How to Exercise Just Enough Options Each Year to Avoid AMT
Qualified Incentive Stock Options (ISOs) are not subject to ordinary income tax when exercised but are subject to Alternative Minimum Tax. Each year there is an AMT Exemption amount
The basic idea is to set up your tax program to calculate your likely taxes for this year except indicate that you only exercised one share. You'll need to know the current Fair Market Value (FMV) of your shares in order for the software to calculate your tax impact. Then go back and change that 1 share to 2 shares and see if your tax increases. If not, then you aren't subject to AMT at all. If it goes up right away, then you are subject to AMT based on your base income regardless of how many shares you exercise. But if not, then gradually increase the number of shares you exercise until your taxes due/refund finally changes. That will be the threshold where you first trip AMT, so you can exercise up to that many of your ISO shares without tax consequences and thereby get a head start on your eligibility for long term capital gains treatment. You also have the benefit of avoiding larger amounts of AMT that would otherwise be due if you were to exercise these shares later on when the current FMV of your shares is higher. You can estimate your AMT impact using our AMT calculator.
How to Calculate How Many ISOs You Can Exercise Without Owing AMT
Unfortunately, it is not quite as simple as "if your ISO spread is lower than the AMT Exemption, you don't owe AMT". The IRS compares two numbers, your regular income tax and your Alternative Minimum Tax (AMT), and whichever is higher becomes your tax bill. The AMT exemption only factors into the AMT side of the equation.
To estimate how many ISOs you can exercise without triggering AMT, start by calculating your base taxes before including any ISO spread.
Here are the steps:
- Add up your income for the year (including any NSO exercise spread).
- Calculate your standard income tax after the standard deduction (2025: $15,000 single / $30,000 joint). Tax software like TurboTax makes this easy.
- Calculate your AMT = (Income – AMT exemption) × AMT rate (26% or 28%). 2025 exemptions: $88,100 single / $137,000 joint.
- Subtract AMT (3) from regular tax (2) to find your “cushion” aka how much room you have before AMT overtakes.
- Divide that cushion (4) by the AMT rate (0.26 or 0.28). This equal the maximum ISO spread you can add without triggering AMT.
You can also run this in tax software like TurboTax or with our AMT Calculator by adjusting the number of ISOs exercised until the AMT equals $0 (on our tool) or until your tax bill matches the no-ISO baseline (TurboTax).
For the latest official AMT exemption amounts and details, see the IRS Inflation Adjustments page.
Example
- Income: $100,000 income.
- Regular Tax: $100,000 - $15,000 standard deduction for single filers = $85,000 taxable income -> ~$13,600 regular tax (see federal income tax brackets here)
- AMT: $100,000 - $88,100 AMT exemption = $11,900 AMTI -> ~$3,000 of AMT at 26%.
- Cushion: $13,600 - $3,000 = $10,600
- Max ISO Spread: $10,600 / 0.26 = $40,800
So, a single filer with $100,000 of income in 2025 could exercise up to $40,800 of ISO spread without triggering AMT. For example, exercising 10,000 ISOs at a $1 strike when the FMV is $5 ($40,000 spread) would fit under this limit.
Disclaimer: These calculations are estimates for educational purposes only. The actual outcome can vary based on your full tax profile, deductions, credits, state taxes, and whether you are subject to the 26% or 28% AMT bracket. Always consult with a qualified CPA or tax advisor before making exercise decisions.
Things to consider
Company Updates
Knowing when your company last updated its 409A valuation (FMV) is key. Two major events trigger a new valuation:
- A material event such as a funding round or M&A
- 12 months since the last valuation
Most startups refresh FMV annually, while later-stage companies may update more often (sometimes quarterly). If you expect FMV to rise, exercising sooner can let you lock in a lower spread and fit more ISOs under the AMT exemption.
Personal Income
AMT is the higher of your regular tax or AMT calculation. If your regular income is higher in a given year, the cushion before AMT kicks in is larger. This means exercising ISOs during a high-income year can sometimes reduce or eliminate AMT.
If you hold NSOs as well (via a grant or the $100k ISO limit), exercising them can raise your regular tax and further reduce AMT exposure, since NSO spread is taxed as ordinary income.
IRS Updates
The IRS adjusts AMT exemption amounts each year for inflation, so your “just enough” cushion changes annually.
Starting in 2026, the One Big Beautiful Bill (OBBB) makes two important adjustments:
- Exemptions stay high: Tax Cuts and Jobs Act (TCJA)of 2017 level exemptions are now permanent, still indexed for inflation.
- Phase-out starts sooner: Thresholds drop to $500K (single) / $1M (joint).
- Phase-out hits harder: Rate doubles from 25% to 50%, meaning higher earners lose the exemption
Note: Exemption dollar amounts are inflation-indexed; confirm the latest IRS figures for the current year.
Next Steps
Exercising “just enough” ISOs each year can minimize your AMT exposure, start the long-term capital gains clock, and spread your risk more effectively.
If the cost or risk of exercising feels out of reach, ESO Fund can provide non-recourse funding for your options and related taxes. If the shares don’t pan out, we absorb the loss, not you. For more ways to reduce stock option tax costs, see our guide to saving on stock option taxes.
Written by Jordan Long, Marketing Lead at ESO Fund
