The difference between the option price and the fair market value on the exercise date for an ISO is treated as what for AMT purposes?

• A. An add-back.
• B. A regular tax deduction.
• C. A tax credit.
• D. No tax consequence.

Answer: (A)

Exercising an ISO creates a tax preference item for AMT equal to the spread between the fair market value at exercise and the exercise price. That amount is added back to your AMTI when calculating the tentative minimum tax. It’s not a regular tax deduction and it’s not a tax credit; it can trigger AMT if the add-back pushes you into the minimum tax. Later, you may recover some of that AMT via the AMT credit when your regular tax exceeds your AMT in future years, but the immediate treatment at exercise is an add-back.