ISO and RSU Tax Planning Guide for Tech Workers: How to Save Thousands in 2026

If you're a tech employee with Incentive Stock Options (ISOs) and Restricted Stock Units (RSUs), you're sitting on valuable compensation—but also potential tax landmines. We recently helped a client save over $50,000 on their equity compensation taxes through strategic planning. Even better? If they had come to us in 2025, we could have saved them significantly more.

This guide answers the most common questions tech workers ask about ISO and RSU taxation, helping you make informed decisions before tax season catches you off guard.

What Are ISOs and RSUs? Understanding Your Equity Compensation

Incentive Stock Options (ISOs): The Basics

ISOs are a type of stock option that gives you the right to purchase company stock at a predetermined price (the "strike price" or "exercise price"). They offer preferential tax treatment but come with complex rules:

- Grant Date: When your company awards you the options

- Vesting Schedule: When you earn the right to exercise

- Exercise Price: The price you pay to buy the stock (typically the Fair Market Value at grant)

- Fair Market Value (FMV): The current value of the stock

Key Tax Advantage: If you hold ISO shares for at least 2 years from grant date AND 1 year from exercise date, gains qualify for long-term capital gains rates instead of ordinary income rates.

Restricted Stock Units (RSUs): The Basics

RSUs are company shares given to you as compensation that vest over time. Unlike ISOs, RSUs are simpler but offer less tax flexibility:

- Vesting Date: When the shares become yours

- Taxable Event: RSUs are taxed as ordinary income when they vest

- Automatic Withholding: Your employer typically withholds shares to cover taxes (often 22% federal + state)

Question 1: When Should I Exercise My ISOs? Understanding AMT

This is the most critical question for tech workers, and the answer involves understanding the Alternative Minimum Tax (AMT).

The AMT Trap

When you exercise ISOs (but don't immediately sell), you create a "bargain element"—the difference between the FMV and your exercise price. This bargain element is not taxed as ordinary income (good news!), but it is an AMT preference item (potential bad news).

Example:

- Exercise price: $1 per share

- FMV at exercise: $20 per share

- Shares exercised: 10,000

- Bargain element: ($20 - $1) × 10,000 = $190,000

That $190,000 gets added to your AMT income calculation, potentially triggering AMT liability.

AMT Calculation and 2026 AMT Exemptions

The IRS calculates your taxes two ways

• Regular tax (the normal system)

• AMT (a separate system with different rules)

1. Under AMT, the IRS starts with an “AMT income” number
   This can be higher than your regular taxable income because some items get added back, especially: ISO exercise spread (FMV − strike) if you exercise and hold shares past year-end

2. Then the AMT exemption reduces that AMT income

• If you’re single in 2026, the exemption is $90,100

• So AMT taxable income ≈ (your AMT income) − $90,100
  But…

• High income can shrink the exemption (phaseout)
  If your income is high enough, you don’t get the full $90,100—it starts phasing out.

AMT exemption: $90,100 (single) / $140,200 (MFJ)

1. Phaseout starts at: $500,000 (single) / $1,000,000 (MFJ)

2. Phaseout completes at: $680,200 (single) / $1,280,400 (MFJ)

Practical Planning Steps

Consider these factors before exercising ISOs:

1. AMT exemption: How much of your ISO “spread” could be shielded by the AMT exemption this year?

2. Fair Market Value (FMV): If you believe the stock will grow a lot, exercising earlier can trigger less AMT tax and start the ISO holding periods sooner.

3. Batch the AMT hit into one year. If you expect lower income that year, you might keep more of the AMT exemption and stay in the 26% AMT bracket vs pushing yourself higher later.

4. Cash to exercise: Do you have enough cash to pay the exercise cost (strike price × number of shares)?

5. Cash to pay AMT tax: If AMT is likely, do you have enough cash set aside to cover the additional tax due (often paid the following year), without being forced to sell shares at a bad time?

6. AMT strategy (same-year sale): If exercising would trigger AMT and you don’t want to carry that risk, consider exercising and selling in the same calendar year so you can potentially limit AMT exposure and eliminate the ‘tax-without-cash’ risk.

Question 2: How Do I Optimize My W2 and RSU Withholding Rate?

Most employers withhold 22% federal (supplemental wage rate) plus state taxes on W2 and RSU vesting. Problems:

- If your total income puts you in the 32%, 35%, or 37% tax bracket, you're underwithheld

- Underpayment penalties can apply if you're not careful

Safe Harbor Rules: Your Tax Planning Friend

You can avoid underpayment penalties by meeting safe harbor requirements:

1. Pay 90% of current year's tax liability, OR

2. Pay 100% of prior year's tax liability (110% if AGI > $150,000), OR

3. Keep underpayment below $1,000

Strategies to Consider

Increase Withholding If:

- You're in a higher tax bracket than 22%

- You want to avoid a big tax bill at year-end

Decrease Withholding If:

- You meet safe harbor through other income sources

- You deposit the cash flow to earn interests during the year (understand you'll pay later)

Question 3: When Should I Sell My Vested Stock?

This is where tax planning meets financial planning. The decision involves both tax implications and risk management. We have talked about tax considerations. Now let’s talk about risk management.

Don't Let the Tax Tail Wag the Dog

Critical Principle: Never hold concentrated positions purely for tax benefits.

Case Example: Tech workers who held stock through 2022 market correction saw 50-80% declines. The tax savings from long-term capital gains treatment didn't compensate for the loss.

Balanced Approach

1. Sell immediately if you need cash, or have concerns about the company

2. Hold strategically if you're within months of better tax treatment and believe in the stock

Question 4: Planning for Future Grants—Don't Optimize in a Vacuum

Here's what many tech workers miss: You'll likely receive more ISOs and RSUs in future years.

Your 2026 decisions should account for:

- Upcoming Grants: Will you receive more equity next year?

- Vesting Schedules: When will future RSUs vest?

- Career Trajectory: Promotion or job change affecting compensation?

- AMT Credit Carryforwards: Can you use these strategically?

Your Action Plan: 10 Steps to Take Today

1. Inventory Your Equity: List all ISOs, RSUs, grant dates, vest dates, exercise prices, and FMV

2. Calculate Your Bargain Element: For ISOs, determine (FMV - Exercise Price) × Shares

3. Estimate Your AMT: Use tax software or hire a professional to model scenarios 

4. Review Your 2026 Tax Projection: Include salary, RSUs, bonuses, and potential ISO exercises   

5. Check Your Withholding: Are you on track to meet safe harbor? Adjust if needed   

6. Map Your Cash Flow: Identify when taxes will be due and ensure liquidity   

7. Assess Concentration Risk: What percentage of net worth is in company stock?   

8. Ask Your Company: Next 409A date? Upcoming selling windows? FMV trends?   

9. Consider Your Future: What equity will you receive in 2027-2030?   

10. Get Professional Help: Equity compensation is complex, consult with tax professionals

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. Always consult with a qualified tax professional before making equity compensation decisions.