Joe Kristan has a good post on “How the refundable AMT credit works” in an example involving incentive stock options here. He discusses the dangers of ISOs and AMT in a volatile market:
The bottom line? Our reader has to do some thinking on whether the savings of having capital gain treatment of ISOs is worth both the market risk on his stock and the high possibility of having to wait until 2012 to recover taxes due in 2008 if he retains ISO treatment. If the stock goes to zero before he sells it, he has a $420,000 AMT liability and no cash.