What is the AMT on a $40,000 ISO exercise in California?

Approximately $2,800 total. Federal AMT is about $0, and California adds another $2,800 in state AMT.

Does California have its own AMT on top of federal?

Yes. California calculates a separate state AMT, so an ISO exercise that triggers federal AMT almost always triggers state AMT too. The rates stack.

How do I avoid this AMT bill?

Three options. Exercise smaller amounts each year to stay under the AMT trigger point. Do a same-day-sale (cashless exercise), which creates a disqualifying disposition and eliminates the AMT preference at the cost of converting long-term gain into ordinary income. Or pay the AMT and claim the credit on Form 8801 in future years when regular tax exceeds tentative minimum tax.

When does the AMT credit come back?

The minimum tax credit under IRC §53 carries forward indefinitely and offsets regular tax in any future year where regular tax exceeds tentative minimum tax. For a typical high-income filer, a $0 federal AMT credit recovers over roughly 0 years at $40-60k per year.

How much AMT on a $40,000 ISO exercise in California?

Why the bargain element matters

When you exercise ISOs and hold the shares (don't sell same-day), the IRS treats the spread between the fair market value at exercise and your strike price as AMT preference income on Form 6251. That preference gets added to regular taxable income to compute AMTI. AMTI runs through a parallel rate schedule (26% up to $239,100, 28% above) with its own exemption and phase-out. You pay the larger of regular tax and tentative minimum tax.

California's role

California runs its own state AMT using similar mechanics. The state adds approximately 7.0% on the preference amount, which for a $40,000 spread is $2,800.

The AMT credit

AMT paid on an ISO exercise creates a minimum tax credit under IRC §53 that carries forward indefinitely. In future years where regular tax exceeds tentative minimum tax, the credit absorbs the excess. Recovery takes time. For a typical high-income filer, $0 of federal AMT recovers over roughly 0 years, faster when you eventually sell the ISO shares.

Frequently asked

What is the AMT on a $40,000 ISO exercise in California?: Approximately $2,800 total. Federal AMT is about $0, and California adds another $2,800 in state AMT.
Does California have its own AMT on top of federal?: Yes. California calculates a separate state AMT, so an ISO exercise that triggers federal AMT almost always triggers state AMT too. The rates stack.
How do I avoid this AMT bill?: Three options. Exercise smaller amounts each year to stay under the AMT trigger point. Do a same-day-sale (cashless exercise), which creates a disqualifying disposition and eliminates the AMT preference at the cost of converting long-term gain into ordinary income. Or pay the AMT and claim the credit on Form 8801 in future years when regular tax exceeds tentative minimum tax.
When does the AMT credit come back?: The minimum tax credit under IRC §53 carries forward indefinitely and offsets regular tax in any future year where regular tax exceeds tentative minimum tax. For a typical high-income filer, a $0 federal AMT credit recovers over roughly 0 years at $40-60k per year.

Educational estimate · 2025 federal AMT · Single filer · $250k other wages · Not tax advice

Why the bargain element matters

California's role

The AMT credit

Frequently asked

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