It may be advantageous to exercise ISOs in 2025 to save taxes. Next year there are upcoming changes in the tax law that could increase your tax bill. Let’s review ISOs and the Alternative Minimum Tax (AMT). Then we will go through the tax law changes.
ISO Review
When you exercise ISOs to buy your company’s stock, the price you pay is usually less than the company’s stock price.
The difference between the price you pay and the company stock price is known as the bargain element. Let’s say your company is trading for $30 a share and your ISO price is $10 per share. The bargain element will be $20 per share.
The bargain element is excluded from the calculation of income for regular tax purposes, but included for AMT purposes. Therefore a large ISO exercise can push your income level into the AMT zone.
TCJA Rules
Since 2018, under the Tax Cut and Jobs Act (TCJA), AMT payment happens less often for three reasons.
One, TCJA increased the AMT exemption – the amount subtracted from AMT income rather than the standard deduction or itemized deductions. This amount is $88,100 for single filers and $137,000 for married filing jointly in 2025.
Second, TCJA increased the income threshold for AMT. It is $626,350 for single filers and $1,252,700 for married filing jointly. However, this threshold will decrease next year. More on that later.
Last, TCJA capped the State and Local Tax (SALT) to a $10,000 deduction. The SALT deduction is added back to AMT income, so this amount wouldn’t push many taxpayers into paying AMT.
Change in Tax Law
With the One Big Beautiful Bill Act, there are some changes that could expose you to the AMT.
First, the AMT phaseout threshold will decrease to $500,000 for singles and $1,000,000 for married filing jointly in 2026.
Also, the SALT cap will increase to a maximum of $40,000 in 2025. Remember this amount is added back to AMT income if you pay high state and local taxes. This addition could put you into AMT territory.
ISO Illustration
These rules are so boring! Let’s look at an example to clarify the upcoming changes and why it’s advantageous to exercise ISOs in 2025.
Our friend Mikaela has some ISOs and she is a single filer. Here is an illustration comparing the difference in tax payments based on exercising ISOs in 2025 or 2026. Remember that you pay the higher tax amount, whether it be regular tax income or AMT.
| 2025 | 2026 | |
|---|---|---|
| W-2 Wages | $500,000 | $500,000 |
| SALT | $40,000 | $40,000 |
| Bargain Element | $100,000 | $100,000 |
| Regular Taxable Income | $460,000 | $460,000 |
| AMT Income | $600,000 | $600,000 |
| AMT Phaseout Amount | $626,350 | $500,000 |
| AMT Exemption | $88,100 | $38,100 |
| AMT Income After Exemption | $511,900 | $591,900 |
| Regular Tax | $142,600 | $142,600 |
| AMT | $138,213 | $151,713 |
| Tax Paid | $142,600 | $151,713 |
If she exercises ISOs in 2025, she won’t owe any AMT and her tax bill will be $142,600. On the other hand, if she exercises ISOs in 2026 she will owe $9,113 in AMT for a total tax bill of $151,713.
This change in tax law is confusing, so please get in touch with me if you’d like to discuss.