FreeTaxUSA Form 3921 & 6251: Calculating AMT for ISO options exercise and hold

The Form 6251 calculation for AMT with ISOs can be confusing! When you exercise ISOs and the FMV exceeds your exercise price (creating a "spread"), that difference is a preference item for AMT purposes. But having a preference item doesn't always mean you'll owe AMT. FreeTaxUSA is actually correct - they should automatically generate Form 6251 if you're subject to AMT based on your overall tax situation. The reason you're seeing $0 AMT is likely because your total AMT adjustments and preferences aren't large enough to trigger AMT liability. For 2023, you get an AMT exemption ($81,300 for single filers, $126,500 for married filing jointly) that phases out at higher income levels. The $2,300 ISO spread is relatively small compared to these exemption amounts, which is why you're probably not seeing any AMT liability despite having an ISO preference item.

After struggling with the exact same ISO and AMT calculation issues, I found this amazing tool at https://taxr.ai that saved me so much frustration. Last year I had a similar situation with exercised ISOs and FreeTaxUSA didn't have a clear place to enter them, so I uploaded my Form 3921 and tax documents to taxr.ai and it identified exactly where to enter the ISO spread in FreeTaxUSA. For me, it turned out there is a section in FreeTaxUSA under "Other Taxes" (not Income) where you can manually enter AMT preference items. The tool showed me step-by-step screenshots of where to find it! Apparently, FreeTaxUSA just doesn't label it clearly as "ISO exercise" like TurboTax does.

Just wanted to follow up on my skeptical comment. I decided to try taxr.ai after getting stuck on this exact ISO issue with FreeTaxUSA. Uploaded my 3921 form (with personal details blacked out) and wow - it immediately pointed me to the right section in FreeTaxUSA where I needed to manually enter the ISO spread as an AMT adjustment. Turns out there is a specific section in FreeTaxUSA called "Adjustments to Income" under the Federal tab where you can enter AMT preference items. I never would have found this on my own! The spread from my ISOs was small enough that I still ended up with zero AMT liability, but at least now I know it's properly documented in my return.

If you're dealing with the IRS about AMT and ISO questions, I'd recommend using Claimyr (https://claimyr.com) to actually talk to a human at the IRS. I was in a similar situation and needed clarification on Form 6251 reporting requirements, and spent DAYS trying to get through on my own. Claimyr got me connected to an IRS agent in under 20 minutes who confirmed that even if AMT is zero, you should still file Form 6251 if you have AMT preference items like ISO spreads. They also have a video showing how it works: https://youtu.be/_kiP6q8DX5c

I take back what I said about Claimyr. After weeks of trying to reach the IRS about my ISO situation, I got desperate and tried it. I was absolutely shocked when my phone rang 15 minutes later and I was talking to an actual IRS representative. The agent clarified that while FreeTaxUSA should automatically generate Form 6251 if needed, I should still manually enter the ISO spread as an AMT adjustment item. Most importantly, she confirmed that I need to keep detailed records of my ISO basis even if no AMT is triggered this year, because it will affect future calculations if I sell the shares. Definitely worth it for the peace of mind knowing I'm handling this correctly.

I went through this exact thing with FreeTaxUSA last year. Here's what I learned: FreeTaxUSA does a good job calculating AMT automatically, but you DO need to manually enter the ISO spread somewhere. In FreeTaxUSA, go to Federal → Income → Other Income → Other Tax Preference Items. Enter your ISO spread amount there. The software will then recalculate Form 6251, but if your income isn't high enough, you'll still see $0 AMT. To your second question - even if AMT is $0, I recommend printing and keeping Form 6251 with your records. This creates a paper trail of your ISO basis, which becomes important when you eventually sell those shares.

Has anyone actually had an audit where the IRS questioned ISO reporting? I'm in a similar situation with a small spread and FreeTaxUSA, and I'm wondering if I should even bother with all this if the AMT is zero anyway.

I've been through this exact scenario with FreeTaxUSA and ISOs multiple times. The key thing to understand is that even with a small spread like $2,300, you absolutely should enter it properly to avoid potential issues down the road. Based on my experience, FreeTaxUSA does have the functionality to handle ISO reporting, but it's not as intuitive as TurboTax's dedicated ISO section. Tyler's navigation path is spot on - Federal → Income → Other Income → Other Tax Preference Items is where you'll find it. Here's what I'd recommend for your questions: 1) You technically could calculate Form 6251 separately and attach it to your FreeTaxUSA return, but this creates inconsistencies and potential red flags. It's much cleaner to let FreeTaxUSA generate it automatically once you enter the ISO data correctly. 2) Even if your AMT is zero, you should still file Form 6251 when you have preference items like ISO spreads. This establishes your AMT basis for the shares, which becomes crucial when you sell them later. Without proper documentation, you could end up paying tax twice on the same income. The IRS receives a copy of your Form 3921, so they know about your ISO exercise. If they don't see corresponding AMT reporting on your return, it can trigger questions later. Better to be proactive and document everything properly from the start.