RSUs, ISOs, and AMT in plain English
High-level differences between RSUs and incentive stock options, why the Alternative Minimum Tax matters for some ISO exercises, and where DIY ends.
Two flavors of equity (oversimplified on purpose)
RSUs are promises of stock that mature when vesting conditions clear. When shares or cash settle, ordinary income often shows up in wages unless your plan does something unusual.
ISOs are rights to buy stock at a set exercise price with expiration clocks. Tax timing is famously nuanced—holding periods, disqualifying dispositions, and AMT interactions can change outcomes dramatically.
RSUs: wage-like moments
Journalists often describe RSUs as bonuses paid in stock. Value at vest commonly flows through payroll with withholding via share surrender or cash top-ups. What lands in your brokerage after taxes is not the headline grant value.
Liquidity
Tax bills arrive on schedule even when your ability to sell does not.
Liquidity matters: private companies may restrict sales; public companies may have blackouts.
ISOs and AMT
The Alternative Minimum Tax recalculates income with fewer breaks. For ISO exercises, the spread can count under AMT rules even if you have not sold—creating tax without a sale to fund it for some taxpayers.
Not everyone hits AMT; exemptions and phaseouts matter. Model large exercises—do not guess.
When to stop reading blogs
If a single exercise or vest could fund a car, pay a professional who models equity tax for a living. This article educates; it does not replace individualized advice.
- Read grant letters and plan documents.
- Coordinate withholding and estimated taxes when income is lumpy.
What to do next
Practical next steps based on this topic.
Use education to frame questions for a CPA or tax attorney—not to replace them.
- Inventory grants: RSU, ISO, NSO, ESPP tranches with vest and expiration dates.
- Run pro formas: Project ordinary tax and AMT scenarios around exercise and vest.
- Book help before large moves: Equity mistakes can be expensive; advice is insurance.
Disclaimer
General information only—not individualized tax, legal, or investment advice. Consult a qualified professional about your grants and household.