I enjoy it when a financial question takes me back to my technical roots, and a recent conversation about Incentive Stock Options and the Alternative Minimum Tax is one of those. The surface question — how many ISOs can I exercise this year without triggering AMT? — is straightforward arithmetic. The actual question — how should I exercise a million-plus shares over the next decade if the company keeps growing twenty-five percent a year? — is much more interesting, and it's the kind of integrated thinking the surface question never gets you to on its own. The surface question Consider a real-feeling situation. An employee at an early-stage company has accumulated roughly a million vested ISOs over several years. The current Fair Market Value (FMV) is around $1.50 per share — well above the strike price. Each share carries "bargain element," the difference between strike and FMV at the time of exercise, which is what counts for AMT. Total regular compensation is around $250,000. The household has some rental real estate that roughly breaks even. They take the standard deduction. They believe in the company and want to convert their options into stock over time. At those numbers, the AMT break-even is roughly $30,000 of bargain element per year. At an FMV of $1.50, that's about 20,000 shares before AMT kicks in. The exact figure depends on the FMV that the company reports on Form 3921 for the exercise date — that's the number that matters for AMT, not whatever value was current when you started planning. Itemized deductions can shift the calculation, but many of them are disallowed for AMT purposes, so the standard-deduction case is often close to the right answer. That sounds like a clean answer to the question that was asked. It isn't. The real question At 20,000 shares per year, a million-share position takes fifty years to convert. That's not a workable plan. The real question isn't whether to incur AMT — for any successful company with substantial bargain element, AMT is going to happen sooner or later. The real question is when, [...]