ISOs and AMT timing

Incentive stock options carry the most favorable treatment in equity compensation, and the easiest way to lose it. The difference comes down to when, and how much, you exercise.

The rules in brief

When you exercise ISOs and hold the shares, there is no regular income tax at exercise. Hold them at least two years from grant and one year from exercise, and the entire gain at sale is taxed as long term capital gain.

The catch is the alternative minimum tax. The spread at exercise, the difference between the share value and your strike price, counts as income for AMT even though it is not income for regular tax. Exercise enough in one year and you owe AMT on paper gains you have not sold.

What changed for 2026

For 2026 the AMT exemption is $90,100 for single filers and $140,200 for joint filers. It begins to phase out at $500,000 of alternative minimum taxable income for single filers and $1,000,000 for joint filers.

The bigger change is the rate of that phaseout. Under the One Big Beautiful Bill Act, the exemption now shrinks by 50 cents for every dollar above the threshold, double the prior rate. A large exercise can erase the exemption entirely, pushing more of the spread into AMT at 26 and 28 percent.

Timing the exercise

1. Find your crossover. Most people can exercise some ISOs each year without triggering AMT. The projection shows exactly how much spread fits under the line.
2. Exercise early in the year. If the stock falls after exercise, selling in the same calendar year, a disqualifying disposition, can remove the AMT exposure. Exercise in December and that window is gone.
3. Consider the 83(b) election. Where your plan allows early exercise of unvested options, an 83(b) election within 30 days can lock in a small or zero spread.
4. Track the credit. AMT paid because of ISOs generally creates a minimum tax credit you can recover in later years. It is easy to lose track of, and worth real money.

Why a projection comes first

The right number of options to exercise is not a rule of thumb. It depends on your salary, bonus, other income, state tax and the company's outlook. We model it against your projected liability before you exercise, so the tax is a choice rather than a surprise.

This article is educational and is not tax advice for any specific situation.