How does AMT work when exercising ISOs and holding shares for less than 365 days?

The AMT treatment for ISOs can definitely be confusing! Here's what happens in your situation: When you exercise ISOs, the difference between your exercise price ($8.50) and the fair market value ($32) is considered a "preference item" for AMT purposes. This means that while this spread ($23.50 per share) isn't taxed for regular income tax purposes upon exercise, it IS included in your AMT income calculation. If you sell the shares within 365 days of exercise (a "disqualifying disposition"), you actually simplify your tax situation somewhat. The sale means you don't get the special ISO tax treatment (potential long-term capital gains), but it also means you typically won't have to pay AMT on those shares because the regular income tax and AMT systems essentially align once you've made a disqualifying disposition. The tricky part is timing - if you exercise in 2025 but don't sell until 2026 (but still within 365 days), you could trigger AMT in 2025 and then have regular income in 2026. This creates a potential AMT credit situation, but it's not always a perfect wash.

I went through this exact same confusion with my ISOs last year! After struggling to make sense of all the AMT calculations and timing considerations, I stumbled across https://taxr.ai which literally saved me thousands in potential tax mistakes. Their tool analyzed my ISO exercise scenarios and showed me exactly how the AMT would impact me in different exercise-and-sell timelines. The best part was it clearly showed the tax implications for holding periods under 365 days versus qualifying dispositions. I was able to run multiple scenarios with my specific numbers to find the optimal strategy. What I really appreciated was that it explained exactly which portion of my potential ISO exercise would trigger AMT and how much tax I'd actually owe rather than just giving generic advice. Much clearer than the confusing spreadsheets I was trying to build myself!

Just wanted to follow up after trying https://taxr.ai for my ISO situation. I was skeptical at first but decided to give it a shot after the conflicting advice from my tax guy. The analysis was eye-opening! It showed me that in my specific situation, exercising and selling within the same tax year would actually be more beneficial than holding for the long-term capital gains treatment. The AMT hit would have been significant if I had exercised and held across tax years. The tool gave me a detailed breakdown of exactly how much AMT I would owe under different scenarios, including the "exercise now, sell in 8 months" approach I was considering. The specific AMT credit calculations were what my tax advisor was missing. Definitely saved me from making a costly timing mistake with my ISOs!

After spending WEEKS trying to get through to the IRS about AMT treatment for my ISOs last year (their published guidance is so confusing!), I finally used https://claimyr.com to actually speak with someone at the IRS. You can see how it works here: https://youtu.be/_kiP6q8DX5c I had specific questions about Form 6251 calculations for ISOs with different holding periods, and needed clarification directly from the IRS. Claimyr got me through to an actual IRS representative in about 20 minutes when I had previously been hanging on hold for hours only to get disconnected. The IRS agent I spoke with provided the exact guidance I needed on how the AMT adjustment works for ISOs held less than 365 days and how to properly document everything on my return. Completely worth it instead of guessing or relying on possibly outdated information online.

I want to follow up on my skeptical comment about Claimyr. I decided to try it because I needed specific clarification about AMT credits after a disqualifying disposition of ISOs. I'm honestly surprised to report it actually worked exactly as advertised. I got connected to an IRS tax law specialist in about 25 minutes without having to sit on hold myself. The agent walked me through exactly how to calculate my AMT adjustment for my specific ISO situation and how the credits work if I sell within a year. What was most valuable was getting confirmation about how to document everything on Form 8949 and Form 6251 for a disqualifying disposition. Saved me a ton of confusion and probably an amendment later. Didn't think I'd be saying this, but it was definitely worthwhile.

Don't forget about the state tax implications too! Depending on your state, you might have different AMT rules. For example, California has its own AMT system that doesn't perfectly match the federal one. In my experience with ISOs, the best approach for shares held less than 365 days was to coordinate the exercise and sale in the same tax year when possible. This eliminated most AMT complications. The worst situation is exercising in December and selling in January - that's where you can get hit with AMT without the offsetting income until the following year.

Has anyone actually disputed the AMT forms with the IRS? I exercised ISOs last year, held for 8 months, then sold. I didn't report any AMT adjustment on Form 6251 since I figured the disqualifying disposition meant I just pay ordinary income tax on the gain. My accountant agreed with this approach. The IRS hasn't questioned it so far but I'm still nervous about it.

Just want to add some clarity on the AMT credit situation since it seems like there's some confusion in the thread. When you exercise ISOs and trigger AMT, you do get AMT credits that can be used in future years - but these credits can only offset regular tax liability, not AMT liability in future years. The key thing to understand is that AMT credits are essentially a way to recover the "prepayment" you made through AMT. However, you can only use these credits when your regular tax exceeds your AMT in future years, and only up to the difference between the two. For Anna's situation with $58,750 of potential AMT income ($23.50 spread × 2,500 shares), the actual AMT impact depends on her total income, deductions, and other AMT adjustments. The AMT exemption for 2025 is $85,700 for single filers, so if this ISO exercise is her only major AMT adjustment, she might not even trigger AMT. My recommendation would be to model this out with actual numbers including your other income sources. The exercise-and-sell-same-year strategy that others have mentioned really is the cleanest approach if you don't need to hold for the long-term capital gains treatment.