ISO and RSU Tax Planning Guide for Tech Workers: How to Save Thousands in 2026
Last reviewed: September 2026 · Educational, not individual advice
Two numbers drive most equity-compensation tax surprises in 2026. The AMT exemption is $90,100 single and $140,200 joint, phasing out at 50 cents per dollar above $500,000 or $1,000,000 of AMT income. RSU withholding defaults to 22%, below the bracket most tech households land in. This guide covers both, plus safe harbor and timing.
If you are a tech employee with Incentive Stock Options (ISOs) and Restricted Stock Units (RSUs), you are holding valuable compensation and a few tax landmines. This guide answers the questions we hear most from engineers, product leaders, and biotech professionals in the DC metro, in the order they usually matter. To keep it concrete we use a hypothetical composite couple, Steven and Grace: Steven has ISOs at a startup, Grace has large RSU vests at a public company, and they file jointly. They are not clients.
ISOs and RSUs in one minute
ISOs give you the right to buy company stock at a set strike price. If you hold the shares more than two years from grant and more than one year from exercise, the gain qualifies for long-term capital gains rates instead of ordinary income. The catch is the alternative minimum tax at exercise. We explain how ISOs are taxed, qualifying vs disqualifying dispositions in a separate post.
RSUs are shares delivered to you on a vesting schedule. They are simpler and less flexible: the full value is ordinary income when they vest, your employer withholds tax by keeping some shares, and the vest value becomes your cost basis. Whether to sell or hold at vest, and the Maryland surcharge that changes the math, is its own post.
When should I exercise ISOs? The 2026 AMT math
This is the most consequential question for ISO holders, and the answer runs through the alternative minimum tax.
The AMT trap. When you exercise ISOs and hold the shares past year-end, you create a bargain element: the fair market value at exercise minus your strike price. It is not ordinary income for regular tax, but it is an AMT preference item.
Illustrative: Steven exercises 10,000 ISOs at a $1 strike when the fair market value is $20. Bargain element: ($20 − $1) × 10,000 = $190,000. That $190,000 is added to his AMT income even though he has sold nothing and received no cash.
How the two systems compare. The IRS computes your tax twice, under the regular rules and under AMT, and you pay the higher. AMT starts from your regular taxable income, adds back preference items such as the ISO spread, subtracts the AMT exemption, and applies a 26% or 28% rate.
| Item | Single | Married filing jointly |
|---|---|---|
| AMT exemption | $90,100 | $140,200 |
| Exemption starts phasing out at AMT income of | $500,000 | $1,000,000 |
| Phaseout rate | 50 cents of exemption lost per dollar above the threshold | |
| Exemption fully gone at | $680,200 | $1,280,400 |
| AMT rate | 26% on the first $244,500 of AMT income after the exemption, 28% above | |
| AMT paid because of ISOs | Generally becomes a credit against regular tax in later years (Form 8801) | |
The phaseout is faster in 2026 than it was. Under the 2025 tax law the phaseout thresholds dropped back to $500,000 and $1,000,000 and the phaseout rate doubled to 50%. Illustrative: if Steven and Grace's AMT income is $1,200,000, they are $200,000 over the joint threshold, so they lose $100,000 of exemption and keep only $40,200. A couple with income like Grace's can lose the exemption entirely, which makes the ISO spread taxable almost dollar for dollar at 26% to 28%.
Practical planning steps before exercising:
- Room under the exemption. Estimate how much ISO spread you can absorb this year before tentative minimum tax exceeds your regular tax. This is the "how much can I exercise without AMT" question, and the honest answer is that it depends on your regular income, deductions, and state tax; model it rather than guess.
- Fair market value trend. If you believe the stock will rise a lot, exercising earlier locks in a smaller spread and starts the holding clocks sooner.
- Batch or spread. In a lower-income year you keep more exemption and may stay in the 26% band. Splitting an exercise across December and January spreads the AMT across two years.
- Cash to exercise and cash for AMT. The exercise cost is strike price times shares. The AMT bill arrives the following April. Do not plan to sell shares in a bad market to pay it.
- Exercise early in the calendar year. You then have until year-end to decide: hold through December for the qualifying-disposition path, or sell in the same year to erase the AMT preference if the stock has fallen or the AMT bill looks too large.
- Same-year sale as the escape hatch. Exercising and selling in the same calendar year is a disqualifying disposition, taxed as ordinary income, but it removes the AMT exposure and the pay-tax-without-cash risk.
Is 22% RSU withholding enough, and how do I hit safe harbor?
Employers withhold federal tax on RSU vests at the flat supplemental rate: 22% on the first $1 million of supplemental wages in a year, 37% above that. Maryland adds state withholding plus your county rate. None of this is a projection of your actual bracket.
Illustrative: Grace's $100,000 vest lands in the couple's 35% bracket. Withholding covers $22,000; the tax is about $35,000. That is a $13,000 gap from one vest, before state tax. Four vests a year and the April bill is north of $50,000.
| Test | Requirement |
|---|---|
| Current-year test | Withholding plus estimates cover 90% of this year's tax |
| Prior-year test | Withholding plus estimates cover 100% of last year's tax, or 110% if last year's AGI was above $150,000 |
| Small balance | You owe less than $1,000 at filing |
For most tech households the 110% prior-year test is the cleanest target: last year's tax is a known number, and once you have paid in 110% of it, the size of April's balance does not trigger a penalty.
Three ways to close the gap
- Extra withholding on salary. Add a flat dollar amount per paycheck on Form W-4, Step 4(c). Withholding is treated as paid evenly through the year, which fixes timing problems.
- Quarterly estimated payments. Due April 15, June 15, September 15, and January 15. A vest in August means a September 15 payment.
- Sell shares for taxes. Sell a slice of each vest into a tax reserve account. Shares sold at vest have almost no gain, so the sale itself adds little tax.
When to withhold less. If you already meet safe harbor through other income, or last year's tax was much lower than this year's will be, paying in only the safe-harbor amount and keeping the rest invested until April is legitimate. It needs accurate math and the discipline to hold the cash.
When should I sell vested stock?
This is where tax planning meets risk management. Do not let the tax tail wag the dog. Holding a concentrated position purely to reach long-term capital gains treatment is a common and expensive mistake: several large tech names fell 50% or more during 2022, and the tax saved by waiting did not come close to covering the loss. For a Maryland household the long-term rate helps only on the federal side anyway; the state taxes the gain as ordinary income and adds a 2% surcharge above $350,000 of federal AGI.
A balanced approach: sell at vest if you need the cash, have concerns about the company, or employer stock is above 10% to 20% of investable assets; hold a defined portion if you are within months of better tax treatment and the position is a size you could stomach losing half of. We wrote about why concentration is the risk the tax tail hides after Salesforce's early-2026 drop.
Plan for the grants you have not received yet
Many tech workers optimize one year in isolation. You will likely receive more ISOs and RSUs, so this year's decisions should account for next year's vests, refresh grants, a promotion or job change, and any AMT credit you are carrying forward. A large exercise this year may be cheaper than the same exercise next year when a refresh grant vests on top of it.
The Maryland side: no state AMT, but a surcharge on the gain
Maryland has no alternative minimum tax, so the ISO exercise itself creates no state bill until you sell. When you do sell, Maryland taxes the gain as ordinary income at state and county rates (Montgomery County 3.2%; a 3.3% rate for higher earners was approved in May 2026), and since tax year 2025 adds a 2% surcharge on net capital gains when federal AGI exceeds $350,000. Build that into the qualifying-disposition math. Two related levers for high-income years: the HSA guide for 2026 and, for those approaching Medicare age, how IRMAA works.
Your action plan: 10 steps
- Inventory your equity. List every ISO and RSU grant with grant date, vest dates, strike price, and current fair market value.
- Calculate the bargain element on any ISOs you might exercise: (FMV − strike) × shares.
- Estimate your AMT with tax software or a professional, using the 2026 table above.
- Project 2026 income: salary, every vest, bonus, and potential exercises.
- Check withholding against safe harbor and adjust before the next vest.
- Map cash flow for exercise cost and next April's bill.
- Measure concentration: employer stock as a share of investable assets.
- Ask your company about the next 409A valuation, trading windows, and FMV trends.
- Look ahead to 2027–2030 grants and vests.
- Get help. Equity compensation is where a CPA and a planner should be in the same conversation.
If you want the AMT room and the withholding gap modeled for your household, book a call. More guides are on the hub for tech employees.
FAQ: ISO AMT and RSU withholding in 2026
How much ISO can I exercise without triggering AMT in 2026?
It depends on your regular income, deductions, and filing status, so there is no single number. The exemption is $90,100 (single) or $140,200 (joint), and it shrinks by 50 cents per dollar of AMT income above $500,000 or $1,000,000. Model the crossover point before exercising rather than guessing.
What is the AMT exemption for 2026?
$90,100 for single filers and $140,200 for married couples filing jointly. It phases out at 50 cents per dollar once AMT income exceeds $500,000 (single) or $1,000,000 (joint), disappearing entirely at $680,200 and $1,280,400. The AMT rate is 26% up to $244,500 of income after the exemption, then 28%.
Is 22% withholding enough on RSUs?
Usually not for tech households. The 22% supplemental rate (37% above $1 million of supplemental wages) is below the 32% to 37% brackets most RSU recipients reach. On a $100,000 vest in the 35% bracket the gap is about $13,000 federal, plus Maryland state and county tax.
What is the safe harbor if my income jumps this year?
Pay in, through withholding and estimates, at least 110% of last year's total tax if last year's AGI was above $150,000 (100% otherwise), or 90% of this year's tax. Meeting either test avoids the underpayment penalty even if you owe a large balance in April.
Do I get AMT back after exercising ISOs?
Often, yes. AMT paid because of the ISO spread generally becomes a minimum tax credit you can use against regular tax in later years, claimed on Form 8801. The credit can take years to recover, so it reduces the cost of exercising but does not eliminate the cash-flow hit.
Sources
- IRS Rev. Proc. 2025-32, 2026 inflation adjustments (AMT exemption and phaseout)
- IRS Form 6251 instructions, Alternative Minimum Tax
- IRS Form 8801, Credit for Prior Year Minimum Tax
- IRS Publication 15 (2026), supplemental wage withholding
- IRS Topic 306, Penalty for underpayment of estimated tax
- IRS Form 1040-ES, estimated tax due dates
- Maryland Comptroller, Technical Bulletin 58, capital gains surcharge
Disclaimer: This article is for educational and informational purposes only and does not constitute investment, tax, legal, or insurance advice. ISO and RSU taxation depends on your individual circumstances; Steven and Grace are a hypothetical composite, not clients. Always consult a qualified tax professional before making equity compensation decisions.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Securities and investment advisory services offered through LPL Enterprise (LPLE), a Registered Investment Advisor, Member FINRA/SIPC, and an affiliate of LPL Financial. LPLE and LPL Financial are not affiliated with Allset Wealth.
