'Big Beautiful Bill' has Big Impacts Tax Planning for Incentive Stock Options (ISO) and Restricted Stock Units (RSUs)

Navigating the world of taxes as an investor can feel overwhelming, especially when it comes to Restricted Stock Units (RSUs) and Incentive Stock Options (ISOs). With recent changes to state and local tax (SALT) laws, understanding their impact on your earnings and tax obligations is more essential than ever. Recognizing these changes can help you make smarter investment choices and plan effectively for your financial future.

Changes to State and Local Tax deductions (SALT) and the Alternative Minimum Tax (AMT)

The state and local tax (SALT) deduction cap was increased, from $10,000 to $40,000 for 2025, increasing by 1% annually through 2029. Phases out for taxpayers with income above $500,000. Reverts to $10,000 after 2029.

Beginning in 2026, the AMT exemption phaseout thresholds will decrease to $500,000 for single filers and $1 million for joint filers. Furthermore, when a taxpayer's AMT income surpasses the exemption threshold, the new legislation raises the AMT exemption phaseout rate to 50% of the amount exceeding the threshold, as opposed to the current 25%.

*kitces.com LLC

How this affects tax planning for Incentive Stock Options (ISO) and (RSU's)

The SALT deduction is significantly increased for this tax year, and it's set to bring fantastic benefits to eligible taxpayers! This is especially great news for those residing in high-tax states like California and New York. Although, many individuals with equity compensation may be on the edge of the income limits and tax planning may help manage income to not push you slightly over and have your miss out on the deduction.

Purchasing decisions for ISO's will also be affected by the AMT's phaseouts increasing in 2026, so it may be beneficial to adjust your strategy to maximize the more favorable phase out levels in 2025.

Optimizing Your Investment Journey

Understanding the impact of SALT and AMT tax changes on your RSUs and ISOs is vital for any investor who wants to enhance their financial plan. Every individual has varying circumstances, so it's important to run financial planning and tax planning scenarios with a professional to understand your situation and projected outcomes. By staying informed about tax implications and implementing strategic planning, you can minimize potential tax burdens and improve the value of your compensation packages.

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.