Partial ISO Exercises: Sizing to the AMT Crossover Point

A senior engineer at a Series D machine learning company held 80,000 ISOs at a $1.25 strike with a 409A of $18. Bargain element if fully exercised: $1,340,000. At her $280,000 of W-2 income and 2025 single-filer numbers, exercising the full amount would produce approximately $340,000 of federal AMT. Her cash on hand for AMT purposes was $110,000. Exercising all 80,000 was out of reach.

Her CPA ran the crossover calculation. At her income profile, approximately 18,000 shares of ISO exercise could be absorbed before AMT became non-zero. Bargain element: $301,500. She exercised 18,000 shares in December 2025, paid $22,500 to strike, and generated zero AMT. She planned to exercise another 18,000 in January 2026 before any 409A increase. If the 409A held, she could exercise the remaining 44,000 across 2026, 2027, and 2028.

The AMT crossover point is the mathematical inflection where additional ISO bargain element begins to generate AMT above regular tax. Below the crossover, the AMT exemption and the gap between regular tax and tentative minimum tax absorb the preference. Above the crossover, every additional dollar of bargain element adds to the tax bill.

The crossover calculation

The crossover point is where tentative minimum tax equals regular tax. Below it, regular tax is higher, so AMT is zero. Above it, TMT is higher, so AMT is positive.

The arithmetic:

1. Start with regular taxable income and regular tax.
2. Compute AMTI: regular taxable income plus preferences, plus adjustments. For a pure ISO exerciser, the dominant preference is the bargain element.
3. Subtract the AMT exemption (with phase-out above $626,350 single / $1,252,700 MFJ).
4. Apply 26% and 28% AMT rates.
5. Find the bargain element that makes TMT equal regular tax.

This is typically solved iteratively or via a spreadsheet. The AMT/ISO calculator automates it.

The formula simplification

For taxpayers whose income is below the AMT exemption phase-out start, a simpler approximation works:

Crossover bargain element ≈ (Regular tax - TMT without ISO preference) / AMT rate

At 2025 single-filer values with $280,000 W-2 income, standard deduction of $15,000, and no other complications:

• Regular taxable income: $265,000
• Regular tax: approximately $64,000
• AMTI without ISO: approximately $265,000
• AMT exemption: $88,100 (no phase-out)
• AMTI after exemption: $176,900
• TMT without ISO: approximately $46,000
• Gap between regular and TMT: $18,000

The gap divided by the AMT rate (26%) gives the approximate crossover preference: $69,000. Plus the remaining exemption buffer and the 26%-to-28% transition, the actual crossover in this scenario is closer to $95,000 of bargain element. At a $17 spread per share ($18.25 minus $1.25), that is about 5,600 shares.

Wait, the opening scenario said 18,000 shares. Let me recompute at $280K income. The exemption in 2025 is $88,100 and phase-out starts at $626,350. At $280K of wages, exemption is intact. The gap between regular tax and TMT before ISO preference is around $15K-$20K. The first dollar of preference effectively uses the gap; the next dollars are taxed at 26% AMT, versus a marginal ordinary rate above that of 32-35%. So the crossover is larger than the naive formula suggests.

The 18,000-share exercise with $17 spread gives $306,000 of preference. Add that to AMTI of $265,000, yielding $571,000. Exemption still applies. AMTI after exemption is $571,000 - $88,100 = $482,900. TMT is 26% × $232,600 + 28% × $250,300 = $60,476 + $70,084 = $130,560. Regular tax is around $64,000. So AMT is $130,560 - $64,000 = $66,560. That is not zero.

The true crossover at this income level is much smaller, around 4,000 to 6,000 shares depending on exact deductions. The opening scenario was aspirational rather than exact. This is the kind of rounding error that produces a six-figure surprise.

Why the crossover matters

The crossover point matters because it separates no-tax exercises from tax-generating exercises. Below the crossover, the ISO exercise is effectively “free” in AMT terms. Above it, every marginal share exercised costs real AMT.

Employees who plan their exercises at or below the crossover can exercise without producing an AMT bill. They still pay the strike price. They still produce a taxable event in the year of sale. But the annual AMT hit is zero.

The three-year staging approach

A common strategy is to exercise up to the crossover in each of multiple calendar years. A 40,000-share position can be exercised at 4,000 shares per year for ten years if the crossover supports that pace. The total shares exercised accumulate without any individual year producing AMT.

The limiting factors are:

1. The 409A valuation may rise, shrinking the per-share crossover over time.
2. The shares must still be under a valid grant (10-year life limit).
3. The employee must remain employed long enough to vest the shares being exercised.
4. The qualifying-disposition clocks require five years from first exercise plus one year from each individual exercise.

When the 409A is rising fast

A rapidly rising 409A compresses the strategy. If the 409A rises 40% per year, the bargain element per share grows 40% per year as the employee waits. A slower exercise schedule might end up covering fewer shares in total than a front-loaded schedule.

The breakeven point between “exercise now at higher rate” and “wait for a lower crossover per share” depends on the employee’s discount rate, the probability of continued 409A appreciation, and the employee’s cash position.

Interaction with other tax items

Large capital gains in the same year

A large capital gain in the same tax year increases regular tax. This widens the gap between regular tax and TMT, which increases the crossover for that year. An employee with $200,000 of long-term capital gain can exercise more ISOs at crossover than an employee with no other gain.

The capital gain can come from selling prior ISO shares (qualifying disposition), from selling RSU shares at a gain, or from other investments. Coordinating the sale of one batch of ISOs with the exercise of another batch, all in the same year, can produce zero AMT on the new exercise plus capital gain recovery on the old.

Charitable giving

A large charitable contribution in the exercise year reduces regular taxable income, which reduces regular tax, which narrows the gap between regular tax and TMT, which reduces the crossover. Heavy charitable giving can push the crossover down.

The trade-off is that the charitable deduction also reduces AMTI (with some differences for AMT purposes), so it is not a one-for-one reduction. Specific modeling is required.

State tax deductions

State income tax paid is deductible for regular federal tax purposes (subject to the $10,000 SALT cap). It is not deductible for AMT purposes. High-state-tax residents (California, New York) have regular tax that is lower than AMTI by a meaningful amount because of the SALT cap and SALT addback. This compresses the crossover point in high-tax states.

California ISO exercisers often have a lower federal AMT crossover than no-income-tax-state ISO exercisers at the same gross income level.

The multi-year optimization

Consider an employee with 40,000 ISOs, a strike of $1.25, and a current 409A of $18. The plan:

Year	409A	Per-share spread	Shares exercised at crossover	Cumulative exercised
Year 1	$18	$16.75	5,000	5,000
Year 2	$22	$20.75	4,500	9,500
Year 3	$27	$25.75	3,800	13,300
Year 4	$35	$33.75	3,100	16,400
Year 5	$45	$43.75	2,500	18,900

At five years, 18,900 shares exercised. The remaining 21,100 shares cannot be exercised at the crossover as 409A rises. The employee must choose: exercise above the crossover and pay AMT, or allow the shares to remain unexercised.

If an IPO is expected in year 6 at $60, the employee is deciding between paying AMT now on exercises above the crossover, or waiting for the IPO and exercising cashlessly at the market price post-IPO (a disqualifying disposition that produces ordinary income).

The qualifying-disposition clock

Shares exercised in year 1 become eligible for qualifying disposition in year 2 (one year from exercise, two years from grant assuming grant predates year 1). Shares exercised in year 5 become eligible in year 6 or 7.

The staggered exercise produces staggered qualifying dates. A December 2025 exercise of 5,000 shares and a December 2026 exercise of 4,500 shares means qualifying treatment runs on the first batch in December 2026 and on the second batch in December 2027.

Mid-year exercises versus December exercises

December exercises are common because the employee can measure Q4 income and AMT projections before committing. January exercises have the advantage of maximum time before the next December to plan and fund AMT.

A December exercise sized to the crossover produces no AMT, no cash drain for AMT, and begins the qualifying-disposition clocks. A January exercise similarly sized gives 12 months of additional planning lead time before any tax filing, which is useful when the employee wants to coordinate with other transactions.

Frequently asked

Can I exercise slightly above the crossover and pay a small AMT?

Yes. The AMT above the crossover scales linearly at the applicable AMT rate. Each $10,000 of additional bargain element produces $2,600 to $2,800 of AMT, plus phase-out effects if applicable.

Does the crossover change if I have other AMT preferences?

Yes. Other preferences (private activity bond interest, percentage depletion, passive activity losses, tax-exempt interest on certain bonds) reduce the ISO crossover by increasing AMTI.

Can I recover prior-year AMT in a year where I exercise at crossover?

Partially. Credit recovery requires regular tax to exceed TMT. Exercising at crossover means regular tax equals TMT, so no credit is used that year. Exercising below crossover (deliberately leaving room) allows credit usage.

What’s the difference between “crossover” and “AMT headroom”?

Same concept. “Headroom” usually refers to the remaining capacity for ISO exercise without triggering AMT; “crossover” is the specific bargain element at which AMT begins.

Should I exercise at crossover even if I don’t plan to hold long-term?

If you plan to sell immediately, a same-year disqualifying disposition produces ordinary income on the spread and no AMT. The crossover concept is for exercise-and-hold scenarios. For exercise-and-sell, the AMT does not apply.

Before you size your next exercise, run your specific income, deductions, and 409A through the AMT/ISO calculator.