Alternative Minimum Tax (AMT)
What is AMT tax?
The Alternative Minimum Tax (AMT) can applies to current and former employees of privately held companies when they exercise their incentive stock options (ISOs). If the fair market value is higher than the strike price the spread between the two values is treated as taxable gain. This can have a significant cash impact on those who exercise their ISOs.
The purpose of AMT is to ensure higher income taxpayers pay their fair share of taxes despite certain preferential deductions that may be available. The three main triggers are having high household income with a significant number of deductions, realizing a large capital gain, or most commonly exercising stock options, specifically ISOs. Exercising ISOs causes taxation if there is a significant on-paper gain aka (FMV - Strike Price) * Total ISOs Exercised.
How does AMT work?
The basics:
Alternative Minimum Tax per its name sets a minimum level of taxation that people must pay. To determine if you owe AMT, you must calculate your taxes 2 ways:
- Regular federal income tax – Based on your income, tax bracket, and filing status, excluding any ISO exercises.
- AMT calculation – This includes your income plus the ISO spread (i.e., (FMV – Strike Price) × ISOs Exercised). This total is known as Alternative Minimum Taxable Income (AMTI). After applying an AMT exemption, the result is taxed at either 26% or 28%, depending on income level.
The IRS then compares both methods and requires you to pay whichever is higher.
Learn how the IRS defines and calculates AMT ->
AMT Exemptions
The 2025 AMT Exemptions are as follows: $88,100 for single filers and $137,000 for married filers. This is the amount your subtract from your AMTI when calculating AMT.
What these exemptions mean for the year 2025 is that if the spread from your ISO exercise is less than $88,100 for individuals (or $137,000 for married filing jointly), you may not owe any AMT.
AMT Rates
The Federal AMT rate is 26% or 28% depending on where your AMT income level falls (26% if below $239,100 or 28% if above). The income calculation includes normal income plus any ISO exercise gain minus the exemption amount. This creates your adjusted gross income (AGI). State rates vary, but most states have none. California for example has a rate of 7%. Other states that have AMT rates are: Iowa (7%),Minnesota (5.8%), and Colorado (3.47%).
AMT Phaseout Thresholds
A less important factor in AMT is the phase out thresholds. The exemptions mentioned above are only available to lower income filers. Anyone above the phaseout threshold lose 25 cents of exemption for every dollar they exceed the threshold level. In 2025, those levels are $609,650 for single filers and $1,218,700 for married filers. For most people, the phaseout threshold does not come into play.
OBBB Changes to AMT (Effective 2026)
The One Big, Beautiful Bill (OBBB) made several permanent changes to the Alternative Minimum Tax.
- Exemptions stay high: The higher exemption levels from the 2017 TCJA are now permanent and continue to adjust annually for inflation.
- Phase-out starts sooner: Beginning in 2026, exemptions start phasing out at $500K (single) and $1M (joint).
- Phase-out hits harder: The phase-out rate doubles from 25% to 50%, meaning higher earners lose the exemption more quickly.
These changes are positive for most employees exercising ISOs, since the higher exemption levels are locked in. But for high earners, the lowered thresholds and faster phase-out may trigger AMT sooner.
Note: Exemption dollar amounts are indexed for inflation; check the latest IRS figures for your filing year.
How to Calculate Alternative Minimum Tax (AMT):
The easiest way to calculate AMT is to use ESO Fund's AMT Calculator!
If you want to calculate AMT on your own here is how: First calculate your taxes without the ISO exercise. You can use a tax software program such as Turbo Tax for free as long as you don't file the return. If you use Turbo Tax, there will be a question similar to, "Did you exercise and hold Incentive Stock Options During the Tax Year?" You should answer "No" to this question for now. Now take the following steps:
- Note your total tax amount $ for both state and federal. This is your baseline tax aka Regular Federal Income Tax.
- Now enter an ISO exercise by going back to the question where you initially said No. This time say Yes.
- Enter the number of shares, strike price, and Fair Market Value at the time of the exercise. Normally, you would be entering this information from IRS Form 3921 which your company would have sent you in January of the year following your exercise.
- Upon submitting the ISO exercise event, your total taxes for both Federal and State should immediately update.
- The difference, if any, between this updated tax figure and your baseline taxes noted earlier (1) is the AMT tax associated with your ISO exercise.
To calculate how many ISOs you can exercise each year without triggering AMT tax, enter a smaller number of shares in (3) and gradually increase it until your tax due actually increases over the baseline calculation.
Note that tax rates can change between the time you do this exercise and the time you actually file your return. Moreover, many other factors such as deductions, your tax bracket, state income taxes, and capital gains will also impact your final AMT tax calculation. Since ESO Fund has no way of knowing how your final taxes will look, you are advised to work with a tax professional to minimize your risk of not having sufficient funds when you finally file your tax return. ESO Fund is not obligated to increase its funding to you at a later date.
Disqualifying Disposition
If you exercise and sell ISOs in the same tax year, this is called a Disqualifying Disposition. In this case you no longer owe any AMT on the ISOs sold, but only pay income tax on the sale sale process minus your cost to exercise. This eliminates any double taxation for sales that occur in the same calendar year as the option exercise.
AMT Credits and Double Taxation
But what if you hold the shares longer than 1 year and sell them, are you double taxed?
The answer is no, but with a catch. It is true that when you finally sell shares that were formerly ISOs, you pay either Income Tax or Long-Term Capital Gains on the difference between the sale price and your strike price. Since you have already paid AMT on the difference between your strike price and the FMV at exercise, you are technically being taxed twice on that portion of the income. The way to recoup this double taxation is through the AMT Credit process.
Simply put, you can recoup a certain amount of AMT each tax year, assuming you don't owe additional AMT for that year. See the link above for more on the AMT Credit process.
Letting ESO Fund cover the Exercise and Taxes
Since the cost of exercising stock options is already very high, the addition of taxes makes the entire investment even more risky. A solution for reducing this risk is obtaining funding from ESO Fund to cover theentire cost of exercising your stock options, including the tax. You retain unlimited upside potential without risking any of your personal capital. If you exercised your ISO stock options earlier this year and are concerned with the tax burden next year, then ESO is an ideal solution since we can provide money for the AMT and even reimburse your exercise costs..
You retain title to the stock in an ESO Fund transaction. Since you don't have to transfer the stock or pledge it as collateral, this greatly simplifies the paperwork needed to obtain funding from ESO Fund. You also retain the ability to payoff ESO Fundat any time before the company exits. For more information on reducing stock option taxes or regarding how ESO Fund can benefit you, please contact us below.
For help funding exercise related taxes, check out how ESO Fund can cover your taxes risk-free.
Written by Jordan Long, Marketing Lead at ESO Fund
