ISO Tax Strategies

Incentive Stock Options (ISO's) in a publicly traded stock company allow for employees to have discretion as when to exercise options before expiration. At expiration, the options expire worthless. The longer you wait to exercise and the closer you get to that expiration date, the tighter the window gets from a planning perspective.

With ISO's, the spread between the exercise price and the current market price is not taxable income, as is the case with NSO's (Nonqualified Stock Options). However, it's possible that an exercise could trigger Alternative Minimum Tax (AMT.) AMT is common with a large spread between the exercise price and current market price and is taxed at 26 or 28%.

We had a particular client whose ISO's expired during Q1 2025. The original intent was to wait as long as possible and exercise after this calendar year rolled over to defer any tax liability for another year - just buying more time. Again, while the full exercise wouldn't create 'taxable income' in 2025, it was projected to generate ~ $50k of AMT.

But there was a planning opportunity to take advantage of before the end of this year. What would it look like if some of the ISO's were exercised now and the remainder in 2025, so the AMT was broken up over two years? 

In the end, we decided to exercise the majority of the ISO's now, which would cause the client $30k of AMT on their 2024 tax return. But why accelerate income instead of buying time for another year? Because much of the $30k of 2024 AMT will come back as a tax credit in 2025, offsetting tax from the remaining ISO exercise next year. So rather than paying ~ $50k all-in, we're looking at more like ~ $30k. $20k in tax savings - real money.

Good planning is not deferring taxes as long as possible but taking advantage of windows at different stages of life. We often see this play out with retirees temporarily in lower brackets, when we force distributions from the IRA rather than the Roth or taxable account, or we intentionally create capital gain taxes to take advantage of the 0% rate. Many of these windows are time sensitive and are lost with the start of a new year. You can't go back and take advantage after the fact.

Taxes are always only part of the story, but all too often, are quite overlooked. They can be a worthwhile consideration that provide compounding savings over a lifetime.

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^{Neither Voya Financial Advisors nor its representatives offer tax or legal advice.  Please consult with your tax and legal advisors regarding your individual situation.}