Hi!
If part of your compensation comes in ISOs or RSUs, the tax treatment is where most of the value is won or lost, and 2026 changed the math in ways that are easy to miss. Here is what we are watching for our equity comp clients this year.
ISOs: exercising and holding does not create regular taxable income, but the spread between your strike price and the fair market value is an AMT preference item. You can owe alternative minimum tax on a paper gain, with no shares sold and no cash in hand to pay it.
The AMT exemption now phases out twice as fast and starts at lower income ($500,000 for single filers, $1,000,000 for joint), so exercises that sat comfortably under the line in prior years can trigger AMT this year. The AMT you pay is not always lost either. It often generates a minimum tax credit you can recover in later years, but only with deliberate multi-year planning.
A few things that catch people:
- Disqualifying dispositions: sell ISO shares before holding one year from exercise and two years from grant, and the bargain element converts to ordinary income on your W-2 instead of long-term capital gain. Timing the sale can be the difference between a 37 percent rate and a 20 percent one.
- RSU under-withholding: RSUs are ordinary income at vesting, but employers usually withhold at the 22 percent supplemental rate. If you are in the 32 to 37 percent brackets, that leaves a gap you are expected to cover through estimated payments, not at filing.
- Underpayment exposure: the year is half over. A large vest or exercise without a matching estimated payment can trigger penalties, and the IRS is charging roughly 7 percent, compounded daily, on the shortfall. High earners generally need to cover 110 percent of last year’s tax to stay inside the safe harbor.
- The 3.8 percent NIIT: once you sell, the gain can pull you into net investment income tax on top of capital gains, which changes the real cost of holding versus selling.
None of this is a reason to avoid exercising or to sell on a fixed schedule. It is a reason to model the year before you act: which lots to exercise, how much AMT cushion you have left, when to sell to hit long-term treatment, and what to pay in now so April is not a surprise.
Let’s build your equity comp plan if you hold ISOs, RSUs, or any other employer equity. Reply to this email by Monday next week so we can schedule a 40-minute consultation with our senior tax specialist to scope out what your situation needs.
Sincerely,
–
George Dimov, CPA
Licensed and Insured
(833) 829-1120 toll free
(212) 994-8081 Fax
www.dimovtax.com