2025 Tax Strategy: Reduce ISO AMT with These Game-Changing Updates

How the 2025 AMT Rule Changes Could Save You Big on ISO Taxes (Yes, Really)

Ever exercised your Incentive Stock Options (ISOs) and got hit with a surprise tax bill — even though you didn’t sell a single share?

If you’ve been sitting on ISOs, especially in a private company or startup, you’ve probably heard about the Alternative Minimum Tax (AMT) and how it can ruin your day.

But there’s some good news: Starting in 2025, thanks to the new tax law — the One Big, Beautiful Bill Act (OBBBA) — AMT rules are changing, and that could mean real savings for you. Let’s break down what’s changing, how it affects ISO exercises, and how to plan smarter.

First Off — What’s the AMT and Why Should You Care?

Here’s the short version:
The Alternative Minimum Tax is a parallel tax system that makes sure certain high earners pay at least some tax, even if they’re using a lot of deductions. But the catch? It often hits middle-class tech workers and small business owners who exercise stock options.

And here's the big kicker:
➡️ AMT is only triggered if you exercise ISOs and don’t sell the shares in the same tax year.

If you do sell them in the same year, you’ll owe ordinary income tax — not AMT. But if you exercise and hold, the IRS considers the “spread” between your strike price and the fair market value (FMV) as income for AMT purposes.

🔍 Example:
Strike Price: $10
FMV at Exercise: $50
Spread: $40 × 5,000 shares = $200,000 in AMT income
You didn’t sell the shares… but you could still owe thousands in AMT.

What’s Changing in 2025 with the AMT?

Thanks to the One Big, Beautiful Bill Act (OBBBA) signed into law on July 4, 2025, the AMT is getting a facelift — and it’s mostly good news if you’re exercising ISOs.

Here's what’s new:

• ✔ Higher AMT exemption amounts (making AMT less likely for many)

• ✔ Better annual inflation adjustments

• ✔ BUT — in 2026, the exemption phaseout accelerates, so the benefit may shrink for higher earners

📊 2025 AMT Exemptions (from IRS Rev. Proc. 2024-40):

• Single: $88,100

• Married Filing Jointly (MFJ): $137,000

• Head of Household: $88,100

• MFS: $68,500

📉 2026 Warning:
If you’re MFJ, the exemption phaseout threshold drops from $1,252,700 to $1,000,000, and the phaseout rate increases from 25% to 50%. That means more AMT for higher earners starting in 2026.

So… Should You Exercise in 2025?

Short answer? Probably — if you plan it right.

🧠 Example Scenario:
Salary: $160,000
3,000 ISOs
Strike Price: $5
FMV at exercise: $25
Spread: $20 × 3,000 shares = $60,000 AMT income

Under pre-2025 rules, that $60K might push you into AMT territory. But with the 2025 exemptions, you could avoid AMT altogether — or owe much less.

Why Exercising Early in the Year Matters

Here’s a key planning tip that’s often overlooked:

• ✔ Exercising ISOs early in the year (Jan–Mar) gives you:

  • Time to monitor stock performance

  • Flexibility to sell before year-end if needed

  • More room to use offsetting tax strategies (like NSOs or donations)

• ❌ Exercising in Nov/Dec? You’ve got no time to adjust if the AMT surprise shows up. That’s how people get stuck with giant bills and no options.

Pro Strategy: Use NSOs to Soften the AMT Blow

Most folks don’t know this trick, but it’s a smart one:

You can exercise NSOs (Non-Qualified Stock Options) in the same year you exercise ISOs — and the ordinary income from NSOs can actually reduce your AMT liability.

How? NSO income increases your regular tax, and AMT is calculated based on the difference between AMT and regular tax. So raising your regular tax = less AMT gap.

⚖️ Example:
ISO exercise triggers $60K in AMT income
NSO exercise adds $40K in regular income
Your AMT exposure might drop to just $20K — or even zero, depending on your total return

What You Should Do Now

If you’re holding ISOs and thinking about exercising in 2025 or 2026, here's your game plan:

✔ Run an AMT projection with a tax pro (don’t guess or use chatgpt)
✔ Exercise ISOs early in the tax year for flexibility
✔ Consider pairing ISOs with NSOs to reduce AMT exposure
✔ Watch FMV vs strike price spreads
✔ Break up exercises across years to stay under AMT thresholds

Bottom Line: 2025 Might Be Your Sweet Spot

The AMT changes under the One Big, Beautiful Bill Act give you a rare window to finally take control of your ISO strategy — and maybe avoid AMT altogether.

But timing is everything.

2025 = Opportunity.
2026 = Higher AMT risk (thanks to the 50% phaseout rate).

So don’t wait until December to think this through. Start modeling now, explore your mix of ISOs and NSOs, and build a tax-smart plan that actually works for your income.

Need help modeling the tax impact of an ISO or NSO exercise? Let’s talk, book an Equity Compensation Consult today. You don’t have to navigate the AMT minefield alone.