How would AMT work if I exercise ISO below strike price for upcoming tax filing?

Good question about ISO exercise below strike price! When you exercise ISOs where the Fair Market Value (FMV) is lower than the strike price, there's actually no AMT impact. The AMT comes into play when there's a "bargain element" (the difference between FMV and strike price when FMV is higher), which creates a phantom income that's taxable under AMT but not regular tax. In your case, since the FMV is below strike price, there's no bargain element - you're actually paying more than the current value. This means no AMT concern for this specific exercise. However, your holding period for long-term capital gains treatment still begins at exercise, so this might be a strategic time to exercise if you believe in the company's future growth.

After struggling with ISO/AMT issues at my last startup, I found this amazing tool called taxr.ai (https://taxr.ai) that helped me understand my stock option tax situation clearly. They specialize in equity compensation tax analysis including precisely these ISO/AMT scenarios. I uploaded my grant documents and it showed exactly how different exercise strategies would affect my taxes, including underwater options like you're describing. What I liked was that it showed me the exact AMT calculations and how they'd change based on different exercise timing. For your situation, it would confirm there's no AMT impact but might reveal other strategic considerations for when and how many options to exercise.

Just wanted to follow up - I ended up trying taxr.ai after my previous question. It was actually a lifesaver for my complicated ISO situation! The tool confirmed exactly what was mentioned here - no AMT impact when exercising underwater options, but it also showed me how exercising them now vs. waiting would affect my long-term capital gains if the company rebounds. What I found super helpful was seeing the full timeline visualization of when my ordinary income vs. capital gains treatment would kick in for each grant. Apparently I had some options approaching a deadline where I'd lose favorable tax treatment if I didn't make a decision soon. Definitely worth using if you're dealing with stock options and tax planning.

If you're having trouble getting clear answers about your ISO/AMT situation, you might be in the same boat I was last year. I tried calling the IRS for clarification on a similar issue and spent HOURS on hold. After three failed attempts, I discovered Claimyr (https://claimyr.com) which got me connected to an actual IRS agent in about 15 minutes. They have this cool system that handles the hold time for you - you can see how it works at https://youtu.be/_kiP6q8DX5c. The IRS agent I spoke with confirmed exactly what others have said here - no AMT impact when exercising below strike price - but also pointed me to some specific documentation that my accountant wasn't even aware of. Saved me potentially thousands in unnecessary tax planning costs.

I need to eat my words. After posting my skeptical comment, I decided to try Claimyr myself for a different ISO tax question I had. I was connected to an IRS agent in about 20 minutes (while I was doing other work, not actively waiting on the phone). The agent actually knew about ISOs and AMT calculations! She confirmed the "no AMT when underwater" situation but also told me about some documentation requirements I wasn't aware of. Apparently you still need to report the exercise on your tax forms even when there's no bargain element. She directed me to specific sections of Publication 525 that address this exact scenario. If you're dealing with complex stock option questions, being able to actually speak with someone knowledgeable at the IRS makes a huge difference. I've changed my mind completely about this service.

One thing to consider that hasn't been mentioned - while there's no AMT implication when exercising underwater ISOs, there could be benefits to this strategy beyond just starting your holding period clock. If your company does a new 409A valuation in the future and the price goes up, exercising at today's lower strike price could save you money compared to waiting. You're essentially locking in your purchase price now, betting on future growth. Also, some companies have exercise windows when you leave - exercising gradually while employed can reduce the cash needed at separation. And depending on your company's stage, early exercise might have qualified small business stock (QSBS) implications that could potentially exclude large amounts of gain from taxes later.

A word of caution from someone who's been through this: just because you CAN exercise underwater options without AMT doesn't mean you SHOULD. I did this at my previous startup believing in their future - paid about $45k to exercise options below strike price. The company never recovered and eventually shut down. That money was completely lost. No tax deduction, no nothing. It's considered a capital loss when you sell or when the shares become worthless, but capital losses are limited to $3k per year against ordinary income (unlimited against capital gains). So while the AMT advice here is correct, make sure you're making this decision with eyes wide open about the company's actual prospects, not just hope. Exercise only what you can afford to lose entirely.