ISOs and the AMT After OBBBA: How Much Can You Exercise in 2026?

This article draws on two pieces of work written for financial advisors: Ben Henry-Moreland’s analysis of the One Big Beautiful Bill Act at Kitces.com, which we’d recommend reading in full, and Daniel Zajac’s presentation “Making Sense of ISOs,” a clear walk through the crossover point, the minimum tax credit, the choice between holding and selling, and how the calendar shapes an exercise. The household, the calculations, and the figures below are our own.

What the Regular Tax Ignores and the AMT Counts

Start with what an incentive stock option is for. Under the regular income tax, exercising an ISO is not a taxable event. There is no income at exercise and no Social Security or Medicare tax, then or later. If the shares are held more than two years from the grant date and more than one year from the exercise date, the sale is a qualifying disposition, and everything above the strike price is long-term capital gain. In 2026 that means a rate of 0%, 15%, or 20% in place of ordinary rates that reach 37%.

Sell sooner and the sale is a disqualifying disposition. The spread at exercise (or, in an ordinary sale, the actual gain if the price has fallen and the gain is smaller) becomes ordinary compensation income in the year of the sale. It still escapes payroll tax, and the employer is not required to withhold income tax on it, a courtesy that can turn into an underpayment problem. We cover the rules that prevent one in our article on estimated taxes and the safe harbor.

The second system is the alternative minimum tax. The AMT is a parallel calculation with its own definition of income, its own exemption, and two rates of its own. Inside it, the ISO’s special treatment does not exist. Exercise and hold the shares through the end of the calendar year, and the spread (the share price on the exercise date minus the strike price, often called the bargain element) is added to AMT income for that year. No cash has come in. If the AMT calculation produces a larger number than the regular tax, the difference is added to the year’s tax, and it counts under the estimated tax rules like any other income tax: it can wait for the return only if withholding and estimated payments already meet a safe harbor.

Two details in that paragraph do most of the planning work. The first is the phrase “through the end of the calendar year.” Sell the shares in the same calendar year they were exercised, and the regular tax and the AMT treat the transaction the same way, so there is no AMT adjustment at all. The second is that the AMT keeps its own books. Shares bought through an ISO carry two cost bases, the strike price for the regular tax and the exercise-date value for the AMT, and the difference between them is what later brings the AMT back as a credit.

We introduced ISOs alongside restricted stock units, employee stock purchase plans, and deferred compensation in our overview of stock compensation. This article is the longer look at the one item on that list with a second tax system attached.

How the Minimum Tax Is Figured in 2026

For a household that takes the standard deduction, the arithmetic, which lives on Form 6251, has four steps.

AMT income. Start with regular taxable income and add back what the AMT does not allow. The standard deduction comes back ($32,200 for a married couple filing jointly in 2026), as do state and local taxes for those who itemize, and so does the spread on any ISO shares exercised and still held at year-end.

The exemption. In 2026 it is $140,200 for a married couple and $90,100 for a single filer. It is subtracted from AMT income, and it begins to shrink once AMT income passes $1,000,000 for a couple or $500,000 for a single filer.

The rates. What remains is taxed at 26% on the first $244,500 and 28% above that. Long-term capital gains and qualified dividends keep their own 0%, 15%, and 20% rates inside the calculation, which matters in the year ISO shares are finally sold. The result is called the tentative minimum tax.

The comparison. If the tentative minimum tax is larger than the regular tax, the excess is the AMT, and it is paid on top of the regular tax. If the regular tax is larger, there is no AMT that year, and the amount by which the regular tax exceeds the tentative minimum tax is the cushion an ISO exercise has to work with.

That last sentence is the whole idea behind a crossover point, so it is worth making concrete.

One Couple, 14,000 Options

Take a hypothetical married couple in Austin. The facts would be the same in Dallas, Houston, or San Antonio, since Texas adds no income tax of its own. Together they earn $400,000 in wages and take the standard deduction. One of them holds 14,000 vested ISOs, granted several years ago with a $15 strike price, and the shares trade at $65. The grant vested over several years, which matters: only $100,000 of grant-date value can first become exercisable as ISOs in any one year, and options above that line are treated as nonqualified stock options. Exercising everything would cost $210,000 and buy shares worth $910,000, a spread of $50 a share and $700,000 in all. To keep the arithmetic visible they have no other income, and we apply the 2026 brackets and thresholds to every year shown. Every figure is our own calculation for this one household. It is an illustration of the mechanics, not a forecast and not a recommendation.

Before any exercise, their taxable income is $367,800 and their regular tax is $73,468. Their AMT income is $400,000, because the standard deduction comes back. The exemption takes that to $259,800, and the tentative minimum tax is $67,854. The regular tax is higher by $5,614, so they owe no AMT. That $5,614 is their cushion.

The Crossover: How Little Fits Before the AMT Starts

Each dollar of ISO spread adds a dollar of AMT income and nothing to regular income. It raises the tentative minimum tax by 28 cents (26 cents for households lower on the AMT scale) and leaves the regular tax alone. The cushion is used up when the spread reaches the cushion divided by that rate. For this couple, $5,614 divided by 28% is $20,050 of spread, which is 401 shares.

That is the crossover: the largest exercise-and-hold that produces no AMT. For a couple holding 14,000 options it is about 3% of the grant. Exercising only up to the crossover each year sounds prudent in the abstract. On these facts it would take about 35 years, and an ISO’s term cannot run longer than ten.

The crossover is not the same for every household, and it does not rise steadily with income. It depends on how far the regular tax has pulled ahead of the tentative minimum tax, a gap that narrows in the 22% and 24% brackets and widens above them.

A married couple with $200,000 of wages can exercise and hold $41,508 of spread before the AMT begins. At $300,000 the room is $30,462, and at $400,000 it is $20,050. It reaches its low point, $14,943, at $435,750 of wages, where the 24% bracket ends. From there it widens: $24,121 at $500,000, $44,338 at $600,000, and $94,338 at $800,000. It peaks at about $120,000 near $880,000 of wages. Beyond that, wages plus the spread pass $1,000,000, the spread is priced at 42 cents, and the room narrows again, to $105,706 at $1,000,000.

The reason is easy to see once it is laid out. In the 24% bracket, a dollar of salary adds 24 cents of regular tax and 26 to 28 cents of tentative minimum tax, so each raise shrinks the cushion. In the 32%, 35%, and 37% brackets the regular tax grows faster than the minimum tax, and the cushion rebuilds: each dollar of ordinary income in the 35% bracket makes room for 25 cents of ISO spread, and in the 37% bracket, 32 cents. Our couple, at $400,000, sits close to the bottom of that curve.

Henry-Moreland’s analysis of the law at Kitces.com, published when it passed, charted the same relationship, the AMT adjustments a household can absorb at each income level, and found that for married couples, AMT exposure is greatest between roughly $300,000 and $500,000 of taxable income (about $330,000 to $530,000 of wages for a couple taking the standard deduction). Our figure runs that idea on wages, and the low point it finds sits inside that range. Households that itemize get different figures than these, because state and local taxes are added back for the AMT while mortgage interest and charitable gifts are not. A large property tax deduction thins the cushion, which is the interaction we ran in our article on the SALT cap for Texas homeowners.

What OBBBA Changed, and What It Left Alone

The 2017 tax law raised the AMT exemption and, more importantly, pushed the income level at which the exemption starts to disappear far up the scale. Both changes were temporary. Section 70107 of the One Big Beautiful Bill Act made the larger exemption permanent, which is why the 2026 exemption looks like 2025’s with an inflation adjustment. It also made two changes that take effect in 2026.

The first lowers the phaseout threshold. In 2025 the exemption began shrinking at $1,252,700 of AMT income for a married couple and $626,350 for a single filer. For 2026 those lines drop to $1,000,000 and $500,000.

The second doubles the speed. Above the threshold, the exemption used to shrink by 25 cents for every added dollar of AMT income. It now shrinks by 50 cents, and it is gone entirely at $1,280,400 for a couple and $680,200 for a single filer.

Inside that range, a dollar of ISO spread does two things at once. It is taxed at 28%, and it removes 50 cents of exemption, which exposes another 50 cents of income to the same 28%. The combined cost is 42 cents per dollar of spread (28% times 1.5). Above the range the exemption is gone and the cost falls back to 28 cents.

What did not change is everything below the threshold. A household whose AMT income stays under $1,000,000 (joint) or $500,000 (single) in the exercise year computes its AMT the way it did before, with a slightly larger exemption. So the fair summary of OBBBA and ISOs is narrower than it first sounds. The law raised the cost of large exercises, and of exercises stacked on top of a high-income year, and it left small and moderate ones alone. We made the same point about Roth conversions that share a year with an exercise in our piece on conversion planning for Austin tech households.

What Each Block of Shares Costs

Back to the couple, and to the question they would actually ask: what does it cost to exercise and hold a given number of shares?

The first 401 shares carry no AMT. After that, each share adds $14 of AMT, which is 28% of its $50 spread. Exercising and holding 1,000 shares produces $8,386 of AMT. For 4,000 shares it is $50,386, and for 8,000 shares $106,386. At 12,000 shares the bill is $162,386 and the couple’s AMT income reaches exactly $1,000,000, so the last 2,000 shares fall inside the phaseout. Their $100,000 of spread removes $50,000 of exemption and costs $42,000, or $21 a share. Exercising and holding all 14,000 produces an AMT bill of $204,386, and $14,000 of it exists only because of the phaseout. Like the rest of the bill, that $14,000 comes back later as a credit, as the next section explains, so what the phaseout adds is a larger prepayment and a longer wait to recover it.

Now the part that gets lost when the conversation is about rates. To hold all 14,000 shares, this couple writes two checks: $210,000 to exercise and $204,386 with the return the following April, $414,386 in all, with nothing withheld along the way. In exchange they hold $910,000 of a single stock, issued by the same company that pays their salary.

The AMT Credit: A Prepayment on a Slow Schedule

AMT paid because of an ISO exercise is not lost. It becomes a minimum tax credit that carries forward without expiring and can be used in any later year in which the regular tax exceeds the tentative minimum tax, up to the amount of that excess. In effect, the AMT on an ISO is a prepayment of tax on a gain the regular system will reach later. (AMT caused by permanent differences, such as the standard deduction, does not create a credit. For this couple the whole $204,386 does, because without the exercise they would owe no AMT.)

How fast the prepayment returns depends on the cushion. In an ordinary year, with wages only, this couple’s regular tax exceeds their tentative minimum tax by the same $5,614 as before, so that is all the credit they can use. At that pace, $204,386 would take 37 tax years. The credit is figured each year on Form 8801, and the exercise year’s Form 6251 is the record worth keeping until the credit is used up.

The sale is what speeds it up. Suppose they hold for a little over a year and then sell all 14,000 shares at the same $65. For the regular tax the gain is the full $700,000, taxed at long-term rates: $127,705 of income tax, plus $26,600 of the 3.8% net investment income tax. For the AMT the basis is $65, so the gain is zero. That pushes the regular tax far above the tentative minimum tax for the year, and $133,319 of the credit comes back at once. The remaining $71,067 returns at $5,614 a year, which takes thirteen more tax years.

So “you get it back” is true and incomplete. On these facts about two thirds returns in the sale year, and the last third takes more than a decade.

One more limit matters on a timeline this long. Tax carryovers generally belong to the spouse who generated them, and the minimum tax credit follows the same logic. If that spouse dies, the credit can still be used on the joint return for the year of death, but the deceased spouse’s share is lost after that: the survivor cannot use it in later years, and it does not pass to heirs. In Vichich v. Commissioner in 2016, the Tax Court denied a widow the credit from her late husband’s ISO exercise, in a case from a separate-property state about a credit he built before they married. In a community property state like Texas, there is a reasonable argument that half of a credit built during the marriage belongs to the surviving spouse, but we know of no court that has settled it.

Hold, Sell, or Split

The reason to accept all of this is the rate. Here is what the lower rate is worth to this couple if the share price does not move.

If they exercise and sell everything in the same year, the $700,000 spread is ordinary income. It adds $243,782 to their federal tax, 34.8% of the spread, and there is no AMT. Because that income is compensation, it also escapes the 3.8% net investment income tax, which a qualifying sale does not. They keep $456,218 after tax and are out of the stock.

If they hold all 14,000 shares for the qualifying sale and the price is still $65, the eventual tax on the spread is $154,305, or 22.0%, once the whole credit has come back. That is $89,477 less, about 12.8% of the spread. Measured only through the sale year, with $71,067 of credit still outstanding, the advantage is $18,410.

Those are the two ends. In between sits the choice most households actually face, which is how many shares to hold.

Selling 10,000 shares in the exercise year and holding 4,000 brings the eventual tax to $207,382. The exercise year’s AMT falls to $34,604, the sale covers the exercise cost and all of that year’s added tax with $235,614 left over, and the whole credit comes back in the year the remaining shares are sold. Selling 7,000 and holding 7,000 lowers the eventual tax to $186,306, with $25,766 of the credit still coming back over five more years, and leaves $40,614 of cash after the first year’s costs.

One feature of these numbers is general, and it is easy to miss. In all three cases where some or all of the shares are held, the tax added in the exercise year is the same $204,386. Once a household is in the AMT, its total tax for the year is set by its AMT income, and AMT income counts the spread on every exercised share, sold or held. Selling a share in the exercise year changes which tax is paid on it (ordinary income tax, which is permanent, in place of AMT, which returns as a credit). It does not change the amount due in April, as long as some AMT is still owed. What the sale changes is the cash on hand to pay that amount and the quantity of stock still at risk.

How Far the Stock Can Fall Before Holding Loses

A tax saving of $89,477 is the reward for holding $910,000 of one stock for a year. The stock does not have to fall far to erase it.

If the couple holds all 14,000 shares and sells a year later at $56.61, a decline of about 12.9%, they end up exactly where they would have been by selling at exercise, and that is after the entire credit has eventually come back. Below that price, holding loses. Counting only the credit recovered through the sale year, the break-even is $63.57, a decline of about 2.2%.

A year later at $84.50 (up 30%), holding finishes $297,503 ahead of having sold at exercise. At $65 it is $89,477 ahead. At $55.25 (down 15%) it is $14,536 behind, at $45.50 (down 30%) it is $118,549 behind, and at $32.50 (down 50%) it is $257,278 behind. Each of these counts the minimum tax credit as fully recovered, which takes years, and sets aside whatever the proceeds of an early sale would have earned or lost elsewhere in the meantime.

A modest decline is not the larger danger. A large one that arrives after December 31 is.

December 31 Is a Decision Date

Suppose the couple exercises all 14,000 options and the price then falls by half, to $32.50. The shares are worth $455,000, and the real gain over the strike price is $245,000, not $700,000.

If they sell before the end of the exercise year, the tax system sees the real gain. A same-year sale is a disqualifying disposition with no AMT adjustment, and the ordinary income is limited to the actual gain of $245,000. Their tax rises by $78,550, and they keep $166,450. That limit holds only for a sale on which a loss would be allowed. A gift or a sale to a related party loses it entirely. So can a sale within 30 days before or after another acquisition of the company’s shares (an employee stock purchase, another option exercise, and, on a cautious reading, a restricted stock unit vesting), the same window the wash sale rule uses: on the shares that acquisition matches, the full exercise-date spread becomes ordinary income.

If they are still holding on January 1, the AMT is fixed by the exercise-date spread. They owe $204,386 of AMT on $700,000 of paper gain, most of which no longer exists, against shares worth $455,000. Selling a little over a year after exercise, still at $32.50, produces a long-term gain of $245,000 for the regular tax and, for the AMT, a capital loss of $455,000, because the AMT basis is $65. Here the parallel system turns harsh. An AMT capital loss, like a regular one, can offset only $3,000 of other income a year, so the loss does not undo the earlier AMT. In the sale year the couple recovers $43,204 of credit. The remaining $161,182 returns at $6,454 a year (the $5,614 cushion plus $840, because the $3,000 of AMT loss allowed each year lowers the tentative minimum tax), which takes 25 years. Through the sale year, they have kept $37,758 of a gain that would have left them $166,450 had they sold in December, with $161,182 of credit still to come.

The scenario is not hypothetical for everyone. In Merlo v. Commissioner, decided by the Fifth Circuit in 2007, an employee exercised options in December 2000 on shares valued at about $1.08 million, for a cost of about $9,200. The shares were worthless within a year. He argued that the 2001 loss should be carried back to erase the 2000 AMT. The Tax Court and the Fifth Circuit both said no: the capital loss limits apply inside the AMT as well, and the loss could only be carried forward.

The practical point is the calendar, and it cuts both ways. A January exercise leaves eleven months in which a same-year sale can still undo the AMT if the price falls. Its one-year mark also arrives before the balance of the exercise year’s tax is due the following April, so a qualifying sale (for options also more than two years past their grant date) can help pay the bill it created. A December exercise leaves almost no time for the first and none for the second. What it offers in exchange is knowledge: by December the year’s income is known, and the exercise can be sized against real numbers. Trading windows and the cash needed to exercise sit on top of both.

Private-Company ISOs

Everything above assumes shares that can be sold. With a private company the same rules apply and the exit does not. The spread is measured against the fair market value of the shares on the exercise date (usually taken from the company’s latest appraisal), the AMT belongs to that year’s tax, and there may be no buyer for the shares for years, or ever. The December 31 decision does not exist when there is no market to sell into. The exercise cost and the AMT are both real money, paid for shares whose value is an appraisal.

People still exercise private-company options for sound reasons: a small spread early in a company’s life, a grant about to expire, the three-month window that follows leaving an employer, or the holding period for the qualified small business stock exclusion, which begins at exercise. (The exclusion itself is the subject of our article on Section 1202.) The questions worth asking are how much cash the exercise and the tax will take, what happens to the plan if that cash never comes back, and whether the company allows any sale before a liquidity event.

How We Think About It

We lean toward pricing the AMT and against treating it as a line to stay under. The crossover is a useful number to know, but for a household with a large grant it can be too small to be a strategy. This couple’s was 401 shares. So before an exercise we lean toward modeling the year: the AMT at several exercise sizes, how quickly the credit would return given the household’s normal cushion, and whether the AMT can be paid from assets other than the shares themselves. The size of the exercise comes out of that model. It is the same discipline we bring to any large income year, where one number drives several costs at once, and it is the method described in our article on the multi-year tax projection.

On holding for the lower rate, we lean, for the most part, toward holding what the plan can carry and selling the rest. A qualifying sale is worth real money, about 13 cents per dollar of spread for the couple above, and it is earned by keeping a concentrated position for more than a year. The amount worth keeping starts from what the household could lose without changing how it lives. From there it is a conversation before it is a calculation, covering the company’s outlook, how much of the household’s net worth already sits in the stock, the unvested shares and future grants still coming, any other forms of company stock the household holds, and which mix of sales produces the best overall tax result. It is the view we lean toward for any concentrated stock position: the taxes are weighed carefully, and the tax bill does not get to make a risk decision.

We do not lean one way on timing within the year. Exercising early preserves the December decision described above. Trading windows, cash, and the rest of the household’s situation can point elsewhere, and we would sooner model the choice than adopt a rule.

For private-company options we lean toward exercising only with money the household could lose entirely. The exercise cost and the AMT are certain, the value of the shares is not, and the plan should still work if the shares are never sold.

The trade-offs run in both directions. Selling early gives up a lower rate that, for a household with room to carry the risk, is a meaningful saving. Holding everything turns a tax plan into a bet on one company. The lean described above sits between those two, and the number that puts a household there is its own.

Common Questions

Do I owe AMT every time I exercise incentive stock options?

Exercising incentive stock options triggers the AMT only when the tentative minimum tax, with the ISO spread included, exceeds the regular tax for the year. A small exercise can fit inside the gap between the two, and shares sold in the same calendar year they were exercised create no AMT adjustment at all. In our worked example, a married couple with $400,000 of wages could exercise and hold $20,050 of spread in 2026 before any AMT was due.

How much AMT will I owe on an ISO exercise in 2026?

The AMT on an ISO exercise is 26% or 28% of the spread above the household’s crossover point (the amount it can exercise and hold before any AMT is due), and 42% of any spread that falls inside the exemption phaseout. In 2026 the phaseout runs from $1,000,000 to $1,280,400 of AMT income for a married couple and from $500,000 to $680,200 for a single filer. In our example, a couple earning $400,000 who exercised and held 14,000 options with a $700,000 spread owed $204,386 of AMT.

What did the One Big Beautiful Bill Act change about the AMT?

The One Big Beautiful Bill Act made the higher AMT exemption permanent and, starting in 2026, lowered the income level where the exemption phases out and doubled the phaseout rate. The thresholds fell from $1,252,700 to $1,000,000 for married couples and from $626,350 to $500,000 for single filers, and the exemption now shrinks by 50 cents per dollar of AMT income above the threshold, up from 25 cents. Households whose AMT income stays below the threshold in an exercise year compute the AMT as before.

Do I get the AMT back after an ISO exercise?

AMT paid on an ISO exercise becomes a minimum tax credit that carries forward indefinitely, but each year it can offset regular tax only up to the amount by which regular tax exceeds the tentative minimum tax. A qualifying sale of the shares is what brings a large part of it back at once, as long as the price has held. In our example, $133,319 of a $204,386 credit came back in the sale year and the remaining $71,067 took thirteen more years. If the shares fall sharply after exercise, recovery can take much longer, and credit attributed to a spouse who dies is generally lost after the year of death.

Is it better to exercise and hold ISOs or to exercise and sell?

Holding ISO shares for a qualifying sale converts the spread from ordinary income to long-term capital gain, while selling in the exercise year removes both the AMT adjustment and the single-stock risk on the shares sold. In our example the lower rate was worth about 12.8% of the spread if the price held, and a decline of about 12.9% over the holding year erased the advantage. We lean, for the most part, toward holding what the plan can carry and selling the rest, sized from a model of the household’s own numbers.

What happens if the stock drops after I exercise ISOs?

A sale in the same calendar year as the exercise removes the AMT adjustment, and in an ordinary sale it also limits the ordinary income to the actual gain, so the tax follows the lower price (a gift, a sale to a related party, or a sale within 30 days of another acquisition of the company’s shares can lose that limit). If the shares are still held on January 1, the AMT is based on the exercise-date spread no matter what the shares are worth later, and a later AMT capital loss offsets capital gains plus only $3,000 of other income a year. That is why the end of the exercise year is a decision date.

Does a same-day sale of ISO shares trigger the AMT?

A sale in the same calendar year as the exercise, including a same-day sale, creates no AMT adjustment. The spread is taxed as ordinary compensation income, with no Social Security or Medicare tax and no required income tax withholding, so estimated tax payments may be needed.