How to Exercise ISOs and NSOs Without Triggering AMT

If you’ve got both Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs) ready to exericse, first off, congrats!  You are about to come into some wealth, but if you aren't strategic, you will pay most of it in taxes.

You’ve probably heard rumblings about Alternative Minimum Tax and maybe even felt its sting.

AMT is one of those hidden tax traps that shows up quietly and wrecks your refund...or worse, hands you a surprise five-figure tax bill.

When it happens with Incentive Stock Option exercises, it is just purely evil. We don't see how this can even be legal, but it's there and comes at you will full force and hopefully doesn't knock you out.

But with the right timing, you can exercise stock options strategically and actually minimize (or even avoid) AMT. Let’s walk through how this works.

First, a Quick Recap: ISO vs. NSO

Incentive Stock Options (ISOs):

• Come with potential tax advantages

• No Ordinary Income tax at exercise (if holding periods are met)

• But the spread or unrealized gain between the exercise price and the fair market value (FMV) is included for AMT purposes

• Can trigger AMT if the spread is large

Non-Qualified Stock Options (NSOs):

• Always trigger ordinary income at exercise

• No AMT impact

• Simpler to plan for, but higher upfront tax bill

The Problem: When the Spread Is Huge, So Is the AMT

First, let's clarify that if you exercise and sell your ISO stock options in the same tax year, AMT isn't even a game-player... but you will pay taxes still at short-term capital gains or ordinary income tax rates.

For the rest of this discussion, let's assume you have ISOs to exercise and either you can't sell them or don't plan to.

Let’s put it into numbers. Let's say you have ISOs with:

• Exercise price: $10/share

• FMV on exercise date: $100/share

• You exercise 1,000 shares

That $90,000 difference ($100 - $10 x 1,000) is not taxed for regular income, but it is counted for AMT. And that’s where things get painful... because this tax effect hits and you haven't even sold the stock!

Once your AMT income gets high enough (in 2025, about $88,100 for single or $137,000 for married filing jointly), AMT starts replacing your regular tax calculation—and that $90K spread pushes you there fast.

Note that the OBBBA makes changes to AMT starting in 2026 and guess what, it's even less favorable to tax payers! Read more about them at 2025 Tax Strategy: Reduce ISO AMT with These Game-Changing Updates.

So How Can You Be Strategic?

If you only exercise ISOs and do not sell the in the same year, in that kind of situation, you’ll likely owe AMT. But here’s the trick:

Pair your ISO exercises with NSO exercises in the samet tax year to reduce or eliminate AMT exposure while still accessing equity upside.

Why does this help? Because NSOs increase your regular taxable income. That increase helps “absorb” the AMT calculation, making it less likely AMT will apply.

Remember AMT is a minimum tax, so if your tax liability is increased, AMT doesn't come into play or...not as much.  This strategy can reduce the delta between regular tax and AMT so you’re not stuck paying both.

Why care about AMT? Won't you get it back the following year?

Not exactly. It is a alternative minimum tax credit carryforward and if you don't hit AMT limits in the following year, that tax paid just keeps rolling forward. This is why we find it sooooo evil! You pay, and it may take you years, if ever, to get the credit back.

Real-World Example: ISO + NSO Exercise Strategy

Scenario:

• You're single, with $100,000 in salary

• You have:

  • 1,000 ISOs with a $10 exercise price, $100 FMV

  • 1,000 NSOs with a $10 exercise price, $100 FMV

Option A: Exercise only ISOs

• No regular income from the exercise

• But $90,000 goes to AMT income

• After your exemption phases out, AMT could add $15,000–$20,000 to your tax bill

Option B: Exercise both ISOs and NSOs

• NSOs add $90,000 to regular income

• That pushes your regular tax higher... possibly above what AMT would require

• You either eliminate or significantly reduce the AMT impact on the ISO exercise

So instead of paying tax twice (once under regular rules for NSOs, once under AMT for ISOs), your regular tax bill offsets your AMT exposure. You’re paying tax, but just once, not double-dipping. 

Key Takeaways

• Large spreads on ISOs = large AMT risk (if you don't sell in the same year as exercise)

• Exercising NSOs increases regular taxable income, which reduces how much AMT bites

• Combining both types of exercises in the same year can create balance

• Timing, income levels, and stock value matter. This is not one-size-fits-all and what works for the engineer in the next cubicle may not be best for you

• Work with a tax advisor or planner to run projections before exercising 

Final Thought: AMT Is Never a Welcome Guest

Exercising stock options should feel like a win, not like triggering a stealth tax bomb.

If you have both ISOs and NSOs that have appreciated well above your exercise price, you’re in a powerful position. You can strategically structure your option exercises to minimize taxes now, qualify for better rates later, and avoid AMT altogether.

The trick is planning ahead and understanding how these options interact and not just treating them like lottery tickets.

Schedule an Equity Consult today and see if you can avoid the AMT trap.