ISO AMT implications are the Alternative Minimum Tax consequences of exercising incentive stock options. At exercise, the bargain element (FMV minus strike) becomes an AMT adjustment item under IRC Section 56(b)(3), potentially triggering significant federal AMT liability in the year of exercise even though no regular ordinary income tax is owed. The AMT is recoverable as a credit against future regular tax but represents a real cash outlay in the exercise year. It is the most-misunderstood tax consequence of ISO exercise and the source of many of the painful tax surprises that ISO holders experience.
The AMT mechanic for ISO exercise: