Exercised some ISO stocks and held them last year. Received Form 3921 from my employer. Filled out "ISO Exercise and Hold" under Investment Income. Right after my Federal and state tax due skyrocketed up. Can anybody explain what just happened here?
Yes, you've run into the Alternative Minimum Tax. The "spread" between the cost of exercise and the value of the stock received is an "add back" item in determining the taxable income to use under the AMT. Look at Form 6251 and you'll see the tax that's calculated there.