Stepwise.

ISO Exercise & AMT Calculator

Estimate the cash cost of exercising incentive stock options in 2026, including the alternative minimum tax triggered by the bargain element on shares you have not sold.

How to use this calculator

  1. 1Enter how many options you plan to exercise, your strike price, and the current fair market value per share — the 409A valuation if the company is private.
  2. 2Enter your other income for the year, since the AMT exemption phases out as income rises.
  3. 3Check the cash figure: it is the exercise cost plus the AMT, and both must be paid in actual money.
  4. 4If AMT is triggered, look at the zero-AMT share count — exercising up to that line each year is how large grants are usually moved without ever paying it.

How the calculation works

AMTI = regular taxable income + standard deduction + bargain element. Exemption = base − 50% × (AMTI − threshold). AMT owed = max(0, 26%/28% × (AMTI − exemption) − regular tax)
bargain element
Shares × (share value at exercise − strike price). Income for AMT purposes only
exemption
The AMT exemption for your filing status, reduced as income rises
26%/28%
AMT is 26% on the first $244,500 of excess AMTI in 2026 and 28% above it

The bargain element is added to income for the AMT calculation only. Regular taxable income is unchanged by an ISO exercise, which is exactly why the resulting bill is such a shock — nothing on a payslip or W-2 reflects it.

The One Big Beautiful Bill Act restored the exemption phase-out to 50 cents per dollar of AMTI above the threshold for 2026, up from 25 cents. The exemption disappears twice as fast as it did in recent years, so AMT exposure at high incomes is materially greater than in 2024 or 2025.

AMT paid on an ISO exercise generally creates a minimum tax credit that can be recovered in later years when the shares are sold. It is a timing cost rather than a permanent one — but the cash is required now, and recovery can take years.

Worked example

10,000 options at $2, now worth $20

  1. 1.Exercising costs 10,000 × $2 = $20,000 in cash.
  2. 2.The bargain element is 10,000 × ($20 − $2) = $180,000, which is added to income for AMT purposes only.
  3. 3.That $180,000 pushes tentative minimum tax above regular tax, and the difference is AMT owed with the return.
  4. 4.No shares have been sold and no cash received — the tax is due on a paper gain.

Result: A large AMT bill on top of the $20,000 exercise cost

Staying under the AMT line

  1. 1.Exercising only 2,000 options costs $4,000 and creates a $36,000 bargain element.
  2. 2.That is small enough that tentative minimum tax stays below regular tax, so no AMT is triggered.
  3. 3.Repeating this each year moves the whole grant over time without ever paying AMT — the standard approach for a large position.

Result: No AMT at all, for $4,000 of exercise cost

Why an ISO exercise can cost money you never received

Incentive stock options carry a genuine tax advantage: exercising them creates no ordinary income, and if the shares are held long enough the entire gain is taxed at long-term capital gains rates rather than as wages. That advantage is real and can be worth a great deal.

The catch is the alternative minimum tax. The AMT is a parallel calculation that disallows certain benefits and adds back certain items, and one of the items it adds back is the bargain element on an ISO exercise — the difference between what you paid and what the shares were worth on the day you exercised. For regular tax purposes that gain does not exist until you sell. For AMT purposes it is income the moment you exercise.

The consequence is a cash tax bill on a gain that is entirely on paper. If the company is private the shares usually cannot be sold to fund it. People have exercised options, received a substantial AMT bill, watched the company's valuation fall, and been left owing tax calculated on a value that no longer existed. This is the single most damaging mistake in equity compensation, and it is entirely avoidable by calculating first.

What changed for 2026

The One Big Beautiful Bill Act made a change to the AMT that is easy to miss and materially increases exposure for exactly the people who exercise ISOs.

The exemption itself rose — $90,100 for a single filer and $140,200 for a married couple filing jointly. But the rate at which that exemption is withdrawn as income rises was restored to 50 cents per dollar, double the 25 cents that applied under the Tax Cuts and Jobs Act. A single filer with AMTI of $700,000 now loses $100,000 of exemption where previously they would have lost $50,000. The exemption disappears entirely far sooner, and the effective marginal AMT rate in the phase-out band is considerably higher than the headline 26% or 28%.

Anyone whose ISO plan was modelled on 2024 or 2025 figures should recompute before exercising.

Strategies that actually reduce the bill

AMT on ISOs is highly controllable, because you choose when and how much to exercise. Four approaches are standard.

  • Exercise up to the AMT line — there is a quantity each year that keeps tentative minimum tax below regular tax, and therefore triggers no AMT at all. Exercising that amount annually moves a large grant across several years at zero AMT cost. This calculator reports that number directly.
  • Exercise early, when the spread is small — the bargain element is the entire problem, and it grows as the company's valuation rises. Exercising shortly after a grant or a new 409A valuation, while strike and fair market value are close, can create almost no AMT.
  • Exercise in January — this gives a full year to watch the share price before the tax is due. If the value collapses within the same calendar year, a disqualifying disposition — selling before the holding period completes — removes the AMT item entirely, converting the transaction to ordinary income on the actual, smaller gain.
  • Plan to recover the credit — AMT paid on an exercise generally becomes a minimum tax credit usable in later years when regular tax exceeds tentative minimum tax. It is a timing cost rather than a permanent one — but it can take many years to recover, and it must be funded in cash now.

The holding periods that make ISOs worth it

The tax advantage of an ISO only materialises if two holding periods are both satisfied: the shares must be held more than one year from the exercise date, and more than two years from the grant date. Meet both, and the entire gain from strike price to sale price is long-term capital gain.

Fail either — by selling too early — and the transaction becomes a disqualifying disposition. The bargain element is then taxed as ordinary income rather than sitting in the AMT calculation, and any further gain is short-term. That is worse from a rate perspective, but it is not always the wrong answer: selling in the same calendar year as the exercise eliminates the AMT problem entirely, and for someone facing a large AMT bill on illiquid private shares, certainty can be worth more than the rate advantage.

What this assumes, and where it stops

Assumptions

  • The 2026 federal schedule and AMT parameters apply, with the standard deduction added back for AMT as the rules require.
  • The only AMT preference item is the ISO bargain element. Other adjustments — private activity bond interest, depletion, certain depreciation — are not modelled.
  • Regular taxable income is derived from the income entered and the standard deduction, without itemising.
  • No shares are sold in the same year, so the exercise is not a disqualifying disposition.

Limitations

  • State AMT is not included. California in particular operates its own AMT and can add substantially to the federal figure.
  • The minimum tax credit recoverable in later years is not projected — only the cash cost this year is shown.
  • Itemised deductions, other AMT adjustments, credits and multiple equity events in one year will all move the real figure.
  • This is a planning estimate, not tax advice. An ISO exercise of any size is worth modelling with a qualified tax professional before it is executed, because it cannot be undone.

Common questions

Why do I owe tax when I have not sold anything?

Because the alternative minimum tax treats the bargain element — the gap between your strike price and the share value at exercise — as income in the year you exercise, even though no shares were sold and no cash was received. Regular income tax does not, which is why nothing appears on your W-2 and nothing is withheld. The AMT bill arrives with your return and must be paid in cash, which is exactly why it catches people holding illiquid private-company shares.

How many options can I exercise without triggering AMT?

There is a specific quantity each year, and this calculator reports it. It is the number of options whose combined bargain element keeps your tentative minimum tax just below your regular tax. Exercising up to that line annually, over several years, is the standard way to move a large grant without ever paying AMT. The number depends on your other income, so it changes each year and is worth recalculating.

Do I get the AMT money back?

Usually, eventually. AMT paid on an ISO exercise generally creates a minimum tax credit that offsets regular tax in future years when your regular tax exceeds your tentative minimum tax. In that sense it is a timing cost rather than a permanent one. But recovery can take many years, it depends on your future tax position, and none of that helps with the immediate problem — the cash has to be found now.

What happens if the share price crashes after I exercise?

The AMT is calculated on the value at the exercise date, so a later fall does not reduce it — this is what ruined people in past market crashes. There is one important escape: if you sell the shares in the same calendar year as the exercise, it becomes a disqualifying disposition and the AMT preference item disappears, replaced by ordinary income on the actual gain realised. Exercising early in the year deliberately preserves that option.

Sources

Formula and content last reviewed on .

Results are estimates for information only, not professional advice.

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