensure high earners pay a minimum effective tax rate. ISO exercise-and-hold triggers AMT because the bargain element is added to AMT income but not regular income. In 2027, the AMT exemption is approximately $88,100 single / $137,000 married, phasing out at $626,350 / $1,252,700. The AMT tax rate is 26% up to $244,700, then 28%.
How the AMT Trap Works on ISOs
When you exercise an ISO and hold the shares past year-end, the bargain element (FMV minus strike, on exercise date) is added to your AMT income. Regular tax recognizes no income because ISOs are tax-free at exercise. But AMT is calculated separately, and if the tentative AMT exceeds your regular tax, you owe the difference. The shock: you owe tax in cash even though you haven't sold a share.
The AMT Sweet Spot Strategy
Calculate the maximum number of ISOs you can exercise each year before crossing the AMT threshold. Stay below the exemption phaseout ($626,350 single / $1,252,700 married joint in 2027) to preserve the full exemption. Spread exercises across multiple tax years. Always exercise in early January to maximize time before next year's AMT filing — if stock craters, you have until December 31 to sell and reverse the AMT (disqualifying disposition).
AMT Credit Carryforward
The good news: AMT paid on ISO exercise creates an AMT credit that can be recovered against future regular tax. Each year your regular tax exceeds tentative AMT, you can use credit equal to the excess. Most ISO-exercisers recover the AMT over 5-10 years. Track it on Form 8801 every year — it can be carried forward indefinitely.
Last updated May 2026. Sources: IRS Form 6251 — Alternative Minimum Tax, IRS Publication 525 — Taxable and Nontaxable Income