ISOs and AMT in 2026: What Women Leaders Need to Know

Oct 14 — 2025
Blog, Stock Compensation, Tax Planning and Strategies

Estimated reading time: 13 minutes

What Is the Alternative Minimum Tax?
ISO Basics: Grant, Exercise, and the Bargain Element
How Exercising ISOs Triggers the AMT
ISOs and AMT in 2026: What Changed
Five Strategies to Manage AMT on Your ISOs
Your ISO Exercise Checklist
Frequently Asked Questions
Work with a Fee-Only Fiduciary Who Knows Equity Compensation
Sources

The alternative minimum tax (AMT) is a parallel federal tax calculation that runs alongside your regular return, and you pay whichever result is higher. Exercising incentive stock options and holding the shares past December 31 is one of the most reliable ways a high earner lands in it, which is why ISOs and AMT belong in the same planning conversation from the start.

That conversation changed for 2026. The One Big Beautiful Bill Act, signed in July 2025, lowered the income thresholds where the AMT exemption starts to disappear and doubled the speed of the phase-out. If you are an executive woman with meaningful option grants and income anywhere near $500,000, the margin for casual exercising is gone.

Here is how the tax works, the 2026 numbers verified against the IRS inflation adjustments, a worked example with real arithmetic, and the five strategies I walk clients through before they exercise a single share.

What Is the Alternative Minimum Tax?

The alternative minimum tax is a second way of calculating your federal income tax. Every year your liability is figured twice: once under the regular rules and once under AMT rules, and you owe the higher of the two. The AMT uses its own income definition, its own exemption, and two flat rates of 26 and 28 percent.

The AMT calculation starts with your taxable income, adds back certain deductions and preference items, and calls the result alternative minimum taxable income, or AMTI. You subtract an exemption amount, then apply the rates. For 2026, the 26 percent rate applies to the first $244,500 of income above your exemption and 28 percent applies to everything past that breakpoint.

Most W-2 earners never owe it. The taxpayers who do usually did one specific thing that inflated AMTI while leaving regular taxable income untouched. Exercising incentive stock options and holding the shares is the classic example.

ISO Basics: Grant, Exercise, and the Bargain Element

An incentive stock option gives you the right to buy company stock at a fixed strike price. You owe no tax when the options are granted and, under the regular tax system, no tax when you exercise. Tax arrives when you sell, and how much you pay depends on how long you held the shares.

The difference between the fair market value of the shares on the day you exercise and the strike price you paid is called the bargain element. On a qualifying disposition, meaning you sell more than two years after the grant date and more than one year after the exercise date, your entire gain is taxed at long-term capital gains rates. Sell earlier and you have a disqualifying disposition: the bargain element (or your actual gain, if smaller) is taxed as ordinary income.

This is where ISOs differ from restricted stock units. RSUs are taxed as ordinary income automatically at vesting, with no AMT wrinkle. ISOs hand you the timing decisions, and the tax outcomes follow from those decisions. If your package includes both, I covered the RSU side in Should You Sell or Hold? Crafting a Plan for Vested RSUs.

How Exercising ISOs Triggers the AMT

Exercise ISOs and hold the shares past December 31 of the exercise year, and the entire bargain element is added to your AMTI for that year, even though you sold nothing and received no cash. The adjustment is reported on line 2i of Form 6251. If it pushes your tentative minimum tax above your regular tax, you owe the difference as AMT.

Sell within the same calendar year and the adjustment disappears. The IRS treats regular tax and AMT identically for a same-year disposition, and no line 2i entry is required. That single rule is the hinge for most of the planning below.

The trap is that AMT is calculated on the paper spread at exercise, and the stock is under no obligation to stay there. Executives who exercised in a peak year and held through a decline have owed six-figure AMT bills on gains that no longer existed by the time the tax was due.

A Worked Example: 5,000 ISOs at a $10 Strike

Here is a hypothetical composite, simplified to show the mechanics. A pharmaceutical VP, a single filer, exercises 5,000 ISOs in March 2026 at a $10 strike while the stock trades at $50. Her bargain element is 5,000 x ($50 – $10) = $200,000. She holds the shares past year-end, so the full $200,000 is added to her AMTI.

Say her AMTI before the exercise is $450,000. The exercise takes it to $650,000. Her 2026 exemption starts at $90,100, but AMTI above $500,000 phases it out at 50 cents per dollar. Her $150,000 of excess income cuts the exemption by $75,000, leaving $15,100. Her AMT base is $650,000 minus $15,100, or $634,900.

Tentative minimum tax: 26 percent of the first $244,500 is $63,570, plus 28 percent of the remaining $390,400 is $109,312, for a total of $172,882. Assume her regular federal tax for the year works out to about $120,000 (the exact figure depends on her deductions and other income). She pays the higher number. The exercise created roughly $53,000 of additional federal tax, before any state tax, on shares she has not sold.

One comparison worth seeing: under the pre-2026 rules, the phase-out rate was 25 percent, so the same $150,000 of excess AMTI would have cost her $37,500 of exemption instead of $75,000. The 2026 rule change alone adds about $10,500 to this hypothetical bill, which is 28 percent of the extra $37,500 of exemption she lost.

ISOs and AMT in 2026: What Changed

For 2026, the interaction between ISOs and AMT tightened. The One Big Beautiful Bill Act, signed July 4, 2025, kept the higher post-2017 AMT exemption amounts but reset the exemption phase-out thresholds to $500,000 for single filers and $1,000,000 for joint filers, and it doubled the phase-out rate from 25 percent to 50 percent, effective in 2026.

The IRS confirmed the 2026 figures in Rev. Proc. 2025-32. In practice, a single executive whose AMTI crosses $500,000 (a threshold that includes the ISO bargain element itself) now loses her exemption twice as fast, and starts losing it at a lower income level than she did in 2025. More high earners will owe AMT in 2026, and larger exercises will owe more of it.

2026 AMT figure	Single filer	Married filing jointly
AMT exemption	$90,100	$140,200
Exemption phase-out begins (AMTI)	$500,000	$1,000,000
Exemption fully phased out (AMTI)	$680,200	$1,280,400
Phase-out rate	50 cents per $1 over threshold	50 cents per $1 over threshold
26% rate applies	First $244,500 above exemption	First $244,500 above exemption
28% rate applies	Above $244,500	Above $244,500

If you file married filing separately, the 2026 exemption is $70,100, the phase-out also begins at $500,000 of AMTI, and the 28 percent rate begins at $122,250. All of these figures apply to tax year 2026, the return you will file in early 2027, so confirm them with your CPA before acting on a large exercise.

Five Strategies to Manage AMT on Your ISOs

None of this argues against exercising. It argues for sequencing. The principle underneath every tactic here is the same: ISOs and AMT are manageable when you model before you exercise and check the position again before year-end.

1. Exercise Early in the Year, Then Watch the Stock

Exercising in January or February gives you ten-plus months of information before the AMT consequence locks in on December 31. If the stock holds or rises, you keep the shares, start the one-year clock toward a qualifying disposition, and budget for the tax. If it falls hard, you still have the escape hatch below. Exercising in December gives you none of that flexibility.

2. Exercise Up to Your AMT Crossover Point

Your AMT crossover point is the number of shares you can exercise in a year before tentative minimum tax overtakes your regular tax. Below that line, the exercise costs you nothing extra today. A CPA can compute it from a projection of your full-year income. Many executives spread a large grant across three or four Januaries, exercising up to the crossover each year, and sidestep AMT entirely.

3. Use a Disqualifying Disposition as an Escape Hatch

If you exercised, held, and the stock has dropped well below its exercise-date value, selling before December 31 of the exercise year converts the event into a disqualifying disposition. The AMT adjustment vanishes, and your ordinary income is generally measured by what you actually received rather than the old paper spread. You surrender the capital gains treatment you were holding for, and you can save a six-figure phantom tax bill. Run the numbers with your CPA in early December, while there is still time to trade. And if the honest reason you are holding is attachment to the company, read my piece on Home Stock Syndrome and your retirement plan.

4. Track Your AMT Credit with Form 8801

AMT paid on an ISO exercise is a timing difference, so it generates a minimum tax credit you can claim on Form 8801 in later years, in any year your regular tax exceeds your tentative minimum tax. The credit carries forward until it is used. Recovery is often slow in high-income years, which is one reason the credit belongs inside a longer plan. I cover the multi-year sequencing side in Maximize Your Retirement Income with Effective Tax Planning.

5. Coordinate the Exercise with the Rest of Your Income

An ISO exercise never happens in a vacuum. Bonus timing, a spouse’s income, RSU vesting, deferred compensation elections, and charitable deductions all move both sides of the regular-versus-AMT comparison, and the phase-out thresholds are measured against the combined total. Your 40s and 50s are exactly when these levers stack up. I wrote about using them deliberately in Peak Earning Years: Are You Making the Most of Them?, and my free Executive Woman’s Tax Playbook shows how the tax pieces fit together before retirement.

Your ISO Exercise Checklist

Before you exercise anything in 2026, work through this list:

Pull every grant document. Confirm strike prices, grant dates, vesting schedule, expiration dates, and the post-termination exercise window, commonly about 90 days if you leave. My post on what happens to equity compensation when you are laid off covers that scenario.
Get the current fair market value. For a private company, that is the latest 409A valuation. It sets your bargain element.
Compute the bargain element per lot. Shares times (fair market value minus strike), for each grant you might exercise this year.
Project your 2026 AMTI with and without the exercise. The $500,000 and $1,000,000 phase-out thresholds are measured against AMTI that includes the bargain element itself.
Ask your CPA for your crossover number before you exercise anything.
Confirm the cash. You need the strike price at exercise and possibly an AMT payment by April 2027, and neither should depend on selling the shares you intended to hold.
Calendar an early-December review. That is your last clean window for the escape hatch if the stock fell.

An ISO exercise plan that models AMT in advance is standard work for us, not a special request. We coordinate all of it inside Align360™ Wealth Management, and you can read more about how we work with high-net-worth women.

Frequently Asked Questions

Do I Pay AMT When I Exercise ISOs?

Not automatically. Exercising ISOs creates no regular taxable income, but if you hold the shares past December 31, the bargain element is added to your alternative minimum taxable income for that year. You owe AMT only if the resulting tentative minimum tax exceeds your regular tax. Small exercises often stay under the line; large exercises at high income levels rarely do. Model it before you act.

How Do I Avoid AMT on ISOs?

Three levers work. Exercise only up to your AMT crossover point each year, so tentative minimum tax never passes your regular tax. Exercise early in the year so you can sell before December 31 if the stock falls, which erases the AMT adjustment. Or accept a disqualifying disposition and pay ordinary income rates on the spread. A CPA or fee-only advisor can model all three before you commit.

What Is the AMT Exemption for 2026?

For tax year 2026, the AMT exemption is $90,100 for single filers and $140,200 for married couples filing jointly, per IRS Rev. Proc. 2025-32. The exemption phases out at 50 cents per dollar once alternative minimum taxable income passes $500,000 for single filers or $1,000,000 for joint filers, disappearing entirely at $680,200 and $1,280,400 respectively.

What Happens to the AMT Credit?

AMT paid because of an ISO exercise generates a minimum tax credit, claimed on Form 8801, that offsets regular tax in future years when your regular tax exceeds your tentative minimum tax. Unused credit carries forward until absorbed. Recovery often takes years for high earners, so treat it as deferred cash flow, and keep every Form 6251 filing so none of the credit gets lost.

Should I Do a Same-Day Sale of My ISOs?

A same-day sale is a disqualifying disposition: the spread is taxed as ordinary income and no AMT adjustment applies. You give up the chance at long-term capital gains rates, and you gain certainty, cash, and diversification. For a large position in a volatile stock, that trade is often worth making. The right answer depends on your concentration, your cash needs, and your bracket.

Work with a Fee-Only Fiduciary Who Knows Equity Compensation

I am a CFP® and fee-only fiduciary, and my practice is built for executive women whose wealth is concentrated in the company they helped build. ISO decisions sit exactly where investment risk, cash flow, and tax law meet, so I plan them as one piece of the whole retirement picture. If you want a quick read on where you stand overall, start with my free Retirement Readiness Assessment.

If you are holding a grant and unsure what this year’s exercise should look like, book a free 15-minute Align Call. Whether we work together or not, you’ll walk away with clarity on your best next step.

All information is for educational purposes only and should not be considered financial, tax, or investment advice.

Sources

Alternative Minimum Tax, AMT, Equity Compensation, financial advice for women, ISOs, stock options, tax planning