Updated October 2026 with the 2026 AMT amounts under the 2025 federal tax law.
Exercising Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs) can be one of the most stressful parts of an equity compensation package, especially when the Alternative Minimum Tax (AMT) leaves you with a surprise bill. In this Silicon Valley case study (client details changed to protect privacy), we walk through how we helped a client:
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Pinpoint their AMT exposure
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Complete the right IRS forms
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Plan cash flow around quarterly estimated payments
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Understand the difference between selling ISO shares in the same year and holding them
2026 update: what changed for AMT
The case below uses 2025 figures. For 2026, the AMT exemption is $140,200 for married couples filing jointly and $90,100 for single filers. Under the 2025 tax law, the exemption now starts phasing out at $1,000,000 of alternative minimum taxable income for joint filers ($500,000 for single filers), and it phases out faster: by 50 cents for every dollar above the threshold. High earners who exercise ISOs may therefore reach AMT sooner in 2026 than in 2025. The steps below still apply.
The Client’s Equity Exercise
Grants Exercised:
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3,000 ISOs at a $10 strike when FMV was $50 → $120,000 AMT preference item
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500 NSOs at a $10 strike when FMV was $50 → $20,000 ordinary income
Without planning, the client was looking at an estimated $35,000 of AMT at filing time, on top of their regular tax. Here is how we turned that into a clear plan.
Step 1: Calculate Your NSO Liability
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Compute the “Bargain Element”
(FMV − Strike Price) × Number of Shares
→ ($50 − $10) × 500 = $20,000 of ordinary income -
Report on Form W-2
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Box 1: +$20,000 wages
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Boxes 2, 4 and 6: Withholding for federal income tax, Social Security and Medicare
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AMT Impact
NSO income flows through your regular tax. There is no AMT adjustment on Form 6251.
Step 2: Unpack Your ISO AMT Exposure
A. Compute the AMT Preference Item
(FMV − Strike Price) × Number of Shares → ($50 − $10) × 3,000 = $120,000
B. Complete Form 6251 (Alternative Minimum Tax)
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Line 2i: Enter $120,000
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Subtract the AMT exemption (for 2025, $137,000 for married filing jointly; for 2026, $140,200, subject to the phase-out described above)
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Apply the 26% and 28% AMT rates to calculate the tentative minimum tax
C. Compare vs. Your Regular Tax
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AMT Due = Tentative Minimum Tax − Regular Tax (reported on Form 1040, Schedule 2, Line 1)
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In this case, the difference was about $35,000
Step 3: Understand ISO Disposition Scenarios
| Disposition Type | Holding Period | Tax Result |
|---|---|---|
| Qualifying Disposition | ≥ 2 years from grant and ≥ 1 year from exercise | No additional ordinary income. The entire gain is long-term capital gain on Schedule D. AMT was already paid on the initial spread (Form 6251). |
| Disqualifying Disposition | Sale within either holding period | The bargain element (FMV at exercise − strike), limited by the sale price, is ordinary income on Form W-2, Box 1. Any remaining gain is short- or long-term capital gain. |
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Same-Year Sale Example:
Exercise 3,000 ISOs at $10 (FMV $50) → $120K preference; sell at $60-
$40/share × 3,000 = $120K ordinary income on Form W-2
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$10/share × 3,000 = $30K short-term capital gain
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Hold Beyond Year-End:
No extra W-2 income. The gain is long-term capital gain when sold after the holding periods, and the AMT paid at exercise may generate a credit (Form 8801) that can reduce regular tax in future years.
Step 4: Align Your Estimated Tax Payments
ISO exercises have no withholding, so any AMT is usually covered through Form 1040-ES estimated payments. For this client, we:
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Increased the remaining quarterly payments to cover the projected AMT
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Timed payments around known income events to protect cash flow
Results & Key Takeaways
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No surprise at filing: the AMT was projected in advance and covered through estimated payments
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Smoother cash flow: quarterly payments were timed to income events
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Reusable process: the same steps apply to future ISO and NSO exercises
Every situation is different. Results depend on your income, filing status, state, and the timing of your exercises and sales.
Planning an ISO or NSO Exercise?
Flex Tax and Consulting Group works with Bay Area tech employees on equity-compensation tax planning. In a tax strategy session, we can:
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Model your ISO/NSO tax liability (Form 6251 and Form 1040)
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Map out your estimated tax payments (Form 1040-ES)
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Track AMT credits for future years (Form 8801)
Schedule a consultation: Book a Tax Strategy Session
About Flex Tax and Consulting Group
Flex Tax is a full-service tax advisory firm based in the Bay Area. We support professionals, founders, and investors throughout San Francisco, Castro Valley, and beyond with proactive, year-round planning beyond just filing returns.
Related Post:
California Equity-Based Compensation Guidelines – Move from CA to Other States
This article provides general information only and is not tax or legal advice. Tax outcomes depend on individual facts and circumstances. Contact us about your specific situation.
Sources: IRS: Tax year 2026 inflation adjustments (Rev. Proc. 2025-32); IRS: About Form 6251.