AMT Credit for Incentive Stock Options: Timing, Traps, and Strategy

If you have incentive stock options (ISOs), you’ve likely been introduced to AMT. AMT is a tax due that may be due on the bargain element of your incentive stock options. It’s commonly triggered when you exercise and hold ISOs in the hopes of achieving a qualified sale and preferential long-term capital gains (LTCG) treatment.

AMT can be significant, making it well worth your (or your client’s) attention and consideration. Otherwise, you may find yourself owing tax that you are not prepared for and when you didn’t  realize cash proceeds via a sale.

The good news is that the AMT is often temporary and can be returned in future years as an AMT credit. When and how the AMT credit is returned is nuanced, but important to a well thought out ISO strategy.  Because the reality is, the full benefit of a qualified sale of ISOs is not realized until AMT paid is fully returned via the AMT credit.

So, as part of the planning process for exercising and holding ISOs, it’s wise to include an analysis of when and how AMT paid may be returned as an AMT credit. Doing so enables you to make more informed decisions that might impact how many shares you want to exercise and hold in the first place.

In this article, we will break down

• Why you may ow AMT in the first place
• When and how the AMT Credit may be returned
• Why some people get it back quickly
• Why others may wait years
• And how to manage your ISOs in a way that helps you meet your goals

Let’s dive deeper into why AMT the credit exists and how/when it gets returned to taxpayers.

A Quick Introduction to AMT

The Alternative Minimum Tax (AMT) is a parallel tax system that is calculated annually for each taxpayer, but isn’t relevant for the majority of people. For some, particularly those who exercise and hold ISOs, the possibility of incurring AMT is real and understanding what AMT is and how it works becomes necessary.

The traditional tax system is based on the regular tax calculation, of which you are likely aware. In short, regular tax due based on applying the graduated tax rate schedule to your taxable income.

In a year when you exercise and hold ISOs, however, you’ll want to know about the calculation for the tentative minimum tax (TMT). TMT, is a second calculation that occurs every year and adds back into the calculation certain “preference items” and applies a flat tax rate of either 26% or 28%, depending on what your alternative minimum taxable income (AMTI) is.

For those with ISOs, the bargain element is included as income for purposes of figuring the AMT. Specifically, the bargain element is equal to:

(fair market value (FMV) – exercise price) x number of options exercised.

If your TMT exceeds your regular tax, you pay the higher amount. The difference between the two is the AMT.

Let’s take a look at what your tax liability could look like in a year you decide to exercise and hold ISOs:

Assume you’re married, earn $300,000 annually, and decide to exercise 10,000 ISOs. The exercise price is $10/share, while the fair market value (FMV) at the time of exercise is $50 per share. You choose to exercise and hold the shares.

Doing so creates a bargain element of $40 per share ($50 FMV – $10 exercise), or $400,000 total ($40 × 10,000).

Under the regular tax system, the bargain element isn’t recognized as income in the year of exercise, since you haven’t sold the shares.

Your regular tax calculation (assuming the standard deduction and no other deductions or credits in 2025) would look like this:

• Salary: $300,000
• Adjusted gross income: $268,500
• Regular tax owed (approx. 18.7% effective rate): $50,133

Now, under the AMT system, the $400,000 bargain element is added to your tentative minimum tax calculation (even though no sale has occurred):

• Regular taxable income (no deductions): $300,000
• ISO bargain element: $400,000
• Total AMT Income: $700,000
• AMT exemption: –$137,000
• AMT taxable amount: $563,000

The AMT rates apply as follows: 26% on the first $239,100 and 28% on the remaining $323,900:

• 26% x $239,100 = $62,166
• 28% x $323,900 = $90,692
• TMT total: $152,858

Now, let’s compare the two tax systems:

• TMT owed: $152,858
• Regular tax owed: $50,133
• Difference: $102,725

Because your TMT exceeds your regular tax, you would owe approximately $102,725 in AMT for the year.

How AMT Credit Works

The good news is that AMT is often temporary, the $102,725 isn’t gone forever, and can be returned as an AMT credit, used to offset regular tax in future years.

Similar to how AMT is calculated, the AMT credit will be based on the difference between your regular tax and TMT calculations (somewhat in reverse). In years following a year in which you either have AMT credit carry-forward or paid AMT in the prior year, some or all of this can be returned via a credit if your regular tax exceeds your TMT.

Continuing the example above, let’s say you paid $102,725 of AMT in 2024 after exercising and holding ISOs.

In 2025, you have the following:

• Regular tax: $51,000
• TMT: $43,000

Because your regular tax exceeds your TMT by $8,000, you can use $8,000 of your AMT credit. The remaining $94,725 ($102,725 of AMT less $8,000 of AMT credit) of unused AMT credit carries forward to future years (using Form 8801 on your tax return). Note that the total tax due is the regular tax of $51,000. $8,000 is covered from the AMT credit, and the amount due by the taxpayer is $43,000.

If your regular tax again exceeds your TMT in 2026, you’ll have the opportunity to recover more credit, and so on—until it’s fully used or offset by future AMT years.

Why Does AMT Credit Exist?

Broadly speaking, tax liability is often incurred when you realize a profit or otherwise earn income. For example, if you sell shares of stock at a price higher than what you paid for them, you expect to owe capital gains tax.

But with exercised and held ISOs and AMT, the tax impact is different. AMT due to exercised and held ISOs is essentially a prepayment of tax on phantom income—rather than tax owed on realized profits. Phantom income, in this sense, refers to the bargain element that is included as income when calculating the AMTI and TMT, even though you are not selling the shares.

So while AMT is a “pre-payment” of tax, the AMT credit can be thought of as a refunding of the prepayment and ensuring that you do in fact realize the benefit of a lower long-term capital gains tax rate.

AMT credit, in effect, is squaring up your prepayment of tax for AMT with the LTCG gain rates for a qualified sale.

How AMT Credit is Actually Returned

While paying AMT is a bit of shock for many first-timers, the good news is that previously paid AMT may be returned as an AMT credit in the short term, possibly in the year following the year you paid AMT.

Other times, fully returning the AMT credit requires that you do a qualified sale of ISOs. A qualified sale can help generate a bigger spread between regular tax and TMT, accelerating AMT credit in a single year.

A third way to return AMT credit could be a high-income tax year. Similar to the ability to exercise and hold a lot of ISO bargain element in a high income year, the same goes for accelerating AMT credit.  High incomes, by themselves, can widen the gap between regular tax and TMT.

Unfortunately, getting all your AMT back isn’t always so simple. For some scenarios, AMT credit is not returned quickly. In fact, sometimes AMT credit can linger for a long while even after you sell your ISO shares in a qualified sale that caused AMT in the first place. Which, if true in your planning, may cause you to reconsider the full benefit of a qualified sale, as some of the tax benefit could be tied up for a long while.

Let’s explore these scenarios further.

Scenario 1: A Small Amount of AMT Paid

If you exercise ISOs and pay AMT, it’s possible that you’ll be able to return all previously paid AMT in the following tax year, even if you do not sell your shares. This is particularly possible if the amount of AMT paid is small, perhaps due to exercising up to the AMT crossover point (and going slightly over) or for some other reason.

Going back to our prior example, let’s assume that in year one, instead of paying $102,725 in AMT, you exercise considerably less ISOs and the AMT due was $5,000.

We now have the following:

• Regular tax due: $51,000
• TMT: $43,000
• Spread: $8,000
• AMT Credit: $5,000 (100% of previously paid AMT)

In this example, the full AMT is returned. Practically speaking, the AMT experience is manageable from a personal standpoint, allowing you to recognize the full benefit of LTCG in a simplified manner.

Scenario 2: Selling ISOs in a Qualified Disposition

As we reviewed above, AMT credit can begin to be recovered even in years when you don’t sell your qualified ISOs. As long as your regular tax liability exceeds your TMT, the difference can be used to recover a portion of your AMT credit. However, because the gap between those two calculations is often narrow, the annual recovery amount may be modest—particularly for taxpayers in lower income years.

Perhaps the best way to widen the gap and accelerate credits is to sell previously exercised ISO shares in a qualified disposition.  This occurs because the sale of qualified ISOs can have the effect of “undoing” what caused AMT in the first place.  In doing so, it’s possible you can generate a negative adjustment to AMTI, widening the gap between regular tax and TMT.

Let’s look at an example of what happens when you sell qualified ISO shares:

In 2022, say you have the following:

• ISOs exercised: 20,000
• Exercise Price: $10/share
• Fair Market Value (FMV) at exercise: $35

This created bargain element of:

($35 – $10) x 20,000 = $500,000

Assuming a 28% AMT tax rate, the AMT paid on this exercise event would be $140,000.

You decided to hold the shares through 2025, when you sold them at $60/share in a qualified disposition.

At the final sale, you have both a regular capital gain and an AMT capital gain.  These two calculations are key factors that help determine a negative adjustment when figuring your AMTI, and ultimately how wide the adjusted gap might be.

In our example, you have the following:

• Regular Capital Gain ($60 – $10) × 20,000 shares = $1,000,000
• AMT Capital Gain: ($60 – $35) × 20,000 shares = $500,000

To figure the adjustment on Form 6251 when figuring AMTI for the sale of the qualified shares, the calculation is as follows:

AMT Capital Gain (Loss) – Regular Capital Gain (Loss) = Negative Adjustment

500,000 – 1,000,000 = $500,000

The net result of this adjustment is a lowering of AMTI, a widening of the spread between regular tax and TMT, and room for additional AMT credit. In practice, it’s common to see a large one-time recovery in the year of a qualified sale, followed by smaller annual recoveries until the credit is fully used.

(The actual calculation for a negative adjustment on Form 6251 is equal to Total AMT Capital Gain – Regular Capital Gain for the entire tax return, not just qualified ISO sales)

Generally speaking, the bigger the spread between the AMT basis and the regular basis, the more the opportunity to accelerate AMT credits (and something you can pick and choose if you have different exercise and hold dates).

Scenario 3: High Income Tax Years to Accelerate AMT Credit

In high-income years where your regular tax bill is meaningfully higher than your tentative minimum tax bill, you have a higher potential of recovering significant AMT credit.

For example, let’s say your wage income came to $1.5 million and you did not exercise ISOs in 2025. Assuming you’re married filing jointly and taking the standard deduction, your regular tax bill will come to around $467,407.

In this scenario, your TMT liability would be about $394,169. Because the TMT is less than your regular tax liability, you’ll be required to pay regular tax. However, you have a significant spread to work with here, since your regular tax is $73,238 greater than your TMT. In a single tax year, you have the opportunity to return $73,238 in AMT credit (assuming you have at least that much carried forward from previously paid AMT).

In a year like this, where your taxable income is high, the spread is high as well—giving you a greater opportunity to return more AMT credit than in years where your income is lower.

Why the AMT Credit Doesn’t Always Come Back Quickly

A common misconception is that once you sell your ISO shares in a qualified disposition, all of the AMT you paid in the year of exercise will come back immediately. Unfortunately, that’s not always the case. In fact, the more AMT paid, the less likely it is that the full amount will be returned immediately following a qualified sale

Scenario 1: Mismatched Tax Math

If you exercise and hold ISOs that generate a lot of AMT, it’s possible that when you sell these same shares as qualified, you may return all the AMT credit in one year.

This is because when you exercise and hold ISOs, you pay AMT on the bargain element at a rate of 26% or 28%. When you later sell those shares in a qualified disposition, the resulting capital gains are taxed at a maximum long-term capital gains rate of 20%. Since your recovery is effectively tied to this tax rate, the math doesn’t always balance out perfectly.

In other words, you paid AMT at a higher rate than you may be able can recover through the regular tax system. The result is that part of your AMT credit remains on the books, carried forward into future years, even after selling all your shares as a qualified disposition.

Example

Suppose you exercised and held your ISOs, generated a $2 million bargain element, and paid around $587,000 in AMT. A few years later, you sell the shares for $2 million in capital gains during a qualified disposition. The tax might look like this:

Following the sale of those ISOs, you find that you recover only $402,107 in that year—leaving about $185,000 to carry forward.

This happens because you originally paid AMT at 26–28%, but the long-term capital gains tax rate maxes out at 20%. Even though you’ve met all the timing requirements and realized a successful sale, the credit recovery in this example is limited by the rate mismatch between what you paid and what you’re able to offset.

As we reviewed earlier, the remaining amount will be carried forward and reported on Form 8801 of your tax return, with the ability to be returned every year based on the spread between the regular tax and TMT.

Scenario 2: Selling Shares at a Lower Price Than the FMV at Exercise

A second scenario that could slow down your ability to refund AMT credit may occur when your company’s stock loses value between the time you exercise your ISOs and the time you sell your shares as a qualified sale.

Let’s say you exercised 1,000 shares at a $10/share exercise price when the FMV was $50 per share. That created a $40,000 spread, which was included in your AMT calculation in the exercise year.

Fast forward a few years—your company’s stock has fallen to $40 per share, and you sell in a qualified disposition.

• Regular basis: $10 per share
• AMT basis: $50 per share
• Sale price: $30 per share

Your regular gain is $20,000 ($20 × 1,000), while your AMT gain is a $20,000 loss ($20 × 1,000). As we learned above, the actual negative adjustment is equal to the following:

AMT Capital Gain (Loss) – Regular Capital Gain (Loss) = Negative Adjustment

In this example, this equals:

-$3,000 – $20,000 = -$23,000

AMT capital loss, like regular capital loss, is limited to -$3,000. In this example, the remaining $17,000 AMT capital loss is carried forward to future years.

The key here is that when you exercised and held ISOs, you reported and paid AMT on $40,000 of income. When you sell, the negative adjustment (even as a qualified sale) is $23,000. The practical impact here is a smaller spread between regular tax and TMT for the calendar year because of the AMT loss. And as we know by now, a smaller spread between the two means a smaller AMT credit, all else equal.

(Note, the calculation above is typically based on the entire tax return, not just ISO shares. We’ve isolated the ISOs here for illustrative purposes.)

Strategies to Plan for AMT Credit?

As you make the move to exercise and hold ISOs, it’s important that you consider AMT paid in the year of exercise AND AMT credit. Because, as we discussed before, you’re not truly maximizing the benefits of LTCG and a qualified sale so long as you have AMT credits that are not returned.

The good news is that with good planning, you can consider when and how you’ll make sure your AMT credits are refunded to you under various circumstances. The market’s movements are unpredictable, and they very well may impact your ability to access that AMT overpayment in a reasonable amount of time.

Ask yourself:

• What happens in a strong market where my shares appreciate significantly before I sell?
• What happens if the company’s value declines or remains flat for several years?
• How long might it take to recover my AMT credit if I don’t sell shares soon?

Running projections across “up,” “down,” and “sideways” market scenarios helps you understand how long your money could be tied up in the form of AMT credit carryforwards.

If the projections show that a large portion of your AMT could be locked up for many years—especially if you anticipate long holding periods or limited liquidity—it may be worth re-evaluating whether the long-term capital gains treatment truly outweighs the near-term tax cost.

Leverage AMT Loss Carryforward

If you have AMT loss carryforwards from prior years (say you sold ISOs at a lower price than their FMV at exercise), you can use non-ISO capital gains to help reduce your TMT and speed up your AMT credit.

Non-ISO assets, such as taxable investments or other appreciated securities, generally have the same basis for both AMT and regular tax purposes. When you sell those assets, they create AMT capital gain equal to your regular capital gain. But if you have an AMT loss carryforward from prior ISO transactions, that loss can offset the AMT gain and create a negative adjustment on Form 6251.

Remember, the basic relationship looks like this and includes AMT gain and regular gain for your entire tax return, not just ISO shares:

AMT Gain – Regular Gain = Negative Adjustment

As an example, let’s say you have a $50,000 AMT loss carryforward from prior ISO activity and decide to sell $200,000 of appreciated stock from your taxable brokerage account. Because the AMT basis and regular basis are the same, the AMT gain equals the regular gain—but the $50,000 loss carryforward produces a negative adjustment.

Using the formula above, we can calculate a negative adjustment as follows:

• Total Capital Gain: $200,000
• Total AMT Capital Gain: $200,000 – $50,000 (AMT loss carryforward) = $150,000
• Negative Adjustment Form 6251: $150,000 – $200,000 = $50,000

This $50,000 reduces your TMT, allowing you to reclaim additional AMT credit that would otherwise remain stuck for future years.

Time Income Events to Your Advantage

When regular tax is higher, the math may allow you to reclaim more of your AMT credit. In some years, it may make sense to intentionally create a wider gap between your regular tax and TMT by increasing your taxable income.

This can be done a few different ways including:

Exercising nonqualified stock options (NQSOs): NQSOs trigger ordinary income tax, not AMT, raising your regular tax liability and potentially unlocking more AMT credit.

Executing a disqualified ISO sale: Selling ISOs before meeting the holding requirements results in ordinary income, increasing regular income tax and perhaps widening the spread.

While these actions increase your immediate tax bill, they can also help recover some of that AMT credit that might otherwise remain unused for many years.

Be Mindful of How Many ISOs You Exercise

With an understanding of the many nuances of ISOs, you can begin to strategize how many ISOs you want to exercise, when you want to exercise, and what the tax and cash flow requirements may be.

During the planning, you may want to be mindful to avoid triggering AMT that extends well beyond the sale of the shares themselves.

Claiming Your AMT Credit

AMT credit recovery isn’t always clean or immediate—and much like AMT itself, it can be complex. Most people (and many advisors) focus on the year of exercise and the frontend of AMT

But that’s only half the story. Once you pay AMT you want to ask when and how do you get it back?

For some, AMT credit comes back quickly—sometimes in the very next year. For others, it may take years of careful planning, projected income events, and strategic sales.

Ultimately, good planning will help you:

• Understand your potential AMT exposure
• Estimate how and when AMT credit may be returned
• Decide whether the pursuit of LTCG and qualified ISO treatment is worth the accompanying AMT prepayment
• Integrate your AMT and AMT credit strategy into your broader financial plan

Once you understand how AMT credit works and under what circumstances it can be returned to you, it becomes much easier to incorporate ISOs—and their tax consequences—into a long-term, goals-based financial strategy.