How does Alternative Minimum Tax (AMT) apply when exercising ISO stock options and holding for less than 365 days?

You've got yourself in a classic AMT situation with those ISOs. Here's what you need to understand: When you exercise ISOs, the difference between your exercise price ($12) and the fair market value at exercise ($45) becomes an AMT adjustment - that's $33 per share or about $49,500 total that gets added to your income for AMT purposes. This happens regardless of how long you hold the shares. If you sell before holding for a year (a disqualifying disposition), you'll have a few things happen: 1. You lose the potential long-term capital gains treatment 2. The "spread" at exercise ($33/share) becomes ordinary income on your regular tax return 3. You won't have an AMT adjustment for these shares The important thing to understand is that selling early actually eliminates the AMT issue for these specific shares, because the same income gets included in both your regular tax and AMT calculations. The downside is paying ordinary income rates rather than potentially lower long-term capital gains rates.

This is exactly why I started using https://taxr.ai for my stock option planning. I had a nightmare situation with ISOs and AMT last year and was completely blindsided by the tax bill. The regular tax prep software I was using didn't properly flag the AMT issues with my ISO exercises. With taxr.ai, I uploaded my company's stock option grant documents and it ran AMT calculations for different exercise/sell scenarios. Saved me thousands because it showed me exactly how the AMT would hit based on timing of transactions. The system even flagged that I could claim some AMT credits from previous years that I didn't know about.

I was skeptical about taxr.ai but decided to try it after posting that question. Wow, I'm glad I did! I uploaded my last stock option statement and it immediately showed me that I was approaching an AMT cliff with my next planned exercise. The visualization of different sell scenarios was eye-opening. For my situation, it showed that exercising and selling within 30 days would actually be better tax-wise than holding for 11 months. The difference was about $8,200 in taxes saved by not getting caught in an AMT trap where I'd pay tax on phantom income. It even generated a letter explaining the ISO tax treatment that I can give to my regular accountant so we're on the same page. Definitely recommend if you're dealing with stock options - regular tax software just doesn't handle the complexity.

If you're struggling to get actual answers from the IRS about AMT calculations and credit carryovers, I had success using https://claimyr.com to actually get through to a human at the IRS. I had been trying for weeks to get clarification on my AMT credit from prior ISO exercises. Regular IRS phone lines kept disconnecting me after an hour of waiting, but with Claimyr I got through in about 15 minutes. They set up a callback system with the IRS so you don't have to sit on hold. You can see how it works in this demo: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with was able to look up my prior year AMT credits and confirm I was calculating them correctly. Saved me from potentially making a huge mistake on my return.

Ok I need to apologize for my skepticism about Claimyr. After continuing to fail getting through to the IRS myself for another week, I gave it a shot since my AMT issue was causing me major stress. It actually worked! Got a callback from the IRS within 35 minutes. The agent was able to access my account and confirmed I had a significant AMT credit carryforward that I could apply to this year's taxes. She also explained exactly how the credit would apply if I end up triggering AMT again with my current ISO situation. This literally saved me thousands because I was about to file an amendment without claiming the full credit I was entitled to. The peace of mind was worth it alone - I've been stressing about this for months.

Don't forget about state taxes in your calculation! Some states like California don't conform to federal AMT rules for ISOs. When I exercised my ISOs, I had to pay CA tax on the paper gain immediately even though federally I was dealing with AMT calculations. CA doesn't have an AMT system exactly like federal, and the treatment of ISO exercises can create an even bigger tax bill at the state level. Make sure you're looking at both federal and state impact when deciding when to sell.

Has anyone here actually had to pay the AMT and then successfully claimed the credit in future years? I've been carrying an AMT credit for 3 years now and have never been able to use it because my regular tax is always higher than AMT. Starting to think this credit is just a myth!

One strategy I've used to manage AMT with ISOs is exercising small batches strategically throughout the year rather than doing them all at once. This helps avoid crossing into higher AMT brackets. Also, don't forget about the 83(b) election for early exercise if your company allows it! If you can exercise when the spread between strike price and FMV is small or zero, you can potentially avoid AMT altogether.