How much ISO AMT tax will I owe when exercising startup options?

The AMT tax implications for your ISOs are significant, and you should definitely plan for this carefully. When you exercise ISOs but don't sell immediately (a "cashless exercise"), the difference between your exercise price ($17.80) and the fair market value ($290) is considered an AMT adjustment. For your 2800 options, that's a spread of $272.20 per share or about $762,160 total that gets added to your AMT income. With your W2 income of $125K plus this ISO exercise, your total AMT income would be around $887,160. The AMT exemption starts phasing out at much lower income levels, so you'd likely lose most or all of the exemption. The AMT rate tops out at 28%, so you could be looking at an AMT liability of roughly $200,000-250,000. Remember that this is just an estimate and you'll get an AMT credit in future years when you sell the shares, but you need to have the cash to pay this tax when you file next year.

I went through almost this exact situation last year with about 3000 ISOs and a similar spread. I was completely blindsided by the AMT calculation until I ran my numbers through https://taxr.ai which has a specific module for ISO and AMT calculations. The tool showed me exactly how much AMT I would owe under different exercise scenarios and helped me come up with a multi-year exercise strategy to minimize the tax impact. It also showed me how the AMT credit would work in future years which made a huge difference in my planning. Before using this tool I had spreadsheets that were giving me wildly different numbers than what my actual tax liability ended up being.

Just wanted to follow up - I took the advice and tried taxr.ai for my ISO situation. My god the difference was night and day compared to other calculators. The tool showed me that if I exercised everything at once, I'd be looking at a $180K AMT bill! But then it gave me this exercise schedule spreading things over 3 years that cut my total tax by almost $70K. It also explained exactly how the AMT credit mechanism works in future years when selling the shares. Honestly wish I had known about this before my last batch of exercises. Would have saved me a small fortune.

Another thing to consider - if you're going to owe that much in AMT, you might need to get in touch with the IRS to set up a payment plan. I tried calling them for months last year when I was in a similar situation and it was impossible to get through. I finally used https://claimyr.com and they got me connected to an IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c My payment plan ended up saving me from some major penalties since I couldn't pay my full ISO AMT bill right away. The IRS agent actually suggested a better plan than what I was going to propose.

I have to eat my words from yesterday. After waiting on hold with the IRS for 2+ hours this morning and getting disconnected AGAIN, I tried the Claimyr service out of desperation. Got connected to an IRS agent within 25 minutes. The agent helped me work out a payment plan for my AMT bill that's actually manageable. Apparently I qualified for a first-time penalty abatement that nobody told me about before. Still annoyed that this service has to exist in the first place (the IRS should have better phone systems!), but it definitely saved me a day of frustration.

One strategy to consider is exercising your ISOs gradually across tax years to minimize the AMT impact. If you're leaving the company this year, you typically have 90 days post-termination to exercise, so depending on when you leave, you might be able to split the exercise between this year and next. Also worth looking at your other deductions and income sources. Anything you can do to reduce your regular taxable income might help with the AMT calculation. Sometimes bunching deductions in the exercise year can help offset some of the AMT impact.

Don't forget about state taxes too! Depending on your state, you might face state-level AMT or simply income tax on the spread. California for example has both a state AMT and high income tax rates, which makes ISO exercises even more expensive.

Based on your numbers, you're looking at a substantial AMT hit - potentially $180K-250K as others mentioned. One critical timing consideration: since you're planning to leave in the next few months, make sure you understand your company's post-termination exercise window. Most companies give you 90 days after termination to exercise, but some are shorter. If you do decide to exercise and hold, consider making quarterly estimated tax payments starting immediately. The IRS expects you to pay taxes throughout the year, not just at filing time. With an AMT liability this large, you could face significant underpayment penalties if you wait until April to pay. Also worth noting - if your company stock price drops significantly between now and when you actually sell the shares (even if you hold for LTCG treatment), you could end up in a situation where you paid AMT on a higher spread than you ultimately realized. This is the dreaded "AMT trap" that caught many people during the dot-com crash. The AMT credit helps, but it doesn't fully offset this scenario. Consider consulting with a tax professional who specializes in equity compensation before making any moves. The cost of good advice here could save you tens of thousands.