The Stock Options Book

From Chapter 3, "Tax Treatment of Incentive Stock Options" (footnotes omitted)

The spread on exercise of an ISO is subject to alternative minimum tax (AMT) in the year of exercise unless the stock is sold in the same calendar year. Although the specific application of the AMT is too complex to summarize here, generally AMT is exactly what its name suggests: an alternative to the regular tax system. AMT is imposed on alternative minimum taxable income (AMTI) as com­puted under Sections 56 through 58 of the Code. To arrive at AMTI, the taxpayer computes regular taxable income (as defined in Section 55(c) of the Code) and then adjusts that amount by any adjustments or "tax preference items" (i.e., items that reflect certain deductions and tax deferral benefits allowed under the regular tax system) taken in the taxable year. The spread on exercise of an ISO has always been treated as a tax preference item.

Under Section 55 of the Code, AMT is computed on the amount of AMTI in excess of the applicable exemption amount ($69,950 for married taxpayers filing jointly and $46,200 for single taxpayers in 2008). If the AMT exceeds the taxpayer's regular tax in a given year, the taxpayer must pay the AMT amount rather than the regular tax amount. The difference between AMT and regular tax in any year is allowable as a credit against regular tax in future years when no AMT is due pursuant to Section 53 of the Code. Thus, AMT payment essentially serves as a prepayment of regular tax and accordingly offsets any deferral benefit that the taxpayer would otherwise enjoy in a year when AMT exceeds regular tax.