How to Legally Avoid Paying 42% in AMT When Exercising ISOs
The Alternative Minimum Tax (AMT) is one of the most confusing—and costly—tax traps facing tech employees with incentive stock options (ISOs). If you’re not careful, it can push your effective tax rate up to 42%, costing you thousands in unnecessary taxes.
But here’s the good news: AMT is often optional. With the right strategy, you can legally avoid it, minimize your tax bill, and keep more of your hard-earned wealth.
In this guide, we’ll break down:
Why AMT is optional, even for high earners
The strategies that help you avoid AMT altogether
Why paying $0 in AMT can sometimes backfire and cost you more long-term
What Is AMT and Why Is It Optional?
Think of the regular tax system as a game of Limbo—your goal is to lower your taxable income as much as possible. For years, wealthy taxpayers got so good at “limbo” that Congress added a new challenge: the High Jump.
That’s AMT. No matter how much you reduce your taxable income, you still have to clear a minimum threshold.
Here’s how it works:
The IRS calculates your regular tax liability.
Then they calculate your AMT liability, which adds back certain deductions and the “spread” (bargain element) when you exercise ISOs.
You pay whichever amount is higher.
Because you control when and how you exercise your ISOs, you have significant power over whether you trigger AMT. That’s why I call it “optional.”
The IRS also built in an AMT exemption to protect middle-income taxpayers. For high earners, however, the exemption phases out. In this phaseout zone, every additional $1 of income exposes $1.50 to AMT’s 28% tax rate, creating an effective 42% tax rate.
How to Avoid AMT
Avoiding AMT comes down to managing two things:
The size of your “cup” (how much regular income and deductions you have)
How much “water” you pour in (the ISO spread when you exercise options)
Here are some of the most effective strategies:
Make your cup bigger (reduce AMT exposure):
Accelerate ordinary income by exercising nonqualified stock options, doing Roth conversions, or selling short-term stock.
Be careful with deductions—itemized deductions like state taxes or mortgage interest shrink your cup and increase AMT risk.
Pour in less water (time ISO exercises strategically):
Delay ISO exercises until years with lower income.
Start with tranches that have little or no spread between exercise price and fair market value.
Consider an early exercise with an 83(b) election to avoid AMT entirely.
Use a “disqualifying disposition” (selling exercised ISOs in the same year) to reset your AMT exposure.
Take advantage of the AMT Negative Adjustment when you sell ISOs later, which reduces future AMT bills.
When done right, these strategies can keep your AMT at $0—but that’s not always the best move.
When Avoiding AMT Is a Mistake
Sometimes paying AMT now actually saves you money later. Here’s why:
AMT is temporary. The tax you pay can be recouped through credits in future years.
Avoiding AMT can lock in higher taxes. For example, if you sell ISOs in the same year you exercise them to dodge AMT, you’ll pay ordinary income tax (up to 50% combined state + federal) instead of long-term capital gains.
It can increase risk. Exercising shares with little built-in gain often means tying up more cash in stock that could lose value quickly.
In other words: the goal isn’t always to pay $0 in AMT. Sometimes, it’s smarter to pay a manageable AMT bill now to reduce long-term taxes, start your holding period early, and avoid deadlines like ISO expiration or job termination.
As one of my financial planning professors put it: “Don’t let the tax tail wag the dog.”
The Bottom Line
If you’re a tech employee with ISOs, the AMT doesn’t have to surprise you. With strategic planning, you can:
Decide when to exercise stock options to avoid AMT
Reduce your risk of triggering the 42% AMT rate
Use AMT to your advantage when it makes long-term sense
For many clients, this planning has meant tens of thousands saved in taxes—and peace of mind knowing they’re making the most of their equity.
