How Many ISOs Can I Exercise Without AMT? The 2026 Crossover Math Just Changed.

A staff engineer at a pre-IPO company holds 20,000 incentive stock options with a $5 strike, the latest 409A values the shares at $30, and she wants to start her long-term capital gains clock before a liquidity window opens. The question she needs answered before clicking the exercise button is how many ISOs can I exercise without AMT, and for 2026 the answer got smaller for high earners. The One Big Beautiful Bill Act reset the AMT exemption phaseout thresholds to $500,000 for single filers and $1,000,000 for joint filers, and doubled the phaseout rate, effective for tax years beginning after December 31, 2025. An exercise plan that cleared 2025 with no AMT can produce a five-figure surprise this year on identical facts.

The mechanics are the same as they have always been. Exercising an ISO triggers no regular income tax under IRC §421(a), as long as the option qualifies under §422 and you hold the shares. But IRC §56(b)(3) treats the spread, the fair market value at exercise minus the strike price, as income for alternative minimum tax purposes. The spread lands on Form 6251 line 2m, and the numbers to compute it come from Form 3921, the information statement your employer must furnish under §6039 by January 31 of the year after the exercise. None of that changed. What changed is the exemption that used to shelter most of the spread.

Section 70107 of the One Big Beautiful Bill Act made the TCJA's larger AMT exemption amounts permanent, which is good news. It paid for the permanence by resetting the exemption phaseout thresholds in §55(d) back to their 2018 starting points of $500,000 for unmarried filers and $1,000,000 for joint filers, indexed after 2026, and by doubling the phaseout rate from 25 cents to 50 cents per dollar of alternative minimum taxable income above the threshold. Per Rev. Proc. 2025-32, the 2026 exemption is $90,100 single and $140,200 joint, and the 28% AMT rate applies to the AMT base above $244,500.

Compare that to 2025, when the phaseout did not even begin until AMTI hit $626,350 single or $1,252,700 joint, and ran at 25%. A single filer in 2025 kept some exemption all the way up to $978,750 of AMTI. In 2026 the exemption is completely gone at $680,200. For joint filers the full-phaseout point dropped from over $1.8 million to $1,280,400. ISO exercises are exactly the kind of one-year income spike that now lands in the phaseout zone, because the spread itself is what pushes AMTI over the threshold.

AMT is not a separate tax on the spread. It is the excess, if any, of your tentative minimum tax over your regular tax for the year. That structure means most people have headroom: the gap between regular tax and tentative minimum tax before any exercise. Each dollar of ISO spread adds 26 or 28 cents of tentative minimum tax, so the spread that fits inside the headroom is tax-free in the year of exercise. The crossover point is the share count where tentative minimum tax catches regular tax, and exercising up to it each year is the core ISO planning move. Here is what it looks like for a married couple in 2026.

Two numbers in that table deserve a hard look. The crossover is about 2,770 shares, meaning this couple can exercise roughly 14% of the grant this year and owe nothing extra in April. And the full exercise costs $28,000 more than it would have under prior law, which is exactly the arithmetic of the reset: the couple's AMTI exceeds the new $1,000,000 threshold by $200,000, the 50% rate strips $100,000 of exemption, and that lost exemption is taxed at 28%.

Inside the phaseout zone, every dollar of additional spread does double duty. It adds a dollar of AMTI taxed at 28%, and it strips 50 cents of exemption, which is taxed at another 28%. The effective marginal rate is 42%, up from 35% under the old 25% phaseout. That rate applies to AMTI between $500,000 and $680,200 for single filers and between $1,000,000 and $1,280,400 for joint filers in 2026. The planning response is to keep large exercises out of that band: split the exercise across December and January so each year's spread stays below the threshold, exercise early in the year when the 409A value is lowest, and re-run the crossover math whenever a new 409A lands, because the spread per share is the input that moves fastest.

Section 56(b)(3) by its terms does not apply if the stock is disposed of in the same taxable year as the exercise. A sale before December 31 is a disqualifying disposition, the spread becomes ordinary wage income for both regular tax and AMT, and the line 2m adjustment disappears. That is the safety valve for the classic ISO disaster, exercising at a high 409A and watching the stock crater before April, owing AMT on value that no longer exists. Exercising in January maximizes the option value of that escape hatch, because you get eleven months to watch the stock before the disposition decision locks. The trade-off is real: a disqualifying disposition forfeits §422 treatment, and the basis reporting on the broker's 1099-B will be wrong in the same way I covered for ESPP disqualifying dispositions, so the Form 8949 adjustment still has to be made by hand.

Because the ISO adjustment is a timing item, AMT paid on an exercise generates a minimum tax credit under IRC §53, tracked on Form 8801 and usable in later years when regular tax exceeds tentative minimum tax. The shares also carry a dual basis: for AMT purposes the basis is the exercise-date FMV, so the year you sell, the AMT gain is smaller than the regular gain and a negative adjustment on Form 6251 line 2k helps release the credit. The cash-flow problem remains, since nothing is withheld on an ISO exercise and the AMT is due with the return, with §6654 estimated-tax penalties if you wait. And for founders and early employees, the exercise math should be run alongside the holding-period math for Section 1202 QSBS after OBBBA, because the same shares are often eligible for both regimes and the exercise date starts both clocks.