Halfway through the tax year is the ideal moment to pause and assess your ISO exercise strategy. The Alternative Minimum Tax (AMT) is one of the most consequential — and most avoidable — surprises in equity compensation. A proactive mid-year review gives ISO holders the opportunity to model their exposure, right-size remaining exercises, and preserve the AMT Credit for future years. This framework walks advisors through a structured, three-step process.
Year-end reviews are too late to course-correct. By June or July, you still have roughly half the tax year remaining — enough time to:
• Adjust the number of ISOs exercised before December 31
• Harvest AMT credits from prior-year exercises if stock price has declined: if a prior exercise generated AMT and the stock’s FMV has since dropped, a disqualifying disposition can convert the spread to ordinary income — reducing the AMT add-back and freeing up the AMT Credit (Form 8801) to offset regular tax sooner
• Coordinate with income events (bonuses, RSU vests) that affect the AMT calculation
• Avoid disqualifying dispositions inadvertently triggered by a tax surprise
What to do
Gather year-to-date income information and estimate full-year ordinary income. Pull the prior-year tax return to identify any existing AMT Credit carry forward.
Key inputs
• W-2 wages, bonus projections, spouse income (if filing jointly)
• RSU vest schedule for the remainder of the year
• Prior-year Form 6251 and Schedule I (for Form 1040)
• Current AMT exemption amounts (indexed annually)
Advisor tip
For 2026, the AMT exemption is $90,100 (single) and $140,200 (MFJ), with phase-out beginning at $500,000 / $1,000,000 — a significant drop from 2025 thresholds due to the OBBBA. High earners reach the phase-out range more quickly, making the baseline projection even more critical this year.
What to do
Calculate the AMT income add-back from planned or already-executed ISO exercises. The bargain element — fair market value minus exercise price — is an AMT preference item, not subject to regular income tax unless a disqualifying disposition occurs.
Formula
AMT Add-Back = (FMV at exercise − Exercise price) × Shares exercised
Run this figure through a full AMT projection — accounting for the exemption, phase-out, and the 26 % / 28 % AMT rate brackets — to arrive at estimated incremental AMT liability.
Decision point
If incremental AMT is modest relative to expected long-term gains (i.e., the stock has strong appreciation potential), exercising now may be worth it. If AMT exposure is high relative to realistic gain, consider reducing the exercise quantity or deferring to a lower-income year.
What to do
Use the AMT model to find the optimal exercise quantity for the year — the number of ISOs that can be exercised without triggering a meaningful net AMT liability, or with an AMT liability fully offset by available credits.
Three levers
• Adjust exercise quantity: Exercise only up to the AMT crossover point in a given year.
• Harvest the AMT Credit: If prior-year ISO exercises generated AMT and the stock’s FMV has since declined, a disqualifying disposition can reduce the AMT add-back by converting the spread to ordinary income — potentially freeing up the AMT Credit (Form 8801) to offset regular tax in the current or future years. Evaluate whether the ordinary income recognition is worth the tax recovery.
• Spread across years: If a client has a large ISO grant and confidence in stock value, consider a multi-year exercise plan that stays below the AMT threshold each year.
Documentation
Record each scenario modeled, assumptions used, and the client’s chosen course of action. ISO planning is one of the highest-litigation areas of tax advice; documentation protects both the advisor and the client.
A mid-year AMT checkup is not just a tax exercise — it is a relationship-deepening conversation. Clients who understand their equity tax exposure feel more confident and better served. Use this framework as the foundation for a proactive, recurring planning rhythm.
