ISO AMT estimator

What does exercising your incentive stock options (the employee-only options with a tax break) actually cost in alternative minimum tax? You can estimate it on the back of a napkin before you part with a dollar. The AMT is a parallel tax with its own income definition and its own rate, and a big ISO exercise is the classic event that turns it on. Here is how to size it yourself.

What feeds the estimate

Five numbers drive the whole thing. Gather these first.

The math, in plain steps

Run it in order:

1. Add your bargain element to your other income. That is roughly your AMT income (AMTI).
2. Subtract the AMT exemption you qualify for at that income level. Above the phase-out, reduce the exemption accordingly.
3. Multiply what is left by the AMT rate (26%, then 28% on the part above the breakpoint). Call that your tentative minimum tax.
4. Compare it to your regular federal tax. You owe the AMT only to the extent the tentative minimum tax is higher. That difference is the extra cash the exercise costs you this year.

Two refinements the napkin version skips. If your income lands in the exemption phase-out range, that separate AMT capital gains computation matters: long-term capital gains and qualified dividends keep their preferential 0, 15, or 20% rates inside the AMT, but they still raise your AMT income and can erode the exemption. And if you file married filing separately, the numbers shrink: for 2026 the MFS exemption is $70,100, the 28% rate starts above $122,250 of AMT income, and the exemption phases out from $500,000, gone by $640,200 2026.

Read the estimate as a decision, not a verdict

Here is the part most exercise calculators skip. The AMT you estimate is not money gone forever. Much of it comes back later as the AMT credit, recovered in years your regular tax beats your AMT. So the real question is not “how big is the AMT,” it is “do I want this much cash tied up in a tax I will mostly recover, on shares I might not be able to sell.”

That second-order cost is the one that bites. If these are private shares, you could owe real AMT cash on a paper gain while holding stock you cannot sell to pay the bill. The estimate tells you the size of that bet. It does not tell you whether to make it.

What if I am exercising private, pre-IPO shares?

The AMT math is identical, but the risk is not. With public shares you can sell some to raise the tax. With private shares you cannot, so the AMT becomes pure out-of-pocket cash on a gain that exists only on paper. That is the worst version of this trap. Size it carefully, and read how exercising ISOs works before you fund it.

Once you have the number, pair it with the full cash cost of exercising, which adds the strike price you also have to pay. Run the estimate before you exercise, not after. The AMT is only a surprise to people who never did the arithmetic.