Understanding Incentive Stock Options (ISO) Tax Treatment - Exercise & Disqualifying Disposition Questions

Thanks for the explanation! I'm in a similar situation but I have a follow-up question. If I exercise ISOs but don't sell any shares until the next calendar year, how does that affect the AMT calculation? And does it matter if I still don't meet the holding period requirements (like if I sell after 6 months)?

If you exercise ISOs in one year but don't sell until the next calendar year, you'll still have the AMT adjustment in the year of exercise. The full bargain element goes into your AMT calculation for that first year, even if you don't sell a single share. If you sell in the following year without meeting the holding requirements (less than 1 year from exercise date or less than 2 years from grant date), it's still a disqualifying disposition. However, the timing creates a different tax situation. Since you've already potentially paid AMT on the bargain element in year 1, you'll get an AMT credit that you can use in future years. The ordinary income from the disqualification will be reported in year 2 when the sale occurs.

Did they help with the AMT credit tracking too? I exercised a bunch of ISOs in 2023, paid huge AMT, and I'm still trying to figure out how to reclaim those credits over time. Does the tool handle that aspect of planning?

I'm skeptical about these services. Did they provide anything beyond what a decent CPA would tell you? And how much access to your personal financial info did you have to give them?

They absolutely help with AMT credit tracking! They actually generate a multi-year projection that shows how your AMT credits will be recovered in future years based on your expected income. This was super helpful for planning my cash flow needs over time. Regarding the CPA comparison, they provided much more detailed scenario analysis than I got from my accountant. My CPA gave general advice, but taxr.ai showed specific optimization strategies with numbers that were tailored to my situation. As for personal info, I just uploaded my previous tax return and stock grant details - they didn't need access to any accounts or sensitive login credentials.

Wait, is this for real? The IRS phone system is a nightmare - I've literally spent 4+ hours on hold before giving up. How much does this service cost? And do they actually get you to someone who can help with ISO/AMT questions specifically?

I call BS on this. No way they can magically get through when the IRS phone lines are constantly jammed. Sounds like a scam where they just take your money and have you wait anyway.

The service absolutely works! They don't charge you unless they actually connect you with an IRS agent. They use an automated system that continually redials and navigates the phone tree until they get through to someone. Yes, they can get you to specific departments. When I used it, I specifically needed help with stock option reporting issues. In the service request, I specified I needed to talk to someone about ISO/AMT questions, and they connected me with an agent who could address those topics. It wasn't a random general agent who couldn't help.

That's a great point I hadn't considered! So would you recommend asking the stock plan administrator about their withholding rates before executing this kind of transaction? Also, would increasing my W-4 withholding for the rest of the year work instead of making an estimated payment?

Definitely check with your stock administrator before executing the transaction. Ask specifically what their withholding rate is for disqualifying dispositions of ISOs. Some use a flat supplemental wage rate (22% federal) while others might use your W-4 rate. Increasing your W-4 withholding for the remainder of the year can absolutely work instead of making an estimated payment. Just make sure the additional withholding happens in the same calendar quarter as your ISO transaction, or at least before the estimated payment deadline for that quarter. The IRS looks at when payments were made, not just the total by year-end, when determining underpayment penalties.

I don't think wash sale rules apply to ISO exercises in the way you're describing. An ISO exercise is acquiring shares, not selling them. The wash sale rule only applies when you sell shares at a loss and then buy substantially identical securities within 30 days before or after the sale. If you subsequently sold the shares from your exercised options at a loss, then bought more of the same stock in your 401k within the 61-day window, that would trigger a wash sale. But just exercising options shouldn't create this issue.

@Isabel Vega is correct - wash sale rules don t'apply to the ISO exercise itself since you re'acquiring shares, not selling them. However, your tax software might be flagging this because underwater ISOs can create some complex reporting situations. When you exercise ISOs where the FMV is below the grant price, you don t'get a tax deduction for the loss "like" you would with NQSOs. The exercise is essentially tax-neutral - no ordinary income, no AMT adjustment, and no deductible loss. If you later sell those shares at a loss and then purchase the same company s'stock through your 401k within 30 days, that would indeed trigger wash sale treatment. But the timing you described exercise (then 401k purchase 20 days later shouldn) t'be an issue unless you also sold the exercised shares during that period. I d'double-check what transactions your tax software is actually flagging - it might be picking up on a different part of your ISO activity.

This is such an important point that often gets overlooked! I'm also in California and got hit with this exact surprise last year. The immediate state tax liability on ISO exercises really changes the math significantly. One thing I learned the hard way is that California also doesn't allow you to reduce the state taxable income even if you make a disqualifying disposition in the same year. So unlike the federal treatment where a disqualifying disposition eliminates the AMT adjustment, California still taxes the full bargain element regardless. For anyone planning ISO exercises in non-conforming states, I'd strongly recommend working with a tax professional who understands both the federal and state implications. The cash flow planning becomes much more complex when you're dealing with immediate state taxes plus potential federal AMT. Thanks for bringing this up - it could save someone from a very unpleasant tax surprise!

@Chloe Martin makes excellent points about strategic timing! I m'new to navigating ISOs but this discussion has been incredibly helpful. One question I have - when you mention exercising older grants first for the holding period, does this strategy still make sense if the older grants have a higher exercise price? I m'trying to balance the holding period optimization with the cash flow impact. My oldest grant has an exercise price of $12 while my newer grants are at $6, but the current FMV is around $35. Would it still be better to exercise the older, more expensive grants first even though they require more cash outlay per share? Also, for those mentioning multi-year planning - are there any rules about how far apart you can spread ISO exercises, or is it just limited by the option expiration dates? Thanks for all the insights everyone has shared!