Should I exercise my ISOs before the end of the year?

It depends on whether the exercise stays under your federal alternative minimum tax (AMT) crossover for the year. Up to the crossover, an incentive stock option (ISO) exercise adds no federal AMT that year, though if you carry an unused AMT credit from earlier years it can reduce how much of that credit you recover. Above it, each extra dollar of bargain element costs at least 26 cents of federal AMT. Because the crossover resets every January 1, spreading a large exercise across tax years keeps more of it under the crossover. For a single filer with $200,000 of taxable income exercising 5,000 ISOs at a $20 spread, all in one year costs about $18,162 of federal AMT up front, about $7,838 of which comes back as a credit the next year; split across two years it is about $5,162 a year. Over the two years the totals are about the same: the split mainly changes when the AMT is paid.

Which tax year does an ISO exercise count in?

The year of the exercise date your employer reports in Box 2 of Form 3921, "Date Option Exercised", as long as the shares are vested. Plan administrators can take several business days to process an exercise, so an exercise submitted on December 30 that completes in January counts in the following year. Check your administrator’s year-end cutoff and submit before it.

When is AMT from a year-end ISO exercise due?

AMT is part of your tax for the exercise year and is owed in cash by the April filing deadline, even if you sold nothing. Estimated tax is owed in four installments: to avoid an underpayment penalty, withholding plus estimates generally need to reach 90% of the current year’s tax or 100% of the prior year’s (110% if prior-year adjusted gross income exceeded $150,000, or $75,000 married filing separately). Withholding counts as paid evenly through the year, so raising it before December 31 covers the earlier installments. For 2026 the fourth estimated payment is due January 15, 2027 (IRS Publication 505), and the annualized income method on Form 2210 can match the payments to when the income arrived.

Should you exercise ISOs before December 31? The 2026 year-end checklist

Q: Can I avoid AMT if I sell my ISO shares in the same year I exercise?

Yes, for those shares. If you exercise ISOs and sell the same shares in the same calendar year, the IRS requires no AMT adjustment for them (Form 6251 instructions, line 2i). The sale is a disqualifying disposition: the gain is ordinary income, but never more than the bargain element at exercise, and a sale at a loss creates no ordinary income at all (Publication 525). Both the exercise and the sale must happen by December 31.

The alternative minimum tax (AMT) is counted one calendar year at a time, and an incentive stock option (ISO) exercise belongs to the year it is exercised. So the question in November and December is not just whether to exercise, but which side of December 31 each exercise lands on. Up to your federal AMT crossover, exercising adds no federal AMT this year (an unused AMT credit from earlier years is the exception; see item 7). Past it, every extra dollar of bargain element costs at least 26 cents of federal AMT, and more once your AMT income, bargain element included, passes the start of the exemption phaseout. The crossover resets on January 1, so when you exercise matters as much as how much.

You cannot change which year an exercise belongs to after December 31. Everything on this list has to be settled by then.

Example

Illustrative example: 5,000 ISOs, two calendars

A single filer in Texas (no state AMT) with $200,000 of taxable income in both 2026 and 2027 holds 5,000 vested ISOs: $2 strike, $22 fair market value, so a $20 bargain element per share, and the price stays put. Their 2026 federal crossover is about $30,146 of bargain element, or 1,507 shares.

All 5,000 in December 2026: about $18,162 of federal AMT for 2026, due by April 15, 2027. With 2027 income unchanged, about $7,838 of it comes back as an AMT credit when you file for 2027.
2,500 in December 2026, 2,500 in January 2027: about $5,162 of AMT each year, $10,324 in total.
Spread over 4 years: every year stays under the crossover, and no federal AMT is due.

Over two years, the first two plans cost about the same: $10,324 once the credit comes back, against $10,324. What the split changes is cash. It avoids paying about $13,000 in April 2027 that would come back only when you file the following year, and only if your regular tax then runs above your minimum tax. Spreading over more years avoids the AMT altogether. The example assumes 2027 income and share price match 2026; if either moves, so does your 2027 crossover.

Seven things to settle by December 31

1. Recompute your crossover with this year's real income

Your crossover depends on your income for the year, and by December you know it far better than you did in spring. Add the December paycheck, any year-end bonus, and every RSU vest still scheduled for 2026. Income moves the crossover, and not always the way you would expect: in the 24% federal bracket and below, more income lowers it, because each extra dollar adds more to your minimum tax than to your regular tax. For 2026 the federal AMT exemption is $90,100 single and $140,200 married filing jointly, and it shrinks by 50 cents per dollar of AMT income above $500,000 single or $1,000,000 joint (Rev. Proc. 2025-32). The crossover article walks the mechanics.

2. Know the date that will be on your Form 3921

The exercise date that counts is the one your employer reports in Box 2 of Form 3921, "Date Option Exercised", and the bargain element uses the fair market value on that date (Box 4, Form 3921 instructions). Plan administrators and brokers often take several business days to process an exercise, and many publish a year-end cutoff. An exercise you submit on December 30 that completes on January 4 is a 2027 exercise. Ask for the cutoff now and submit well ahead of it. If you early-exercise shares that have not vested, the AMT adjustment instead arises when they vest, at the value on that date, unless you elect within the transfer to include it at exercise (Form 6251 instructions, line 2i).

3. Decide whether to spread it across the boundary

If your whole stack would push you past this year's crossover, exercising up to it in late December and continuing in early January keeps more of the exercise under a crossover, because the second batch counts against 2027's. The example above is that move, and a longer schedule spreads the same idea across more years. The year-end calculator shows your crossover for this year and plans the multi-year version.

4. Have the cash, and pay it on time

AMT is owed in cash whether or not you sold any shares, on top of the strike price you already paid. Estimated tax is owed in four installments, and the penalty is figured for each one, so a single January payment can leave the earlier quarters short. Withholding counts as paid evenly through the year, so raising it before December 31 covers those earlier quarters; the annualized income method can instead match your payments to when the income arrived (Form 2210 instructions). You are inside the safe harbor when withholding and estimates reach 90% of your 2026 tax or 100% of your 2025 tax, rising to 110% if your 2025 adjusted gross income was over $150,000, or $75,000 married filing separately (Publication 505). The fourth estimated payment for 2026 is due January 15, 2027.

5. Know the same-year sale escape hatch

If you exercise ISOs and sell those same shares in the same calendar year, the IRS treats regular tax and AMT the same way and requires no AMT adjustment for them (Form 6251 instructions, line 2i). The trade-off is that the sale is a disqualifying disposition: the gain is ordinary income instead of potentially long-term capital gain, but never more than the bargain element at exercise, and a sale at a loss creates no ordinary income at all (Publication 525). It is a way to cap an AMT bill you have already triggered, especially if the price has fallen since you exercised, and it only works if the sale also happens by December 31.

6. At a private company, check when the valuation changes

At a private company, the fair market value on your exercise date usually comes from the board's most recent 409A valuation. If a new valuation is expected, exercising before or after it changes your bargain element, and with it your AMT. A higher valuation after a priced round means a larger bargain element for the same shares. Ask your equity administrator whether an update is scheduled.

7. Count the clock and the credit

A sale taxed at long-term capital gains rates needs you to hold the shares past the later of one year after they were transferred to you and two years after the option was granted (Publication 525). The one-year clock starts at exercise, so a December exercise reaches it a month before a January one. AMT triggered by holding ISO shares generally becomes a credit you can use in later years when your regular tax runs higher; the AMT credit recovery article shows how it comes back. If you already carry an unused credit, note the other side of that: any exercise raises your minimum tax and shrinks the credit you recover that year, even below the crossover.

Where to go from here

For the mechanics behind every item above, start with how to find your AMT crossover, then Form 6251, walked through for how the exercise shows up on your return.

Year-end ISO timing is one decision among several that land in the same tax year. OptionsAhoy plans them jointly: every ISO, NSO, RSU vest and concentrated position, across bullish, neutral, and bearish scenarios, as a year-by-year Plan. Free during Beta.

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