Executive compensation packages often include a large base salary, variable bonuses, company stock plans. This balancing act layers on top of your already demanding schedule.
The interplay between your salary, bonuses, participating in a stock plan, any capital gains and your state can make tax planning a complex task for a busy professional. We work to balance income timing between what you can’t control (base, bonus, Restricted Stock Unit (RSUs)) and what you can control (exercising Incentive Stock Options (ISOs)). The decision when to exercise your stock options is not as easy as an if/then framework. As with anything this complex, the answer is “it depends.”
What has changed? Impacts to Executives with Stock Options
With the new tax law (One Big Beautiful Bill Act (OBBBA)) passed in 2025, AMT exposure reemerges as something to keep in mind for executives with stock options, ISOs in particular. The biggest impact is through the AMT phaseout.
If you are single making > $500k per year, or a married couple making over $1 million per year, you are more likely to be exposed to Alternative Minimum Tax starting in 2026. These AMT phaseout thresholds are not only lower going forward, but the phaseout rate is accelerated (25% to 50%, or 50 cents on every dollar over threshold).
| AMT Metric | 2025 (TCJA Rules) | 2026 (OBBBA Rules) | Change Impact |
|---|---|---|---|
| Exemption (Single) | $88,100 | $90,100 | Slight Inflation Increase |
| Exemption (MFJ) | $137,000 | $140,200 | Slight Inflation Increase |
| Phaseout Threshold (S) | $626,350 | $500,000 | 20% Reduction |
| Phaseout Threshold (MFJ) | $1,252,700 | $1,000,000 | 20% Reduction |
| Phaseout Rate | 25% | 50% | Doubled (100% Increase) |
Table Source: https://ourtaxpartner.com/amt-2025-exemption-2026-changes/
What are some ways executives can navigate these tax law changes with ISO exercise timing?
Exercise in Q1
Consider exercising ISOs early in the year to give you time to assess the stock price. Potential benefit: avoid the AMT if shares are sold prior to Dec. 31 that year. It would be considered a “disqualifying disposition,” subject to ordinary income tax rates. This can be useful when the stock price drops during the year compared to your exercise price. If the stock price is strong and increasing before the end of the year, you have the option to hold the shares until you can sell with long term capital gains rate treatment.
Keep in mind when selling: executives are often subject to sale restrictions such as blackout periods or insider trading policies which means less control over tax timing. To alleviate some of these restrictions, a 10b5-1 Plan may be an option for you, depending on your situation.¹
Front Load or Spread Out
Compare exercising ISOs over multiple years to spread out the impact or front loading. As an early stage executive, the spread and tax applied, may be lowest the younger the company before real growth has occurred. In a more mature company with a stable share price, spreading out the shares you exercise over multiple years may make sense.
Keep in mind when front loading: Only the first $100,000 of options (measured by grant-date exercise price value) that become exercisable in a calendar year can qualify as ISOs. Anything above that amount is automatically treated as a Nonqualified Stock Option (NSO/NQSO) for tax purposes. This is IRC §422’s “$100,000 rule.” ² That puts a limit on what you can exercise in one year.
Accelerate or Decelerate
Monitor your AMT exposure vs. regular tax. If your regular tax exceeds your potential AMT, then accelerating income or capital gains can be advantageous. If you are likely to pay AMT, one strategy is to wait for the next year to take advantage of some deductible expenses not allowed under AMT rules.
Keep in mind AMT at the state level: For example, California has a state AMT rate of 7%. Other states with AMT tax: Colorado, Connecticut, Iowa, Minnesota and Wisconsin.
Next Steps
While this article highlights a handful of strategies, deciding when to exercise stock options is just one piece of the puzzle. At FCA Corp, we take the time to understand your unique compensation package, company stock, tax picture, and long-term financial goals before recommending an exercise strategy.
Whether you’re evaluating your first stock option exercise or managing a complex equity compensation package, we’re here to help you navigate The Way Forward™ with confidence.
Sources:
- https://advisor.morganstanley.com/ed.hansen/documents/field/e/ed/ed-j-hansen/MSSBNA20231107889426_%281%29.pdf
- https://www.law.cornell.edu/uscode/text/26/422
- https://taxfoundation.org/data/all/state/state-individual-alternative-minimum-tax-2021/
- https://taxfoundation.org/data/all/federal/2026-tax-brackets/
- https://www.thomsonreuters.com/en-us/posts/tax-and-accounting/obbba-faq/
- https://ourtaxpartner.com/amt-2025-exemption-2026-changes/
- https://www.esofund.com/blog/alternative-minimum-tax-amt
- https://nationaltaxtools.com/guides/amt-guide/
More helpful articles:
- Non-Qualified Deferred Compensation Plans: Benefits, Risks, and Advanced Planning Strategies for Executives
- Navigating Incentive Stock Options (ISOs) and Strategies that Make Sense
- A Guide to Understanding Non-Qualified Stock Options (NSOs)
- How Financial Planning Helps Diversify a Concentrated Stock Position
- RSU vs. Stock Options: Paths to Sudden Wealth
