How to pay $0 tax on $100k of ISOs (step-by-step)

Ever wonder how some people pay $0 tax on their Incentive Stock Options (ISOs) while others get slammed with a huge bill? As an equity advisor to wealthy tech executives, I’ve seen ISO taxes quietly become people’s biggest lifetime expense. Below is a practical, step-by-step approach to avoid triggering the Alternative Minimum Tax (AMT) on ISO exercises — and how to think about staying tax-efficient when you eventually sell.

1) How AMT is triggered (easy visual)

Think of your AMT exposure like a cup:

• Water poured in = the bargain element (FMV − exercise price) × shares.

• Cup size = the AMT threshold your income allows before AMT applies.

• If the cup overflows = you owe AMT.

Example:
If FMV is $15, exercise price $3, and you buy 10,000 shares:
($15 − $3) × 10,000 = $120,000 bargain element — that’s the “water” you must account for.

Action: Use a calculator or spreadsheet to estimate your bargain element and compare it to your likely AMT threshold before exercising.

2) Timing matters: when to exercise

Filling the cup perfectly still leaves risk — other income (bonuses, RSU vesting, Roth conversions) can push you over.

Two practical timing strategies:

• Late-year exercise: wait until you see most of your income for the year (helps estimate cup size).

• Early exercise: if you expect share price to rise a lot, exercising earlier can mean a smaller bargain element.

Tip: Predicting exact income is hard. If your AMT risk is meaningful, work with a specialist — it’s worth the fee.

3) If you already have too much AMT exposure: two levers

You have two basic levers to avoid AMT on exercise:

1. Make the cup bigger (raise your AMT threshold):

• Increase regular income in AMT-safe ways (depends on circumstances — consult a tax pro).

2. Pour in less water (reduce bargain element):

• Exercise tranches where FMV ≈ exercise price first (lowest per-share “water”).

• Exercise shares with zero spread — essentially no bargain element — which doesn’t create AMT.

Tradeoff: exercising more shares costs more up front and increases market risk. Balance cash, risk tolerance, and tax impact.

4) Getting to $0 tax at sale (the back end)

Avoiding AMT at exercise is only half the battle. Here are ways to reduce or eliminate taxes when you sell:

Pass the cup (transfer the asset):

• Gift: transfer to someone in a lower tax bracket (subject to gift rules).

• Donate: donate long-held shares to charity for deduction and avoid capital gains.

Hold the cup (defer tax):

• Inherit (step-up in basis): heirs receive stepped-up basis at death (complex — estate rules apply).

Drink carefully (sell with little/no tax):

• Sell at a loss or break even: no tax on the transaction; losses can offset gains.

• Tax gain harvesting: use the 0% long-term capital gains bracket strategically (timing, income reduction, or loss harvesting).

• QSBS exclusion: if your company qualifies as a Qualified Small Business, you may exclude large amounts of gains (very powerful but narrow).

Important: Don’t ever consider illegal options (tax evasion is a crime). Always consult a licensed tax advisor on transfers, gifting limits, and charitable deductions.

Final note — $0 tax can be costly

Sometimes aiming for a $0 tax bill creates greater long-term cost/risk. The right approach often reduces your net after-tax cost, not just the tax line item. If your situation could trigger meaningful AMT or big capital gains, work with an advisor who specializes in equity compensation.

Want the spreadsheet I mention in the video? Use the calculator in the video description to run your numbers, or reach out and I’ll help model your exact scenario.

Next step: Watch my follow-up video to learn a simple trick to unlock and reclaim AMT credit — it can make paying AMT feel like you never paid it.