TL;DR (Too Long; Didn't Read)
The Goal: Exercise as many Incentive Stock Options (ISOs) as possible without triggering the Alternative Minimum Tax (AMT).
The "Crossover Point": The specific dollar amount of "spread" (market value minus strike price) you can incur before your AMT liability exceeds your regular tax liability.
The Strategy: By calculating this limit, you can maximize your future capital gains treatment while keeping your current tax bill at zero.
The Symptoms
You’re a high-earner at a venture-backed startup. Your company’s 409A valuation just climbed, and you want to exercise your ISOs to start the one-year clock for Long-Term Capital Gains.
However, you’re paralyzed by the "AMT Boogeyman." You know that if you exercise too many options, you’ll be hit with a massive tax bill in April on money you haven't even cashed out yet. You’re likely staring at a spreadsheet, trying to guess how many shares you can pull the trigger on without writing a five-figure check to the IRS. You want the tax benefits of ISOs, but you can't afford the "phantom income" tax that comes with them.
The Technical Deep Dive: Why the Crossover Point Matters
The Alternative Minimum Tax (AMT) is a parallel tax system designed to ensure that taxpayers who benefit from certain "preference items" still pay a minimum amount. For tech employees, the biggest preference item is the ISO bargain element—the difference between your strike price and the current Fair Market Value (FMV).
In 2026, the tax landscape has shifted. While the One Big Beautiful Bill Act (OBBBA) made higher AMT exemptions permanent, it also introduced a steeper phase-out. For 2026, the AMT exemption is $90,100 for single filers and $140,200 for married couples filing jointly. However, if your income exceeds $500,000 (single) or $1,000,000 (joint), that exemption disappears twice as fast as it used to—at a rate of 50 cents per dollar.
The Mechanics of the "Gap"
To find your crossover point, you have to find the "buffer" between your regular tax and your tentative minimum tax.
Calculate Your Regular Tax: This is what you owe on your salary, bonus, and any RSU vests (taxed as ordinary income).
Calculate Your AMT Floor: This is your AMT liability before you exercise any ISOs. Remember, AMT disallows many deductions (like State and Local Taxes/SALT).
Find the Buffer:
Buffer = Regular Tax Liability - Tentative Minimum Tax (Pre-Exercise)
Solve for the Crossover Spread: Once you know your buffer, you can calculate how much ISO spread you can add. Since the AMT rate is typically 26% (up to $232,100 of AMTI) or 28%, you divide your buffer by the rate:
Max Allowable Spread = Buffer / AMT Rate
Example Scenario (2026 Tax Year)
Imagine you are a single filer earning $250,000.
Regular Tax: Approximately $55,000.
AMT (Pre-Exercise): After applying the $90,100 exemption to your income, your AMT might only be $41,500.
The Buffer: $55,000 - $41,500 = $13,500.
The Crossover Point: $13,500 / 0.26 = $51,923.
In this case, you can exercise enough ISOs to create $51,923 in paper gains without owing an extra dollar in federal tax. If you exercise $51,924 worth of spread, you officially cross over and owe the IRS for the privilege.
The Expensive Mistake
Most employees fall into one of two traps that can cost them hundreds of thousands of dollars in the long run.
1. The "Safety First" Trap (Under-Exercising)
Many people are so afraid of the AMT that they don't exercise at all. They wait until an IPO or an acquisition to do a "cashless exercise."
The Cost: By waiting, you forfeit the chance to start the capital gains clock. Instead of paying a 20% capital gains rate, you’ll pay your top marginal income tax rate (up to 37%) on the entire gain. On a $500,000 gain, that mistake costs you $85,000 in unnecessary taxes.
2. The "Phantom Income" Trap (Over-Exercising)
Conversely, some employees exercise their entire grant in December without running the math.
The Cost: If you exercise $200,000 of spread when you only had a $10,000 buffer, you could trigger a $50,000 AMT bill. Because your company is likely still private, you can't sell the shares to pay the tax. You are now stuck writing a check from your personal savings for "wealth" that only exists on paper. If the company's value drops next year, you’ve paid taxes on money you will never see.
The 2026 Phase-Out Risk
The most dangerous part of the crossover calculation in 2026 is the exemption phase-out.
If your income is near the $500k (single) / $1M (joint) threshold, every dollar of ISO spread you add doesn't just get taxed at 26%—it also kills your exemption. This creates a "hidden" marginal tax rate that can effectively reach 39% or higher within the phase-out range.
If you use a simple online calculator that doesn't account for the 2026 phase-out rules, you will likely underestimate your tax bill by thousands of dollars.
The Rally Solution
Calculating your crossover point by hand is like trying to hit a moving target while wearing a blindfold. Between the 2026 phase-out rules, varying state AMT laws (like in California), and the impact of year-end bonuses, a static spreadsheet just isn't enough.
Rally was built to solve this for the modern tech employee.
Real-Time Data: Upload your pay stubs and connect your equity portal (Carta, Shareworks, etc.).
Precision Modeling: We don't just give you a "guess." We run your specific 2026 tax brackets against the updated OBBBA phase-out logic.
The "What-If" Engine: Slide a toggle to see exactly how many shares you can exercise today, tomorrow, or next month to hit your crossover point perfectly.
Stop guessing with your equity. You worked hard for those options; don't let a "phantom" tax bill take the wind out of your sails.
Rally Tax is an Authorized IRS e-file Provider and SOC2 Compliant.
