Minimize Taxes by Splitting Your ISO Exercise between December and January

Incentive Stock Options (ISOs) are eligible for favored tax treatment which means they are not subject to withholding tax upon exercise like NSOs. However, they are subject to Alternative Minimum Tax (AMT) if the size of your exercise is beyond the exemption limit. In 2025 that exemption is $88,100 for single filers and $137,000 for married filing jointly per the IRS.

If you happen to be at the end of the current tax year and you just eclipse the exemption limit, then consider exercising just enough in December to stay below the limit. While exercising the rest in January of next year to take advantage of a fresh exemption limit. This allows you to dip into the exemption twice.

Keep in mind that 409A updates to the Fair Market Value of your stock are often triggered at the end of a year so waiting until January could result in a higher FMV on your deferred exercise. That could mean triggering some taxes albeit delayed until the following April. If that is a concern, ask company officials about when they plan to do a 409A update since most startups only do them following new rounds of financing.

Timing Your Exercise

Understanding when to exercise my employee stock options is a crucial part of financial planning. The 3 primary reasons to exercise are 1) you've left the company and are in your 90 day post-termination exercise window, 2) you have the ability to early exericise, and 3) you want to reduce exercise taxes.

Splitting your exercise between December and January is a great way to limit exercise related taxes and relies on a similar concept to exercising just enough ISOs each year to avoid AMT. Below we will look at 3 different examples of exercise timing:

• Exercising in Late in Year (ie December)
• Waiting to Exercise in January
• Splitting the Exercise between December and January

Let's use an example option package of 10,000 vested ISOs with a strike price of $1 per share. In this hypothetical example, let's pretend the FMV is at $10/sh in both December and January.

AMT values derived using ESO Fund's AMT Calculator.

Things to Consider When Planning Your Exercise

Company Updates

When planning out your exercise timing, it is important to understand what's going on at your company. Of course, you should have confidence in the company's future prospects if you are planning to exercise at all, but once you've established the intent to exercise, it is helpful to know if/when an FMV update is coming.

There are 2 major reasons a company is required to update their FMV:

• A material event like a funding round or M&A
• 12 months since the latest valuation

If you don't know exactly when the last FMV update occurred, you can typically reach out to the company for this information. Most companies only update the FMV annually unless they raise a funding round, but some later stage companies update their FMV as often as every quarter.

If you expect the FMV to go up, it could make sense to exercise beforehand in order to limit your spread - regardless of what time of year it is.

Personal Income

If you expect to have more personal income in a certain calendar year, it could be advantageous to exercise ISOs during that period. AMT is derived by calculating both your standard income tax and Alternative Minimum Tax. The IRS then takes the larger number as your minimum tax owed. Thus, if you have more income in a particular year, it is possible you will owe less or even zero AMT.

Of note, if you own NSOs in addition to your ISOs (either via a grant or the $100k ISO Limit), you can exercise NSOs and potentially reduce your AMT. This is possible because the spread on an NSO exercise is taxed as regular income, thus adding to your standard income tax number for the year.

IRS Tax Updates

The IRS typically updates the AMT exemption limit each calendar year to adjust for inflation, meaning waiting until January can potentially lower your AMT simply by exercising against a higher exemption amount.

Recently the One Big Beautiful Bill (OBBB) made a couple changes to AMT that are relevant to exercising in 2025 or beyond:

• Exemptions stay high: Tax Cuts and Jobs Act (TCJA) of 2017 level exemptions are now permanent (still indexed for inflation).
• Phase-out starts sooner: New thresholds for 2026 of $500K (single) / $1M (joint).
• Phase-out hits harder: Rate doubles from 25% to 50%.

Note: Exemption dollar amounts are inflation-indexed; confirm the latest IRS figures for the current year.

Next Steps

Splitting ISO exercises across December and January is a simple but powerful way to minimize AMT. Combine it with awareness of 409A updates, your income timing, and the IRS updates, and you’ll be in the great position to keep taxes low.

See this link for more ways to save money on stock option exercise taxes. Feel free to contact ESO Fund for assistance in funding your stock option exercise while not having to face the financial risk of investing in a startup. For help funding exercise related taxes, check out how ESO Fund can cover your taxes risk-free.

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Written by Jordan Long, Marketing Lead at ESO Fund