I enjoy it when my financial work takes me back to my technical roots, and that happened recently with a conversation about Incentive Stock Options and the Alternative Minimum Tax. This particular conversation was interesting because it started with a fairly simple short-term tax question but unfolded into meatier strategic issues.

The first question

The initial question was, “How many ISOs can I exercise this year without triggering AMT?”

Josh (not his real name) worked at a tech company and had accumulated about 500,000 vested ISOs (not his real details). His strike price was $0.25, and the Fair Market Value of the company’s stock was $2.25 per share (which is based on the FMV reported on the company’s Form 3921 at time of exercise).

For AMT calculations, the key consideration is the “bargain element,” which is the difference between the strike price and the FMV. Josh’s bargain element was $2.00 per share.

Based on Josh’s regular income, investment income, and deductions, he could incur about $50,000 in bargain element per year without incurring AMT.

With these parameters, he could exercise 25,000 ISO shares and still stay below the AMT threshold. ($50,000 / $2.00 = 25,000 shares).

That sounds like a clear answer to Josh’s question—and it is—but he should have been asking a different question.

The better questions

At 25,000 shares per year, a 500,000-share position will take 20 years to convert, which is not a workable plan.

The question is not whether to incur AMT. Anyone with a substantial, low-basis position in a growing company will eventually incur AMT. The better question is, What is the best strategy for incurring AMT?

There are five key considerations.

#1 – Consider how much the bargain element is growing each year

Bargain element today is not necessarily the same as bargain element in the future, and in a growing company the tax problem can grow larger over time.

In Josh’s case, his company’s stock price had been increasing 25%/year for several years. When we had our conversation in 2026, Josh’s total bargain element was $1,000,000 ($2.00 bargain element per share * 500,000 shares).

If Josh waited three years to convert his ISOs, at 25% annual growth rate, the FMV of the shares would increase to $4.39, which increases Josh’s bargain element per-share to $4.14 and his total bargain element to about $2.1 million.

The question of whether it would be better to incur AMT on $1 million today or $2.1 million a few years from now doesn’t necessarily have one right answer, but it’s an important question to ask.

#2 – Weigh how strongly you believe in the company

ISOs are only worth exercising if you believe that the stock is either currently worth more than your strike price or is likely to rise to a level that will be worth more than your strike price.

If you’re lukewarm about the company’s prospects, the AMT optimization problem dissolves. You either don’t exercise your ISOs, or your exercise the amount that allows you to avoid AMT.

The conviction question takes precedence: No amount of AMT planning can rescue a position you shouldn’t be holding at all.

On the other hand, if you believe strongly in the company the math can tilt you toward accelerating ISO exercises while the bargain element is comparatively low.

#3 – Watch the AMTI threshold cliff

This requires understanding some basics of AMT and AMTI (alternative minimum taxable income):

• AMT applies tax rates of 26% and 28% based on your AMTI.
• Taxpayers get exemptions from AMT of about $90,000 for single filers, $140,000 for married filing jointly (MFJ).
• The exemptions begin to phase out when AMTI passes $500,000/$1,000,000 Single/MFJ.
• The phase-out rate as of 2026 is $0.50 per $1.00 over the phase-out threshold.

While you’re in the phase-out zone, the effective marginal AMT rate increases to 39% or higher because it’s effectively 50% more than the 26% or 28% base rate.

Consequently, it can be sensible to convert ISOs up to the phase-out threshold and pay the 26% or 28% AMT rate but avoid pushing past the threshold where you’d be paying 39% or more.

#4 – Consider how much AMT you will recover in future years

The excess of AMT over regular tax each year generates a Minimum Tax Credit (MTC) that can be applied in future years when regular tax exceeds AMT.

If you pay $50,000 in AMT in 2026 because of an ISO exercise, you can, in principle, recover some or all of that against regular tax in subsequent years when your AMTI is lower. Under current law, that credit never expires.

Of course, for that to work you will need future years where your regular tax exceeds your AMT, which might or might not ever happen. Strategizing about that depends on knowing the specific tax circumstances of your household. Usually, it’s reasonable to plan for some amount of recovery. And, importantly, the smaller your AMT hit is (e.g., $1,000,000 vs. $2,100,000), the better the chance that you fully recover it, eventually.

#5 – Plan exercise timing within the year

For a private company that recomputes FMV quarterly, the FMV used for bargain-element calculation depends on when you exercise, not on the year-end value. If the FMV is consistently rising, exercising early in the year will produce a lower bargain element than exercising the same shares later in the year. For someone exercising thousands of shares in a fast-growing company, the difference between a Q1 and a Q4 exercise can be material.

How all this adds up

As I said earlier, I enjoy it when financial work takes me back to my software roots, and this question took me back to my roots in more ways than one. In addition to stock options, this discussion also touched on the importance of managing complexity.

None of the individual pieces of exercising ISOs is tremendously complex on its own, but the interactions add up, and the cumulative result can be quite complex—especially when forecasting the results across future tax years.

In a typical case, that forecast will need to include:

• Regular income tax and AMT tax rules
• Strike price, current FMV, current income, current tax circumstances
• Company growth rate
• Personal income growth rate
• Possible change in tax-filing status (e.g., change from single to MFJ)
• Availability of free cash to pay exercise price and excess taxes
• Total bargain element and AMT exposure in current circumstances
• Change in bargain element and AMT exposure in future years
• Assessment of AMT recovery percentage and timeline

I like this kind of question. It’s a multi-year optimization problem with several interacting variables, cash-flow consequences, and real long-term financial consequences.

If you’re carrying substantial ISO holdings and your current advisor has answered the current-year question without walking you through all the implications of a multi-year strategy, that gap could be worth a conversation.

This article describes general principles, not specific advice. AMT calculations are sensitive to the details of each household’s situation and to current tax law, both of which are subject to change. Anyone considering an ISO exercise strategy should work through the numbers with a qualified tax professional and a financial advisor who can model the multi-year consequences.