Tax
ISO Exercises and AMT in 2026: The Lower Phaseout Threshold
Employees and finance leads: the 2026 AMT phaseout starts at $500,000 and runs at 50%. See how a $200K ISO spread is taxed, with worked numbers and options.
By 409.AI Team - 2026-10-08
# ISO Exercises and AMT in 2026: The Lower Phaseout Threshold
If you hold incentive stock options in a private company, the 2026 tax year changed the math on the day you exercise. Two numbers moved: the income level where the alternative minimum tax (AMT) starts taking back your exemption, and the speed at which it does it. For an employee with a large grant and a recent 409A valuation well above the strike price, the difference can be tens of thousands of dollars.
This guide is for employees and founders deciding whether to exercise ISOs this year, and for finance leads who get the "what will this cost me?" question at every refresh. It walks through the rule, a worked example with real 2026 figures, and the choices that change the result.
Why ISOs and AMT still collide
An ISO is not taxed under the regular income tax when you exercise it. You pay regular tax when you sell, and if you meet the holding periods, the gain is long-term capital gain. The IRS says as much on its [ISO tax topic page](https://www.irs.gov/taxtopics/tc427), and it adds the catch: you may owe AMT in the year you exercise.
The mechanism is in [IRC §56(b)(3)](https://www.law.cornell.edu/uscode/text/26/56). For AMT purposes, §421 does not apply to stock acquired by exercising an ISO. In plain terms, the spread between the fair market value on the exercise date and what you paid, called the bargain element, is added to your alternative minimum taxable income (AMTI). Regular tax ignores it. AMT does not.
If you want the broader picture of how ISOs and NSOs differ, start with [how ISOs and NSOs are taxed](https://www.409.ai/articles/iso-vs-nso-how-stock-options-are-taxed). This article is only about the AMT layer.
What changed for 2026
Three pieces matter, and all of them come from primary sources.
The exemption amounts. Section 4.10 of [Rev. Proc. 2025-32](https://www.irs.gov/pub/irs-drop/rp-25-32.pdf) sets the 2026 AMT exemption at $90,100 for unmarried individuals and $140,200 for joint filers.
The phaseout threshold. Under [IRC §55(d)](https://www.law.cornell.edu/uscode/text/26/55), as amended in 2025, the exemption starts to shrink once AMTI passes $1,000,000 for joint filers and $500,000 for everyone else (before inflation indexing from 2026). The same Revenue Procedure lists the 2026 threshold at $500,000 for unmarried individuals, with the exemption fully gone at $680,200. For joint filers the range runs from $1,000,000 to $1,280,400.
The phaseout rate. The statute now uses 50 percent where the older rule used 25 percent. Every dollar of AMTI above the threshold removes 50 cents of exemption.
The rates. AMT is 26 percent on the first slice of the taxable excess and 28 percent above it. For 2026 the 28 percent bracket begins at $244,500 of excess taxable income for most filers, and at $122,250 for married individuals filing separately.
Put those together and you get a band, between $500,000 and $680,200 of AMTI for a single filer, where each extra dollar of income raises the AMT base by $1.50. At the 28 percent rate, that is an effective marginal AMT rate of 42 percent inside the band.
A worked example
Take a single filer in a venture-backed company. Her AMTI before any option activity is $350,000. She holds 20,000 vested ISOs with a $2.00 strike price. The company's current 409A valuation puts common stock at $12.00 a share.
Without the exercise. AMTI is $350,000, which is below the $500,000 threshold, so she keeps the full $90,100 exemption. The AMT base is $259,900. The tentative minimum tax is 26 percent of the first $244,500 ($63,570) plus 28 percent of the remaining $15,400 ($4,312), for a total of $67,882.
With the exercise. The bargain element is 20,000 × ($12.00 − $2.00) = $200,000. AMTI becomes $550,000, which is $50,000 over the threshold. The exemption drops by 50 percent of that excess, or $25,000, to $65,100. The AMT base is $484,900. The tentative minimum tax is $63,570 on the first $244,500, plus 28 percent of the remaining $240,400 ($67,312), for a total of $130,882.
The exercise added $63,000 of tentative minimum tax. A flat 28 percent on the $200,000 spread would be $56,000. The extra $7,000 is the exemption she lost, which is 28 percent of $25,000.
Two caveats keep the example honest. First, you owe AMT only to the extent the tentative minimum tax exceeds your regular tax for the year, so the number on your return depends on your regular liability, which this example deliberately leaves out. Second, it ignores state tax, the net investment income tax and every other adjustment. Your preparer runs the real Form 6251.
What the 409A number does to this
The bargain element is built on fair market value on the exercise date. For a private company, the practical reference is the most recent 409A valuation of the common stock. That makes the valuation a direct input to your personal tax bill, not just a compliance document for the company.
This has two consequences worth planning around.
If the 409A is current and higher than it was at grant, the spread is larger than the grant-date numbers suggested. Employees who modeled the exercise cost a year ago may be working from stale math. Our piece on [how often to get a 409A valuation](https://www.409.ai/articles/409a-valuation-frequency-how-often-should-you-get-one) covers the events that force a refresh, and a priced round is the main one.
If the valuation is stale and the company has since raised money or signed a large contract, the number on file may no longer be fair market value on the day you exercise. That is a problem for the company's compliance and for you, because an understated spread is an understated AMT adjustment. If you are a finance lead, an expiring or outdated valuation is the thing to fix before opening an exercise window. If you need one, the [409A valuation service](https://www.409.ai/products/409a) starts at $899.
Ways to change the result
None of these is advice for your situation. They are the levers that people with a tax adviser typically discuss.
Exercise in slices across tax years. Because the exemption erodes only above the threshold, splitting a large exercise can keep AMTI lower in each year. In the example, exercising 10,000 options this year gives a $100,000 spread and AMTI of $450,000, which is under the $500,000 threshold, so the full exemption survives. The tentative minimum tax is then 26 percent of $244,500 ($63,570) plus 28 percent of $115,400 ($32,312), or $95,882. The tentative tax rises by $28,000, exactly 28 percent of the $100,000 spread, with none of the extra $7,000 of exemption loss. The trade-off is that the second slice is exercised later at a possibly higher price. Whether that helps depends on how the valuation moves, which nobody knows in advance.
Sell in the same year. Under §56(b)(3), the regular-tax treatment of §422(c)(2) applies when the disposition and the AMT inclusion fall in the same taxable year. A same-year sale is a disqualifying disposition. You give up the capital gain treatment, but the AMT adjustment for those shares goes away. In a private company, you rarely have a buyer on demand, so this tends to matter after a tender offer or secondary. Our guide to [tender offers and secondary sales](https://www.409.ai/articles/tender-offers-secondary-sales-409a-valuation) explains how those events interact with valuation.
Use the AMT credit later. AMT paid on an ISO exercise is generally not lost. Under [IRC §53](https://www.law.cornell.edu/uscode/text/26/53), the adjusted net minimum tax from earlier years becomes a minimum tax credit, but the credit in any year is capped at your regular tax minus your tentative minimum tax for that year. If your income stays high and the AMT keeps applying, the credit can take years to recover. If you sell the shares at a loss, part of the credit may never be used. Model the recovery before assuming the AMT is a timing difference.
Check the plan limits first. The $100,000 annual limit on first-exercisable ISOs, measured by grant-date fair market value, decides whether an option is an ISO at all. Our walkthrough of the [ISO $100K limit](https://www.409.ai/articles/iso-100k-limit-409a-grant-date-fair-market-value) shows how that test uses the valuation at grant.
What to do before an exercise window
A short checklist for the person exercising, and for the finance team supporting them:
1. Get the current fair market value in writing. If the last 409A predates a priced round, ask whether it has been refreshed. 2. Estimate your AMTI for the year without the exercise, then add the bargain element. Compare it with $500,000 (single) or $1,000,000 (joint). 3. Run Form 6251 with your preparer for two or three exercise sizes, not just the maximum. 4. Confirm the deadline. Options generally have to be exercised within a set period after you leave, and ISOs convert to NSOs after three months. The company's [post-termination exercise window](https://www.409.ai/articles/extending-post-termination-exercise-window-iso-nso-409a) policy sets the real date. 5. Keep Form 3921, which the company issues after an ISO exercise, with your records. We covered the [reporting rules and deadlines](https://www.409.ai/articles/form-3921-iso-exercise-reporting-section-6039) separately.
The takeaway
The 2026 rules did not create the ISO AMT problem. They moved it down the income scale and sped it up. A $200,000 spread for someone with $350,000 of other AMTI used to sit comfortably inside the exemption. Now it lands in the band where the exemption is being taken away at 50 cents on the dollar, and the effective AMT rate is above the headline 28 percent.
Before you exercise, price the tax at two or three sizes, check which side of $500,000 or $1,000,000 each one lands on, and make sure the valuation behind the spread is current. The cheapest fix is usually a smaller exercise this year and another next year, and it is only available if you do the math before the window closes.