ISO AMT Planning Guide
The #1 pain point in equity compensation planning: AMT exposure from ISO exercises (often without liquidity).
Last updated: January 2026
The #1 pain point in equity compensation planning
For many equity comp clients, the hardest part of the plan isn’t the math — it’s the mismatch between taxable income and cash. ISOs can create a large tax bill in a year where the client never sold shares and didn’t generate liquidity.
What is the Alternative Minimum Tax (AMT)?
The AMT is a parallel tax system that runs alongside the regular federal income tax. Each year, a taxpayer calculates liability under both systems and pays whichever is higher.
For equity compensation, AMT matters because ISO exercises (when the client exercises and holds) create an AMT “preference item” — the spread is included in AMT income even though there’s no sale.
2026 AMT parameters (OBBBA changes)
| Parameter | 2025 | 2026 (OBBBA) |
|---|---|---|
| Exemption (Single) | $88,100 | $90,100 |
| Exemption (MFJ) | $137,000 | $140,200 |
| Phase-out begins (Single) | $626,350 | $500,000 |
| Phase-out begins (MFJ) | $1,252,700 | $1,000,000 |
| Phase-out rate | 25% | 50% |
| AMT rates | 26% / 28% | 26% / 28% |
How ISOs trigger AMT
When a client exercises ISOs and holds the shares, the “bargain element” (FMV − strike) is not taxed under regular income tax — but it is included in AMT income.
Example: ISO exercise AMT calculation
| Element | Value |
|---|---|
| Options exercised | 10,000 shares |
| Strike price | $5/share |
| FMV at exercise | $25/share |
| Bargain element | $200,000 (10,000 × $20) |
| Cash outlay to exercise | $50,000 |
| AMT preference item | $200,000 |
| Potential AMT (upper-bound heuristic) | Up to $56,000 (28% of $200,000) |
Six strategies to minimize ISO AMT
- Find the AMT crossover point. Model the maximum ISO spread the client can exercise without triggering AMT, then exercise up to that threshold annually.
- Exercise early in the year. January/February exercises preserve flexibility — if shares drop significantly, a same-year disqualifying disposition may reduce total tax vs. paying AMT on a higher spread.
- Spread exercises across years. Break a large exercise into 2–4 years to stay below AMT thresholds each year (especially important with 2026’s accelerated phase-out).
- Coordinate with high-income years. In a year with large bonuses/RSUs/cap gains, AMT may not exceed regular tax — the marginal benefit of ISO treatment can change.
- Plan around AMT credits. AMT paid on ISO exercises can generate an AMT credit that may offset future regular tax — but recovery can take years.
- Same-day sale (DD) when needed. Exercise-and-sell avoids AMT entirely. The spread is ordinary income, but cash is immediate and holding risk is removed.