Form 6251: How AMT Impacts ISO Exercises and What Founders Should Know

For many employees, exercising Incentive Stock Options (ISOs) is an exciting milestone. It marks the moment they become true owners in the company. But along with that upside comes a lesser-known tax complication: the Alternative Minimum Tax (AMT).

AMT is calculated using IRS Form 6251, and if employees do not understand it, they could face unexpected tax bills. 

What is Form 6251?

Form 6251 is the IRS form used to determine whether a taxpayer owes the Alternative Minimum Tax (AMT).

The AMT was created to ensure that high-income earners who benefit from certain deductions, credits, or exclusions still pay at least a minimum level of federal tax. 

Each year, taxpayers must calculate their liability under both the regular tax system and the AMT using Form 6251, and then pay whichever amount is higher.

AMT usually applies to individuals whose income and tax situation push them above the AMT exemption. Common examples include:

• Employees exercising ISOs: When an employee exercises ISOs and holds the shares beyond the same calendar year, the “bargain element” (the difference between the strike price and the Fair Market Value (FMV) at exercise) is treated as income for AMT purposes. Even though this gain is not taxed under the regular system until a sale, AMT treats it as immediate taxable income.
• Taxpayers with large state and local tax (SALT) deductions: Regular tax allows you to deduct state and local taxes, but AMT limits this benefit. If you live in a high-tax state, your deductions may be added back under AMT.

Note: For 2024, the exemption is $85,700 for single filers and $133,300 for married couples filing jointly. In 2025, these amounts increase to $88,100 and $137,000. If your AMT income is below these levels, you will not owe AMT. Once your income rises above the exemption, AMT may apply.

How Incentive Stock Option (ISO) exercises trigger Alternative Minimum Tax (AMT) 

When you exercise ISOs, you purchase shares at the strike price, and the IRS pays attention to the difference between that price and the FMV at the time of exercise.

• Under the regular tax system, if you exercise ISOs and hold the shares for at least one year after exercise and two years after the grant date, the eventual sale is taxed as a long-term capital gain. Until then, the spread is not taxed. 
• In contrast, under the AMT system, the spread is treated as income in the year you exercise, even if you do not sell the shares.

So when you exercise your ISOs, the IRS requires you to calculate your tax liability under both systems:

• Regular tax system: Your tax is based on your salary, bonuses, and other taxable income. The ISO spread is ignored until you eventually sell the shares.
• AMT system: Your tax calculation starts with your regular income but then adds the ISO spread from any options you exercised that year, along with other AMT adjustments.

You then pay whichever amount is higher. 

The AMT credit (Form 8801)

If exercising your ISOs triggers AMT, you may owe additional tax in the year of exercise. Later, when you sell the shares, the regular tax system also taxes that same income, which can create the appearance of being taxed twice.

To address this, the IRS allows you to claim an AMT credit on Form 8801 in future years. This credit helps offset the overlap between the AMT you paid at exercise and the regular tax owed at sale. However, because the credit is only available after the sale, there can still be a timing gap that affects cash flow.

When to file Form 6251?

• April 15: This is the regular filing deadline for most U.S. taxpayers. Your Form 6251 should be filed along with your Form 1040 or 1040-SR by this date to stay compliant and avoid late fees.
  
  
• June 15: U.S. citizens and residents working abroad receive an automatic extension to this date. If this applies to you, Form 6251 is due at the same time as your extended return.
  
  
• Filing an extension: If you need extra time, you can request an extension (usually by submitting Form 4868) before the April 15 deadline. This pushes the filing date forward but does not delay the requirement to pay any taxes owed.

Failing to meet these deadlines can trigger late filing penalties. Typically, the IRS charges 5% of the unpaid tax for each month (or part of a month) the return is late, up to a maximum of 25%.

How to file Form 6251

1. Gather your documents

• Your regular taxable income (from Form 1040): this is the income you normally report after subtracting the standard or itemized deductions
• W-2s, 1099s, and other income records.
• Form 3921 (provided by your employer for each ISO exercise).
• ISO exercise details: number of shares, strike price, and fair market value (FMV) at exercise.
• Other AMT adjustment items (e.g., state/local tax deductions, miscellaneous itemized deductions).

‍2. Fill out Part I of Form 6251: Alternative Minimum Taxable Income (AMTI)

• Start with your regular taxable income (from Form 1040).

• Add back the ISO spread and certain deductions not allowed under AMT.

Example:

You earned $150,000 in salary.

You exercised ISOs with a $40,000 spread. You also deducted $10,000 in state income taxes on your regular return.

Under AMT, you must add back both the $40,000 ISO spread and the $10,000 state tax deduction: 

$150,000 (taxable income) + $40,000 (ISO spread) + $10,000 (disallowed deduction) = $200,000 AMTI.

From there, you subtract the AMT exemption and apply AMT rates

3. Fill out Part II of Form 6251: How to calculate AMT

Subtract your AMT exemption:

• 2024 exemptions: $85,700 (single) or $133,300 (married filing jointly).
  Phases out once AMT income exceeds $609,350 (single) or $1,218,700 (MFJ).
• 2025 exemptions: $88,100 (single) or $137,000 (married filing jointly).
  Phases out once AMT income exceeds $626,350 (single) or $1,252,700 (MFJ).
  

Apply AMT rates:

• 26% on the first $116,300 (single) or $232,600 (MFJ) of AMT income above the exemption (2024 thresholds). For 2025, the thresholds increase to $120,600 (single) or $241,200 (MFJ).
• 28% applies to any AMT income above those amounts.
• Compare this AMT calculation to your regular tax and pay whichever is higher.

AMT calculation example for 2025:

AMTI before exemption: $200,000 (single filer)
Subtract exemption of $88,100 → $111,900 subject to AMT

Since $111,900 is below the 26% threshold of $120,600, all of it is taxed at 26%

$111,900 × 26% = $29,094 tentative minimum tax
If your regular tax is $26,000, AMT applies because it is higher.

Note: The 26% “threshold” is the top of the 26% bracket. All AMT income above the exemption and up to that threshold is taxed at 26%, not ignored.

‍4. Complete Part III (if applicable)

If you sold ISO shares during the year and the sale qualifies for long-term capital gains treatment (you held the stock at least 1 year after exercise and 2 years after grant), you’ll need to use Part III of Form 6251.

This section recalculates AMT using the preferential capital gains rates (0%, 15%, or 20%, depending on income) instead of the flat 26%/28% rates. This prevents you from overpaying under AMT when you’ve already earned the lower long-term rate.

• For example: If you exercised ISOs in 2022 and sold them in 2024 at a gain that meets the holding rules, the profit is taxed as a long-term capital gain under both regular tax and AMT. Part III ensures you get the benefit of those lower rates.
  
  
• If the shares were sold in the same year as exercise (a disqualifying disposition), the gain is treated as ordinary income, and Part III usually doesn’t apply.

5. File and pay

Attach Form 6251 to your Form 1040 (or 1040-SR), file electronically or by mail by the deadline, and pay your tax liability.

Wrapping up

Form 6251 helps you determine if the AMT applies and ensures you stay compliant. By understanding how the ISO spread affects your taxes and when to file, you can avoid surprises and plan your exercises more strategically.