Exercise your ISOs in amounts, and in years, that keep the tax bill small enough to pay without a fire sale, and do it early in the year rather than in December. For a high earner with a big gain on paper, that usually means spreading exercises over several years and selling some shares the same day to cover the tax. Exercise everything at once and you can owe a six-figure tax bill on stock you haven't sold.
I've helped clients with equity compensation for 20-plus years, many of them at tech and biotech companies around Boston and Cambridge. The ISO conversations that go badly almost always start the same way: the stock was up, someone exercised a big block in one shot, and they found out what it cost them the following April.
The short version:
- Exercising ISOs and holding the shares can trigger the alternative minimum tax, even though you haven't sold anything.
- New 2026 rules make the AMT easier for high earners to hit.
- Spreading exercises over several years, and selling some shares the same day, can turn one huge tax bill into small ones you can actually pay.
- Exercising in January instead of December gives you a way out if the stock drops.
If you hold ISOs, the next 60 days matter. A January exercise plan has to be built before January, and a December exercise is the one that's hardest to undo.
What Do Strike Price, Spread and Exercise Mean?
These three words decide your tax bill, so here they are in plain English.
- Strike price: the fixed price your grant lets you buy each share for.
- Exercise: actually buying the shares at the strike price. Until you exercise, you own options, not stock.
- Spread: today's stock price minus your strike price. If the stock is $49 and your strike is $9, the spread is $40 a share. This is the number the IRS cares about.
What Is the Alternative Minimum Tax?
The alternative minimum tax, or AMT, is a second way the IRS calculates your tax, and you pay whichever of the two numbers is higher. Think of it as doing your taxes twice.
Every year, your tax is figured the regular way you're used to, and again under the AMT rules. The AMT version counts some things as income that the regular version ignores. It exists to make sure people with big deductions or special tax breaks still pay a minimum amount. In most years, your regular tax is the higher number, so the AMT never shows up. Exercising ISOs is one of the things that can flip that.
Here's a simplified example. Say your regular tax this year is $200,000, and your tax under the AMT rules is $150,000. The regular number is higher, so you pay $200,000 and the AMT doesn't matter.
Now say you exercise ISOs with a $500,000 spread and keep the shares. On the regular calculation, nothing changes: still $200,000. But on the AMT calculation, that $500,000 counts as income, and at the AMT's 28% rate it adds about $140,000, bringing the AMT number to roughly $290,000.
Now the AMT number is higher, so that's what you pay. You owe about $90,000 more than you expected, on shares you haven't sold and that haven't put a dollar in your pocket.
That extra $90,000 is "the AMT." At higher incomes the real number often runs bigger, for reasons the 2026 section below explains.
Why Do ISOs Trigger the AMT?
ISOs trigger the AMT because the spread counts as income under the AMT rules the year you exercise, but not under the regular rules.
Under the regular rules, ISOs get a real break. When you exercise and keep the shares, you owe no regular income tax that year. Hold them more than two years from the grant date and more than one year from the exercise date, and the whole gain is eventually taxed at lower long-term capital gains rates.
Under the AMT rules, there's no such break at exercise. The gap between those two treatments is exactly what creates the AMT bill.
What Changed With the AMT in 2026?
In 2026 the AMT got easier for high earners to trigger, because its built-in exemption now disappears much faster as income rises.
The 2026 AMT exemption for married couples is $140,200. Starting this year, it shrinks by 50 cents for every dollar of AMT income over $1,000,000, and it's gone entirely once AMT income hits $1,280,400. Under the old rules, it shrank by only 25 cents per dollar, and the shrinking started at a higher income.
In plain English: if your household already earns well into six figures, the cushion that used to absorb an ISO exercise disappears fast. An exercise that would have been fine a couple of years ago can now land you squarely in AMT. If you exercised last year without a problem, don't assume this year works the same way.
How Did Derek Avoid a $673,000 AMT Bill?
Derek avoided a $673,000 AMT bill by exercising over four years instead of one, and selling part of each exercise the same day to pay the tax.
Derek, 44, is a VP at a Cambridge biotech. Derek and their spouse earn about $850,000 a year with salary, bonus and RSU vests, and have about $4.6 million invested outside company stock.
After strong trial data, Derek's company stock went to $49. Derek holds 60,000 vested ISOs with a $9 strike price, a $40 spread on every share:
$40 × 60,000 = $2.4 million
Derek's first instinct was to exercise all 60,000 at once and start the long-term clock. Here's roughly what that would have done under 2026 federal rules, with about $800,000 of taxable income before the exercise:
- Regular federal tax: about $218,000
- Tax under the AMT rules, with the $2.4 million spread added: about $891,000
- AMT owed on top of regular tax: about $673,000
That's $673,000 due in April. On top of that comes $540,000 just to exercise the options (60,000 × $9). And not one share sold to pay for any of it.
We checked whether Derek could exercise without triggering AMT at all. At Derek's income, the answer was about $137,000 of spread a year, roughly 3,400 shares. At that pace, getting through 60,000 shares would take more than 17 years. Not a real plan.
So we built one that works:
- Exercise 15,000 shares each January for four years.
- Sell 7,000 of them the same day. That's taxed as ordinary income, with no AMT on those shares.
- Hold the other 8,000 to start the long-term clock.
Each year, the same-day sale pays for exercising all 15,000 shares, the federal and Massachusetts tax on the shares sold, and the AMT on the shares held, with about $25,000 left over. AMT runs about $65,000 a year instead of $673,000 at once. And that AMT isn't gone. It comes back as a credit in later years, when Derek's regular tax runs higher than the AMT.
After four years, Derek holds 32,000 shares with $1.28 million of spread that qualifies for long-term capital gains rates. The federal gap between ordinary income (37%) and long-term gains plus the investment income surtax (23.8%) is 13.2 points:
13.2% × $1,280,000 = about $169,000 in federal tax saved
Derek also sold 28,000 shares along the way, cutting a dangerous bet on one stock without ever being forced to sell. (If one stock is a big share of your net worth, read How Do I Diversify a Concentrated Stock Position?)
These numbers assume the stock holds at $49 and are simplified to show how it works. Your CPA should run your actual AMT projection before you exercise. My job is making sure the plan and the projection match.
What Goes Wrong When You Exercise ISOs Without a Plan?
The big AMT bill is the famous mistake, but it's not the only one. These are the quieter ones I see:
- No cash for April. Nobody withholds tax when you exercise ISOs. The bill shows up all at once at tax time, and if the money's tied up in the stock, you sell under pressure.
- An underpayment penalty on top. Because nothing was withheld, a big AMT year can also trigger an IRS penalty unless you make estimated payments during the year.
- A December exercise followed by a January drop. You can owe AMT on a gain that's already gone, with no way to undo it.
- Selling a few days too early. Sell before the holding periods are up and the long-term treatment is gone. The gain becomes ordinary income.
- Paying tax twice on the same gain. ISO shares have two cost bases, one for regular tax and one for AMT. If that isn't tracked when you sell, or the AMT credit isn't claimed in later years, you can overpay and never know it.
- Missing the window when you leave. Change jobs and you generally have three months to exercise and keep ISO treatment. Miss it and the options lose their tax break or expire.
None of these are exotic. They happen to smart, busy people because the decision lives across two tax systems, several tax years and a stock price that won't sit still.
Why Should I Exercise ISOs in January Instead of December?
Exercising in January gives you the rest of the year to undo the AMT if the stock falls. Exercising in December gives you almost none.
If you exercise in January and the stock drops in the spring, you can still sell before December 31. A sale in the same calendar year turns the exercise into a "disqualifying disposition": the gain becomes ordinary income, and the AMT on those shares goes away. You give up the long-term rate, but you don't pay AMT on a gain that no longer exists.
Exercise in December and that escape hatch is gone. If you're reading this near year-end and thinking about exercising before December 31, slow down and run the numbers first. Waiting a few weeks for January can be the cheapest decision you make all year.
How Much Should I Exercise Each Year?
The right amount is the most you can exercise while keeping the AMT at a level you can pay and your stake in one stock at a level you can live with.
Finding it means answering three questions in order:
- How much spread can you add before AMT kicks in? That's your free room, and after the 2026 changes it's smaller than most people expect.
- How much AMT are you willing to prepay? You get it back as a credit over time, but it's real cash today.
- How much of your net worth should sit in one stock? If the answer is "less than it does now," a same-day sale is doing two jobs at once.
Answering those means running both tax calculations side by side, for this year and the next few, before you commit. It's the part of this I do with clients and their CPAs, ideally in the fall, so the plan is ready to go in January.
Who Needs to Plan ISO Exercises?
Anyone holding vested ISOs with a meaningful spread needs a plan before they exercise, and the bigger the spread or the household income, the more it matters.
That includes you if:
- You hold vested ISOs with a large spread.
- Your company is heading toward an IPO, acquisition or big data readout.
- You're thinking about leaving your job.
- Your household income is already high enough that the AMT exemption is shrinking or gone.
If you already have an ISO plan and want a second set of eyes on it, that's what The Second Opinion is for. For how I help with stock options, RSUs and ESPPs more broadly, see Equity Compensation Planning.
Frequently Asked Questions About ISOs and the AMT
Does Massachusetts have an AMT?
No. Massachusetts doesn't have its own alternative minimum tax, so the AMT is a federal problem. But large exercise-and-sell years can push your income over the $1,107,750 line in 2026, where the Massachusetts 4% surtax starts. Plan for that too.
Do I get the AMT back?
Usually, over time. AMT you pay because of an ISO exercise generally becomes a credit you can use in future years when your regular tax is higher than your AMT. It can take several years to use it all, so think of it as a prepayment, not a refund that shows up next April.
What happens to my ISOs if I leave my job?
Most plans give you a limited window to exercise after you leave, often 90 days. To keep ISO tax treatment, you generally have to exercise within three months of leaving. Miss it and the options either expire or are taxed like non-qualified options, as ordinary income at exercise. Check your plan document before you give notice. (If you have RSUs too, read What Happens to My RSUs When I Leave My Job?)
What is the $100,000 ISO limit?
Only $100,000 worth of ISOs, measured at the grant price, can first become exercisable in any one year. Anything above that is treated as a non-qualified option, even if your grant letter says ISO. Confirm which of your options are actually ISOs before you build a plan around them.
What if the stock drops after I exercise?
If it's still the same calendar year, you can sell, turn the exercise into a disqualifying disposition, and erase the AMT on those shares. If the year has already turned, you may owe AMT on a spread that's gone. That's the strongest argument for exercising in January.
Should I just exercise and sell everything at once?
Sometimes, yes. If the stock is a huge share of your net worth, if you need the cash, or if you're not confident in the company's next few years, exercising and selling right away can beat chasing the long-term rate. You'll pay ordinary income tax on the whole spread, but you'll have no AMT, no concentration risk and no waiting. The right answer depends on your whole balance sheet, not just the tax.
If you're holding ISOs with a meaningful spread, the time to plan is before you exercise, not after. See if we're a fit.