I live in Virginia. How many of my incentive stock options can I exercise this year before the AMT starts?

What happens to my taxes when I exercise ISOs?

The regular tax counts nothing when you exercise. The AMT counts the spread between what the shares are worth and what you paid. The instructions for Form 6251, the IRS form for the AMT, say that for the regular tax "no income is recognized" at exercise, and then that this rule "doesn't apply for the AMT".

The spread is what the shares are worth minus the amount you paid for them. For Maya it is $100 a share, or $200,000 across 2,000 shares. None of it is on her regular return. All of it goes into her AMT income if she holds the shares past December 31.

Where does the AMT start in 2026?

The 2026 exemption is higher than last year's, but it starts shrinking at a lower income and falls 50 cents for every dollar over that point. The exemption is the part of your AMT income the AMT doesn't tax: $90,100 for a single filer and $140,200 for a married couple filing jointly. AMT income, or alternative minimum taxable income, is the income figure the AMT works from. Maya's comes to about $600,000 with the spread.

The exemption begins to shrink at $500,000 of AMT income for single filers and $1,000,000 for joint filers. For tax years beginning after December 31, 2025, it falls by 50 cents for every dollar above that point. A single filer's exemption is gone at $680,200, and a joint filer's at $1,280,400. What's left after the exemption is taxed at 26 percent, and at 28 percent above $244,500.

In 2025 the single exemption was $88,100, it started shrinking at $626,350, and it shrank by 25 cents on the dollar. Under those numbers Maya's $600,000 would have kept her whole exemption. In 2026 she is $100,000 over the threshold and loses $50,000 of it.

How many shares can I exercise before the AMT bites?

Each share you exercise adds its spread to your AMT income, and you owe AMT only once your tentative minimum tax passes your regular tax. Tentative minimum tax is the tax the AMT calculation produces, after any AMT foreign tax credit. It sits on line 9 of Form 6251, the AMT form, and you must file that form when line 7, the same tax before that credit, runs above your regular tax. The AMT owed is only the amount by which tentative minimum tax exceeds regular tax.

Maya's regular tax doesn't move when she exercises, because the regular tax counts nothing at exercise. Her AMT income climbs $100 with every share. Between $500,000 and $680,200 of AMT income, each share also takes $50 off her exemption. So inside that range each share adds $150 to the amount the AMT taxes.

The count that fits is the one whose spread lifts her tentative minimum tax to about her regular tax. That needs her 2026 regular tax, which comes from the rest of her return. This page can't know it, but can show what one share does. Maya's taxable excess is above $244,500, where the AMT rate is 28 percent. Shares that keep her AMT income at or below $500,000 add $28 each to her tentative minimum tax. Shares past $500,000 add $42 each. The first range is used up before the second starts. Once she has her regular tax, the gap between it and her tentative minimum tax before any exercise, divided by those amounts, gives the count.

What if I sell the shares soon after exercising?

Selling in the same year takes those shares out of the AMT, and selling before the holding periods end turns part of the gain into ordinary income. When you exercise and sell in the same year, "no adjustment is required" for the AMT.

The holding periods are two clocks: two years from the date the option was granted and one year from the date the shares were transferred to you. The one-year clock starts the day after you exercise. A sale after both have run makes the whole gain over what you paid a capital gain, the profit on selling an investment. If Maya exercises in December 2026, her one-year clock runs into December 2027, and her grant letter, the paperwork from when the options were granted, shows when the two-year clock ends.

A sale before then makes part of the gain ordinary income, taxed at the same rates as wages. That part is the smaller of the spread at exercise and your actual gain on the sale, and anything above it is capital gain. It goes on your W-2 if you were still an employee, but no Social Security or Medicare tax and no withholding come out of it. If Maya sold some shares at $110 soon after exercising, the full $100 spread on each would be ordinary income. If she sold below $110, only her actual gain over the $10 she paid would be.

Do I get the AMT back in later years?

AMT from an ISO exercise generally comes back as a credit in later years when your regular tax runs above your tentative minimum tax. The minimum tax credit is AMT paid in an earlier year coming back as a credit, figured on Form 8801 in the later year. It is allowed only for AMT caused by deferral items, which "generally don't cause a permanent difference in taxable income over time".

The ISO spread isn't among the items the instructions list as permanent, so we read AMT from an ISO exercise as coming from a deferral item that can produce the credit. The Form 8801 instructions don't name ISOs. In any later year the credit can't exceed the amount by which your regular tax exceeds your tentative minimum tax. So the money isn't simply gone, but it comes back only in years with that gap.

Your basis is what the shares cost you, the amount taken off the sale price to find your gain. For the regular tax it is what you paid, $10 a share for Maya. Your AMT basis goes up by the spread, so Maya's is $110. The two are likely to differ, so keep records for both.

Does Virginia tax my ISO exercise?

Virginia law starts the state return from federal adjusted gross income, and Ruling 05-163 applies that to stock options. An ISO exercise adds nothing to that figure. So Virginia generally taxes an ISO when the shares are sold, not at exercise. Federal adjusted gross income is the total from your federal return that Virginia's math begins with. Maya's $200,000 spread isn't in it.

Virginia's rates are 2, 3, 5 and 5.75 percent. The section of Virginia law that sets them holds no second calculation like the AMT. Ruling 05-32 says Virginia requires no withholding from the grant, the exercise or the sale of ISO shares. Virginia Tax's residency page says someone who moves into Virginia to live, or moves out to live in another state, is generally a part-year resident. Our stock compensation guide walks through how the move date changes the Virginia return.

Back at her desk in Reston, Maya has the grant letter beside last year's return. The number she is looking for is the point where her tentative minimum tax passes her regular tax, and the regular tax line of last year's return gives her a first look at that number. Virginia generally waits until she sells. How many shares she exercises, and whether she holds them, is still hers to decide with her financial advisor, now with her own numbers on the table.

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