When exercising Incentive Stock Options (ISOs), you may be subject to the Alternative Minimum Tax (AMT) due to the difference between the stock's fair market value (FMV) at exercise and the exercise price. Understanding how to calculate AMT adjustments and report them on Form 6251 is crucial for accurate tax filing.

Step 1: Understanding the AMT Adjustment

For ISOs, the bargain element (FMV at exercise minus exercise price) is not taxable under regular tax rules but is included as an adjustment for AMT purposes. This increases your taxable income for AMT and may trigger additional tax liability.

Example: Exercising ISOs and AMT Impact

Let’s assume the following scenario:

• Filing status: Single
• ISO exercise date: March 13, 2023
• ISO grant date: January 3, 2022
• Exercise price: $20,000 for 200 shares
• Fair market value at exercise: $200,000
• Bargain element: $180,000 ($200,000 - $20,000)

Regular Tax vs. AMT in 2023

• Regular Tax Basis: $20,000 (no immediate tax on bargain element)
• AMT Basis: $200,000 (must report $180,000 as an AMT adjustment on Form 6251)

Step 2: Stock Sales and AMT Adjustments in 2024

The taxpayer sells the shares in two separate transactions:

Sale #1 (January 18, 2024 – Disqualifying Disposition)

• Shares sold: 100
• Sale price: $75,000
• Holding period: Less than 1 year (disqualifying disposition)

🔹 Regular Tax Treatment:

• Ordinary income: $65,000 ($75,000 sale price - $10,000 regular tax basis)
• No capital gain or loss

🔹 AMT Treatment:

• No ordinary income
• Short-term capital loss: $25,000 ($75,000 - $100,000 AMT basis)

Sale #2 (April 21, 2024 – Qualifying Disposition)

• Shares sold: 100
• Sale price: $60,000
• Holding period: More than 1 year (qualifying disposition)

🔹 Regular Tax Treatment:

• Long-term capital gain: $50,000 ($60,000 - $10,000 regular tax basis)

🔹 AMT Treatment:

• Long-term capital loss: $40,000 ($60,000 - $100,000 AMT basis)

Step 3: Reporting Adjustments on Form 6251 (Line 2k)

To determine the total negative AMT adjustment, we account for differences in income reporting:

• $65,000 negative adjustment for Sale #1 due to ordinary income difference
• $53,000 negative adjustment due to AMT capital loss limitation
• Total negative adjustment on Line 2k of Form 6251: ($118,000)

Step 4: AMT Capital Loss Carryover

The taxpayer has a 2024 AMT capital loss carryover of $62,000:

• Short-term: $22,000
• Long-term: $40,000

For 2025, if no other capital transactions occur, the AMT adjustment is limited to ($3,000) (standard capital loss deduction limit).

Key Takeaways

✔ AMT Adjustments for ISOs – The bargain element is added as an AMT adjustment when exercised.
✔ Disqualifying vs. Qualifying Dispositions – Disqualifying sales may create differences in taxable income for AMT vs. regular tax.
✔ Capital Loss Adjustments – AMT losses follow different rules, impacting capital loss carryovers.
✔ Form 6251 Reporting – Enter negative adjustments on Line 2k to reflect differences between AMT and regular tax calculations.

Understanding these calculations helps ensure compliance and optimize tax liability when dealing with ISOs and AMT. Always consult a tax professional to review your specific situation!