AMT (Alternative Minimum Tax) risk for ISO holders is the chance that exercising your incentive stock options will trigger a parallel tax calculation that results in a higher tax bill than you’d owe under the regular tax system. In 2026, changes from the One Big Beautiful Bill Act made this risk significantly worse.

If you hold ISOs at a startup, you probably know the basics. Exercise your options, hold the shares for a year, and you get favorable capital gains treatment when you sell. That’s the upside of ISOs.

The downside is the AMT. When you exercise ISOs, the spread between your strike price and the fair market value counts as income under the AMT system, even though you haven’t sold anything and have no cash to show for it. And in 2026, the thresholds that protected many people from AMT exposure just got significantly worse.

What Changed in 2026

The One Big Beautiful Bill Act (OBBBA), signed in July 2025, included changes to the AMT phaseout thresholds that directly affect anyone exercising ISOs. Here’s what moved.

AMT Phaseout Thresholds Dropped Significantly

The AMT works like this: everyone gets an AMT exemption that shields a portion of their income from the alternative tax. But that exemption phases out as your income rises. Once you cross the phaseout threshold, you start losing the exemption. Once it’s fully phased out, your entire AMT income is taxable.

The OBBBA dropped the phaseout starting points significantly:

	2025 (Pre-OBBBA)	2026 (Post-OBBBA)
AMT Exemption (Single)	~$88,100	$90,100
AMT Exemption (Married)	~$137,000	$140,200
Phaseout Starts (Single)	$626,350	$500,000
Phaseout Starts (Married)	$1,252,700	$1,000,000
AMT Rate Breakpoint	~$232,600	$232,600

The exemption amounts went up slightly (inflation adjustment). But the phaseout starting points dropped dramatically. For single filers, the phaseout now starts at $500,000 instead of $626,350. For married filers, it’s $1,000,000 instead of $1,252,700. On top of that, the OBBBA doubled the phaseout rate from 25 cents per dollar to 50 cents per dollar, meaning your exemption disappears twice as fast once you cross the threshold.

This means you lose your AMT exemption faster. And the exemption is what protects you from owing AMT.

AMT Rates Are Unchanged

The AMT rates themselves didn’t change. They’re still 26% on the first $232,600 of AMT income above the exemption, and 28% on everything above that. The rates aren’t the problem. The problem is that more people now fall into the zone where these rates apply.

How This Affects ISO Exercise

When you exercise ISOs, the spread (fair market value minus your strike price) is added to your AMT income. It’s not taxed under the regular system. It’s only an AMT item. But if that spread pushes your total AMT income above the phaseout threshold, you start losing your exemption, and the AMT calculation can produce a higher tax bill than your regular tax.

Here’s the key mechanism: for every dollar of AMT income above the phaseout threshold, you lose 50 cents of your exemption (the OBBBA doubled the phaseout rate from 25% to 50% starting in 2026). So if you’re $100,000 above the phaseout, you lose $50,000 of your exemption. If your AMT income is high enough, the exemption disappears entirely.

A Concrete Example

Let’s walk through a scenario that shows exactly how the 2026 changes create new AMT exposure.

The situation: You’re a single filer. Your regular taxable income is $180,000. You hold ISOs with a strike price of $2 per share and the current 409A valuation (fair market value) is $12 per share. You want to exercise 20,000 shares.

The ISO spread: (12 - 2) x 20,000 = $200,000

Your AMT income: $180,000 (regular income) + $200,000 (ISO spread) = $380,000

In 2025 (Pre-OBBBA)

AMT income: $380,000
Phaseout starts at: $626,350
Your income is below the phaseout. Full exemption of $88,100 applies.
AMT taxable income: $380,000 - $88,100 = $291,900
AMT: $232,600 x 26% + $59,300 x 28% = $60,476 + $16,604 = $77,080
Regular tax on $180,000 income: approximately $36,000
Would you owe AMT? Compare AMT ($77,080) to regular tax ($36,000). The AMT is higher, so you’d owe the difference as additional tax: roughly $41,080.

Wait. Actually, in 2025 this person would have triggered AMT too. Let’s adjust the example to show the marginal difference.

The Real Difference: A Higher-Income Scenario

The situation: You’re a single filer with $400,000 in regular income. You exercise ISOs with a $200,000 spread.

AMT income: $600,000

In 2025:

Phaseout starts at $626,350
Your $600,000 is below the phaseout. Full exemption of $88,100 applies.
AMT taxable income: $600,000 - $88,100 = $511,900
AMT: $232,600 x 26% + $279,300 x 28% = $60,476 + $78,204 = $138,680

In 2026:

Phaseout starts at $500,000
Your $600,000 is $100,000 above the phaseout.
Exemption reduction: $100,000 x 50% = $50,000 (the phaseout rate doubled from 25% to 50%)
Effective exemption: $90,100 - $50,000 = $40,100
AMT taxable income: $600,000 - $40,100 = $559,900
AMT: $232,600 x 26% + $327,300 x 28% = $60,476 + $91,644 = $152,120

The 2026 changes cost this person an additional $13,440 in AMT. And the impact gets worse as income rises, because the exemption phases out twice as fast and disappears entirely at much lower income levels than before.

For someone with $800,000 in AMT income, the exemption would be completely phased out in 2026 (only $180,200 of room at 50% phaseout rate) but still mostly intact in 2025. The swing can be tens of thousands of dollars.

Who’s Most Affected

The people hit hardest by this change are:

Startup employees with large ISO grants at companies with rising 409A valuations. If your company’s FMV has grown significantly since your grant, the spread on your ISOs is large.
Mid-to-high earners with regular income between $300,000 and $700,000. This is the zone where the lowered phaseout thresholds create the biggest swing.
Anyone planning a large exercise in a single year. The AMT is calculated annually. A big exercise in one year can push you well above the phaseout, while spreading it across years might keep you below.

The Complete ISO Guide for Startup Employees

Strategies to Minimize AMT Exposure

The AMT isn’t something you just accept. There are legitimate strategies to reduce your exposure.

1. Exercise in Smaller Batches Across Multiple Years

This is the most straightforward approach. Instead of exercising all your ISOs at once, spread the exercises across two or three tax years. Each year, exercise only enough shares to keep your AMT income below the phaseout threshold (or at least minimize how far above it you go).

For 2026, that means keeping your total AMT income below $500,000 (single) or $1,000,000 (married) if possible.

2. Exercise Early When FMV Is Low

The AMT hit is based on the spread. If you exercise when the FMV is close to your strike price, the spread is small and the AMT impact is minimal.

This is one of the strongest arguments for exercising ISOs early in a company’s life. Combine an early exercise with an 83(b) election, and you lock in the low FMV for both AMT and regular tax purposes.

If your company’s 409A valuation was $1 per share a year ago and is now $10 per share, waiting cost you $9 per share in AMT spread. Exercise early if you believe in the company.

3. Use Our ISO Calculator to Model Scenarios

Before you exercise anything, run the numbers. Our ISO Calculator lets you model different exercise amounts and see the AMT impact. Plug in your income, your strike price, your company’s current FMV, and the number of shares. See exactly where the thresholds hit.

The difference between exercising 15,000 shares and 20,000 shares could be the difference between owing $0 in additional AMT and owing $30,000. Know your numbers before you commit.

4. Consider NSO Exercise for Amounts Above the Threshold

If your company offers both ISOs and NSOs (non-qualified stock options), or if you can negotiate a split, exercising some options as NSOs can sometimes produce a better overall tax result. NSO exercises are taxed as ordinary income immediately, but they don’t create AMT phantom income. In some cases, paying ordinary income tax on a portion is cheaper than triggering AMT on the full amount.

This is situation-specific. Talk to a tax advisor.

5. Track the AMT Credit

If you do pay AMT due to ISO exercise, you receive an AMT credit that can be used to offset regular taxes in future years. The credit doesn’t expire. So AMT isn’t always a permanent cost. It can be a timing issue, where you pay more now but get credits back later.

However, the credit only helps if your regular tax exceeds your AMT in future years. If you’re consistently in AMT territory (which the lower phaseouts make more likely), the credit can take years to fully recover.

The Bottom Line

The 2026 AMT changes are a real problem for ISO holders. The lower phaseout thresholds mean you lose your exemption faster, which means more of your ISO spread gets taxed at AMT rates. This wasn’t a headline-grabbing provision of the OBBBA, but for startup employees with significant option grants, it can cost thousands to tens of thousands of dollars.

The good news is that this is a planning problem, not an unavoidable one. Exercise strategically. Spread exercises across years. Exercise early when FMV is low. And always, always run the numbers before you commit.

Use the Equity Matrix ISO Calculator to model your specific situation before making any exercise decisions.

Equity Matrix helps you track your options, model exercise scenarios, and make informed decisions about your startup equity.

FAQ

Did AMT rates change in 2026?

No. The AMT rates are still 26% (on the first $232,600 of AMT income above the exemption) and 28% (on everything above that). What changed are the phaseout thresholds and the phaseout rate. The phaseout now starts at $500,000 for single filers (down from $626,350) and $1,000,000 for married filers (down from $1,252,700). On top of that, the phaseout rate doubled from 25% to 50%, meaning you lose your exemption twice as fast once you cross the threshold.

How do I know if I’ll trigger AMT?

Add your regular taxable income plus the spread on any ISOs you plan to exercise. If the total exceeds $500,000 (single) or $1,000,000 (married), you’ll start losing your AMT exemption and are likely in AMT territory. Use the ISO Calculator to model your specific numbers. The exact breakeven depends on your deductions, filing status, and state taxes.

Should I still exercise my ISOs?

In most cases, yes. ISOs still offer significant tax advantages over NSOs, particularly the ability to qualify for long-term capital gains treatment. The AMT is a consideration, not a deal-breaker. The key is to exercise strategically: in smaller batches, earlier in the company’s life when FMV is lower, and with full awareness of your AMT exposure. Don’t let the AMT scare you out of exercising entirely. Let it inform when and how much you exercise.

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This article is for informational purposes only and does not constitute legal, tax, or financial advice. Equity Matrix is not a law firm, accounting firm, or financial advisor. Consult a qualified professional for guidance specific to your situation.

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