Imagine you work at a growing tech startup with a meaningful incentive stock option (ISO) package as part of your compensation. Over time, the company succeeds and your options are finally in the money. You decide to exercise those ISOs and hold the shares, moving them into your brokerage account and you’re feeling great about the decision.
Then the surprise arrives: a tax bill far larger than expected, without any cash from a stock sale to help pay it. That’s the Alternative Minimum Tax at work. For many executives and founders, it shows up only after an ISO exercise, and often long after the decision felt safely behind them.
What is the Alternative Minimum Tax?
The AMT is essentially a parallel tax system that runs alongside the regular tax code. For tax year 2026 (the return you’ll file in 2027), you must calculate your tax liability twice: once under the ordinary rules and again under AMT rules. The AMT recalculation starts with your regular taxable income, then adds back certain deductions and preferences that the regular system allows but AMT disallows (or treats differently).
After adding these items, the AMT system applies two statutory rates—26% and 28%—to your alternative minimum taxable income (after subtracting the AMT exemption). If this “alternative” tax computes to be higher than your normal tax, you pay the difference as AMT.²
Fortunately, the Alternative Minimum Tax (AMT) is far less common than it was before 2018. The Tax Cuts and Jobs Act (TCJA) dramatically reduced AMT exposure; Tax Policy Center estimated AMT payers drastically fell from more than 5 million in 2017 to about 200,000 in 2018.¹ The One Big Beautiful Bill Act (OBBBA) made the larger AMT exemptions permanent, avoiding the broad AMT expansion that was projected to occur if TCJA provisions expired after 2025.
That said, starting in 2026 the OBBBA resets the AMT exemption phase‑out thresholds to $500,000 (single) and $1,000,000 (joint) and accelerates the phase‑out. So AMT remains a niche issue overall, but it can still show up for higher‑income taxpayers in specific situations.
One of those situations is incentive stock option (ISO) exercises. For high-net-worth executives and business owners with large ISOs, exercising and holding those options remains one of the most common reasons to trigger AMT. Unlike cash salary or even non-qualified stock options, ISO exercises can create taxable income under AMT rules without any cash proceeds in hand. This often results in a tax liability mismatch, resulting in a bill due to the IRS even though you haven’t sold the stock to generate cash.
Why ISO Exercises Still Trigger AMT in 2026
Even in 2026, with generally higher AMT exemptions in place, exercising incentive stock options (ISOs) can land you in AMT territory. It comes down to a fundamental difference in how ISOs are taxed versus non-qualified stock options (NSOs). With a non-qualified stock option, any gain at exercise is treated as ordinary income and is taxed immediately through your payroll (and your employer gets a tax deduction).
For example, if you have an NSO with a $10 strike price and you exercise it at a time the stock is worth $50, that $40 per share gain is taxed as compensation income right away. Because it’s taxed under the regular system, there’s no further AMT adjustment, as the income is already included in your normal taxable income.
NSO Taxation: Immediate Recognition
The $40/share gain is taxed as compensation income at exercise.No AMT Adjustment
ISO Taxation: Deferral Benefit
Holding Requirements for LTCG Treatment
However, the AMT sees it differently: for AMT calculations, that bargain element is counted as income in the year of exercise. Meaning that the “paper profit” from an ISO exercise is included in your AMT income, even though it’s excluded from regular income.³ This AMT rule is precisely why ISO exercises are a leading cause of AMT bills.
To illustrate, say you have the opportunity to buy 10,000 shares of your company stock at $5 (your ISO strike price) when the current market value is $20. If you exercise and hold the shares, you’ve technically gained $15 per share, or $150,000 of value, but under regular tax rules, none of that is taxable now (because you haven’t sold the stock). Under AMT, though, that $150,000 counts as income.
Depending on your overall tax picture, an extra $150,000 of AMT income could generate a meaningful AMT bill. One straightforward way to eliminate the ISO-related AMT adjustment is to exercise and dispose of the shares in the same tax year (a disqualifying disposition). In that case, the bargain element is generally treated as compensation income for regular tax purposes in the same year—similar to a nonqualified stock option, so there’s typically no separate ISO adjustment on Form 6251 for that year.
More broadly, you can also manage (or avoid) AMT by limiting how many shares you exercise in a given year and/or exercising when the spread is smaller, so the bargain element doesn’t push your AMT calculation above your regular tax.⁴
ISO & AMT: The Hidden Tax Trap
Example Scenario: Exercise & Hold
Regular Tax
AMT Calculation
🚪 The Escape Hatch: Same-Year Sale
But selling immediately also forfeits the potential ISO tax advantage (the lower long-term capital gains rate on post-exercise appreciation). Many executives don’t want to exercise and sell right away; the whole point of an ISO is to hold the stock for long-term gain.
It’s worth noting that the 2025 tax law changes (OBBBA), while they tweaked some AMT parameters, did not eliminate the ISO-AMT issue. The higher AMT exemptions are now permanent, which helps, but starting in 2026 the law also lowered the income threshold where the AMT exemption begins to phase out and doubled the rate of phase-out.⁵ That means high-income taxpayers will lose the AMT exemption more quickly as income rises, making it a bit easier to tip into AMT if you have a very large ISO exercise.
How Much Can Be Exercised Without Triggering AMT
2026 AMT exemption amounts and phase-out start points, per IRS. The higher exemption amounts reduce AMT’s reach, but once income passes the phase-out threshold, the exemption is gradually lost.
How many of my options can I exercise before I trigger AMT?
It would be great if there were a simple dollar figure (or number of shares) as the answer. Unfortunately, there’s no one-size-fits-all answer. The point at which an ISO exercise will trigger AMT depends on your overall tax situation, such as your ordinary income, your deductions, your filing status, and other factors all interact in the AMT calculation. That said, we can at least discuss the general framework.
First, know the basic 2026 AMT exemption amounts. For a single taxpayer, the AMT exemption in 2026 is $90,100, and for a married couple filing jointly it’s $140,200. This is the amount of AMT-calculated income you can have without paying any AMT at all. However, if your income exceeds the threshold where the exemption begins to phase out ($500,000 for singles or $1,000,000 for joint filers), the exemption shrinks quickly.⁶
Finding Your AMT-Free Exercise Window
The AMT Income Spectrum
Finding Your Marginal Exercise Window
regular taxable income
element gradually
equals regular tax
Above those thresholds, for every dollar your AMT income goes over the limit, you lose $0.50 of the exemption (this is the new 50% phase-out rate under OBBBA).⁷ In practical terms, the exemption is fully gone at very high income levels (roughly $680k for singles and $1.28M for joint filers in 2026, after which all your AMT income is taxed). But for anyone below those lofty incomes, the exemption means a sizable chunk of income is shielded from AMT.
Now, when you exercise ISOs, you’re adding the bargain element to your AMT income. So, how much can you add before AMT comes into effect?
Again, there’s no simple formula. Conceptually, you add ISO bargain element income until your tentative AMT just exceeds your regular tax.
Once you’re in AMT territory, each additional dollar of ISO “spread” generally increases tentative minimum tax by 26% or 28%. And if you’re in the AMT exemption phase-out range, the effective marginal impact can be higher than 28%, because each additional dollar of AMT income can also reduce the exemption.
Do Staged Exercises Make Sense in 2026?
When facing a large ISO position, one common strategy is spreading the exercises over multiple tax years instead of doing it all at once. The idea is to utilize that AMT exemption (and lower tax brackets) each year, rather than triggering one gigantic AMT hit in a single year.
Potential Advantages of Spreading ISO Exercises:
Avoiding AMT or minimizing it each year: By exercising a portion of your options annually, you may keep your AMT income below the exemption threshold each time. For example, rather than one $500k bargain element in one year (which will often trigger AMT, depending on the rest of your income and deductions), you might do ~$125k spread over four years and potentially keep each year’s added AMT income within your projected AMT “headroom,” depending on the rest of your tax picture.
Cash-flow management: Smaller exercises mean smaller (or zero) AMT bills in any given year. It also potentially allows you to sell a portion of shares from each exercise to cover that year’s tax (if needed) without liquidating a large position all at once.
Risk mitigation over time: Staging exercises can help manage the market risk and expiration risk. Market-wise, if the stock’s price is volatile or uncertain, exercising in tranches lets you test the waters. You’re not committing all your capital at once; if the stock underperforms or tanks, you haven’t paid tax on the full batch at a high valuation. As for expiration, if your options have many years before they expire, you have the luxury to spread them out and wait for favorable moments.
Potential Downsides of Spreading Exercises:
Rising stock price and lost tax opportunity: If your company’s stock is rapidly appreciating, waiting can backfire. Every year you delay exercising some options, the bargain element potentially grows larger. That means you could end up paying more tax in total because you exercised later at a higher price. In a soaring stock scenario, a one-and-done exercise earlier could have locked in a smaller AMT spread on all shares. Staging, on the other hand, might subject you to progressively larger spreads (and possibly push you into AMT in later years anyway).
Administrative and planning complexity: Multi-year strategies require discipline and reassessment each year. You’ll be running tax projections annually, monitoring legislative changes, and tracking your progress. If something changes (say tax laws, your income, or your personal plans), you might need to adjust. A single exercise event is simpler in that you deal with it once (albeit in a big way).
It’s important to note that bigger one-year exercises can sometimes be more efficient, particularly if you expect to utilize the AMT credit quickly.
The AMT Credit
There’s a silver lining to paying AMT that many people overlook during the stress of writing that tax check: AMT paid due to ISO exercises isn’t gone forever, as it becomes a credit for future tax years. This is officially known as the Minimum Tax Credit. When you owe AMT, essentially you paid more tax than the standard system would have required. That excess amount is remembered as a credit that you can use in a later year to reduce your regular tax, once you’re no longer caught in the AMT. In other words, if you pay extra tax under AMT in 2026, you may get it back in subsequent years when your regular tax exceeds your tentative AMT.⁸
AMT Credit: What to Know
Suppose in 2026 you exercised a large ISO grant and ended up paying $50,000 of AMT (that $50k being the amount by which your AMT calculation exceeded your normal tax). You begrudgingly send the $50k to the IRS in April 2027. Now fast forward to 2027 and imagine you don’t do any ISO exercises that year, and as a result you’re not in AMT because your regular tax is, say, $100,000 and your AMT hypothetical tax is $80,000. In 2027, because your “normal” tax is higher than the AMT calculation, you get to claim a portion of that $50k credit to make up the difference.⁹ In this case, your regular tax exceeded AMT by $20,000, so you could use $20,000 of your AMT credit to cut your 2027 tax bill.
The remaining $30,000 of credit carries forward further. In 2028, you’d do the same comparison, and if regular tax is above AMT, you can use credit up to that difference. Over some years, you eventually could recoup the extra tax you paid.
In Conclusion
The Alternative Minimum Tax may no longer be the widespread threat it once was, but for those substantial incentive stock options, it remains a considerable planning consideration. The good news is that ISO exercises can be managed, so with the right timing, sizing, and coordination, you can harness the opportunities they present (potentially large gains at favorable tax rates) while mitigating the pitfalls (temporary tax hits and liquidity crunches).
We’re here to assist with exactly that. If you’re considering an ISO exercise or simply want to help ensure you’re not overlooking any angles, reach out to us by clicking the button below. It would be our pleasure to help turn a potential AMT minefield into a stepping stone toward your financial goals.
Appendix
- https://taxpolicycenter.org/briefing-book/how-did-tcja-change-amt#:~:text=Image
- https://carta.com/learn/equity/stock-options/taxes/amt/#:~:text=If%20you%20make%20more%20than,is%20likely%20to%20be%20higher
- https://www.investopedia.com/articles/active-trading/061615/how-stock-options-are-taxed-reported.asp#:~:text=However%2C%20exercising%20an%20ISO%20may,for%20the%20ISO%2C%20if%20any
- https://www.investopedia.com/articles/active-trading/061615/how-stock-options-are-taxed-reported.asp#:~:text=If%20you%20sell%20the%20stock,regular%20tax%20and%20AMT%20purposes
- https://carta.com/learn/equity/stock-options/taxes/amt/#:~:text=point%20they%20were%20set%20to,expire
- https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions#:~:text=Alternative%20minimum%20tax%20exemption%20amounts,for%20tax%20year%202026
- https://carta.com/learn/equity/stock-options/taxes/amt/#:~:text=point%20they%20were%20set%20to,expire
- https://carta.com/learn/equity/stock-options/taxes/amt/#:~:text=What%20is%20an%20AMT%20credit%3F
- https://www.nceo.org/articles/stock-options-alternative-minimum-tax-amt#:~:text=The%20AMT%20amount%2C%20however%2C%20becomes,So%20if%20in%202014
