How to review RSU vesting and ISO exercises before year-end

A November RSU vesting date is approaching, and you’re considering exercising incentive stock options before December 31.

Your employer will withhold taxes on the RSUs, but that withholding may not match what you actually owe. The options raise a different question: Could exercising them create an unexpected tax obligation even if you don’t sell the shares?

RSU tax planning requires looking at more than the next vesting date. RSUs generally create taxable wage income when shares are delivered, while exercising and holding incentive stock options (ISOs) can create an alternative minimum tax (AMT) adjustment without an immediate sale.

Before year-end, review your equity schedules, expected compensation, withholding, potential ISO exercise spread, and overall tax position together. The goal is to understand the consequences before making an exercise or sale decision.

How Are RSU Vesting and ISO Exercises Taxed Differently?

RSUs and ISOs may both provide company shares, but their tax treatment differs significantly.

A Restricted Stock Unit (RSU) is generally a promise to deliver company shares once specified conditions are met. For a typical stock-settled RSU, the fair market value of the shares becomes taxable compensation when the shares are delivered, often at or shortly after vesting.

An Incentive Stock Option (ISO) gives an eligible employee the right to purchase shares at a predetermined exercise price. Exercising an ISO generally does not create ordinary income for regular federal income tax purposes. However, it may affect AMT. Nonstatutory stock options (NSOs) and employee stock purchase plans (ESPPs) follow different rules and are outside the scope of this article.

The IRS explains the different treatment of statutory and non-statutory options in Publication 525, Taxable and Nontaxable Income.

When RSUs and ISOs occur in the same year, review their different tax effects together rather than relying on RSU withholding or considering an ISO exercise in isolation.

What Should You Review Before Your Next RSU Vesting Date?

Start with the equity events that have already occurred in 2026 and those scheduled before December 31.

Your equity portal may show the shares expected to vest, but the number of shares alone does not tell you how much taxable compensation to expect.

What to gather before your RSUs vest

• Vesting and settlement dates: Confirm when shares become yours and when taxable income is expected to be recognized.
• Expected share value: Estimate the taxable value using the applicable share price and anticipated number of shares delivered.
• Withholding method: Determine whether the employer withholds shares, sells shares to cover taxes, or uses another arrangement.
• Year-to-date compensation: Include salary, bonuses, earlier RSU settlements, and other relevant income.
• Available shares: Distinguish shares withheld or sold to cover taxes from the shares remaining in your brokerage account.

A thorough RSU tax planning review looks at your broader income and withholding, not just the shares scheduled to vest. Gather your latest pay statement, 2025 tax return, current-year withholding details, and equity award records.

The Gulecha CPA Tax Center includes 2026 deadlines, a document checklist, and links to official tax forms and payment resources.

Consider an employee expecting 400 RSUs to settle in November when the stock trades at $120 per share.

The estimated taxable compensation would be:

400 shares × $120 = $48,000

That $48,000 is generally included in wage income, assuming ordinary stock-settled RSUs with no special deferral provisions. The employee may receive fewer than 400 shares after shares are withheld or sold to cover applicable taxes.

The final taxable amount depends on the actual settlement date, value, and award terms.

For professionals receiving equity throughout the year, stock-based compensation tax planning means considering these figures alongside salary, bonuses, and other income.

Why Might RSU Tax Withholding Be Insufficient?

One common misunderstanding is that if an employer withholds taxes when RSUs settle, the full tax obligation has already been addressed.

Employer withholding is a payment toward your final tax liability. It does not necessarily equal the tax ultimately due.

For 2026, separately identified supplemental wages may be subject to optional 22% federal withholding up to $1 million; supplemental wages paid by the same employer above that threshold are generally subject to 37% withholding. Employers may also use an applicable aggregate method. For a higher earner, the 22% flat rate can be well below the rate that actually applies to the RSU income.

Could RSU Withholding Cover Your Total Tax Bill?

Take a single filer with a $260,000 salary and the $48,000 RSU settlement from the example above. If the employer withholds federal income tax at 22%, the withholding is $10,560. But the RSU income is stacked on top of salary, so it is taxed at the filer’s higher marginal rates:

• Taxable income before the RSUs: about $243,900 ($260,000 salary less the $16,100 standard deduction).
• About $12,300 of the RSU income falls in the 32% bracket, and about $35,700 falls in the 35% bracket.
• Estimated federal income tax on the RSU income: about $16,400.
• Federal income tax withheld at 22%: $10,560.
• Estimated shortfall: about $5,900, before any state income tax.

This is an illustration using 2026 federal rates for a single filer with no other income or deductions. Your numbers will differ. Social Security and Medicare taxes are separate: for a high earner, Medicare tax, including the 0.9% Additional Medicare Tax on wages above $200,000, is generally withheld by the employer, while Social Security tax stops once wages pass the annual wage base.

How Can You Close a Withholding Gap Before December 31?

A shortfall identified in November is usually fixable. Common options include:

• Adjust your Form W-4. Ask your employer to withhold additional federal tax for the remaining pay periods. Withholding is generally treated as paid evenly through the year, so an increase late in the year can help offset an earlier gap. The IRS Tax Withholding Estimator can help you size it.
• Make an estimated tax payment. The fourth-quarter 2026 estimated payment is generally due January 15, 2027.
• Check the safe harbor. Paying at least 100% of last year’s tax (110% if last year’s adjusted gross income exceeded $150,000) generally avoids an underpayment penalty, even if you owe more at filing.

The Gulecha CPA income tax calculator can provide a preliminary estimate of 2026 federal income tax on ordinary income. It excludes AMT and state taxes, so it won’t show the full tax impact of RSUs, ISO exercises, or work performed in multiple states. A year-end tax projection that compares estimated total tax with amounts withheld from salary, bonuses, and RSUs, plus any estimated payments already made, shows whether an adjustment is appropriate.

When Can Exercising ISOs Trigger AMT?

Unlike ordinary RSU compensation, exercising and holding ISOs may create a tax consideration without producing cash from a sale.

For regular federal income tax purposes, exercising a qualifying ISO generally does not create immediate taxable income.

However, for AMT purposes, the difference between the stock’s fair market value and the exercise price may create an adjustment when the applicable conditions are met. This difference is commonly called the ISO exercise spread.

How Is the ISO Exercise Spread Calculated?

Assume an employee exercises 600 ISOs with:

• Exercise price: $30 per share
• Fair market value at exercise: $90 per share
• Number of shares exercised: 600

The potential AMT adjustment is:

($90 − $30) × 600 = $36,000

If the employee holds the shares past December 31 and the shares are transferable or no longer subject to a substantial risk of forfeiture, the $36,000 spread is generally an AMT adjustment. It is not $36,000 of tax; whether AMT is owed depends on the full calculation.

The IRS explains these rules in the Instructions for Form 6251.

How Does the 2026 AMT Exemption Affect ISO Planning?

Whether an ISO exercise results in AMT depends on how your AMT income compares with the exemption. For 2026, the AMT exemption is about $90,100 for single filers and about $140,200 for married couples filing jointly, and it begins to phase out at $500,000 of AMT income for single filers ($1,000,000 for joint filers). Many taxpayers with moderate exercises owe no AMT.

That is not a reason to skip the analysis. AMT does not allow the standard deduction, and it disallows the state and local tax deduction for those who itemize.

Large RSU income, a large exercise, or both can erase the cushion, and California has its own AMT calculation that can differ from the federal one.

What Happens if the Shares Are Sold in the Same Year?

If ISO shares are disposed of in the same calendar year they are exercised, no separate exercise-and-hold AMT adjustment is generally required for those shares.

A same-year sale may instead be a disqualifying disposition, creating ordinary income under regular tax rules.

For a disposition to generally receive qualifying ISO treatment, both holding-period requirements must be met:

• More than one year after the shares are transferred upon exercise.
• More than two years after the option was granted.

A same-year sale can change the tax treatment. Holding longer may preserve the possibility of qualifying treatment but carries market risk and may involve AMT. Neither choice is automatically preferable.

Keep separate regular-tax and AMT basis records because the bases may differ after an AMT adjustment.

How Should You Evaluate RSUs and ISOs Together Before Year-End?

A stock-based compensation tax planning review can compare the tax impact of the RSUs and a potential ISO exercise.

Consider a single filer with a $260,000 salary and a $48,000 November RSU settlement who is also thinking about exercising 600 ISOs in December at $30 per share when the stock is worth $90.

In this illustration, estimated regular tax exceeds the tentative minimum tax, so no AMT would be expected. The margin is only about $4,700, though.

A larger exercise, additional income, or a change in deductions could close it.

The figures assume a single filer, the standard deduction, 2026 federal rates and AMT parameters, and no other income, credits, or adjustments, and they exclude state tax.

A useful year-end review compares several paths: no exercise, a smaller exercise sized to stay below the AMT threshold, an exercise held through year-end, and an exercise followed by a same-year sale.

Weigh each against exercise costs, liquidity, possible disqualifying-disposition income, option expiration dates, trading restrictions, and stock-price risk.

Does Working in Multiple States Change Equity Compensation Taxes?

For professionals who work remotely or move between West Coast states, the work location and the award’s service period can affect state tax sourcing.

California, Oregon, and Idaho tax residents on their income. States can also tax nonresidents on compensation tied to work performed there.

Washington does not tax wage income. However, its capital gains excise tax may apply to certain large long-term gains from stock sales.

Moving out of California does not necessarily end California’s claim. For nonresidents, California may tax the portion of RSU income attributable to California workdays between grant and vest.

Stock options follow separate allocation rules. These depend on the option type and the facts.

What Happens if You Move Before Your RSUs Vest?

Consider an employee who received RSUs while working in San Francisco.

They later moved to Bellevue before the RSUs vested. California may still tax part of the vesting income, because some of the award’s service period was spent working in California.

Keep grant agreements, vesting schedules, employment history, and work-location records. The California Franchise Tax Board’s Equity-Based Compensation Guidelines (Publication 1004) explain the sourcing rules for residency changes.

Should You Sell RSUs or Keep Employer Shares?

RSUs, options, and other employer shares can concentrate a large share of an employee’s wealth in one company.

For typical RSUs, the value included in wages at settlement becomes the shares’ tax basis. A later sale generally creates a gain or loss. That gain or loss is the difference between the sale proceeds and the adjusted basis.

Consider these questions:

• How much of your overall investment portfolio is exposed to employer stock?
• Do you need cash to cover taxes or the cost of exercising options?
• Would holding more shares leave you vulnerable to a decline in the company’s value?
• Are trading windows, blackout periods, or other restrictions relevant?
• How do potential tax consequences compare with your broader financial goals?

A CPA can model the tax consequences. For investment decisions, coordinate with a financial adviser.

How Can Gulecha CPA Help With RSU Tax Planning?

RSU vesting and ISO exercises can create different tax consequences. Review withholding, potential AMT exposure, state tax sourcing, and your award records together before making a year-end decision.

At Gulecha CPA, we offer proactive, personalized tax planning for professionals with equity compensation. Our stock-based compensation services cover RSUs, ISOs, NSOs, and ESPPs. We work with clients across Oregon, Washington, California, and Idaho. Together, we can compare scenarios and understand the trade-offs. You can then approach year-end decisions with greater clarity and confidence.

Call (503) 445-9904, or email info@gulechacpa.com to discuss your situation and goals, with no obligation.

This article is general information, not tax, legal or investment advice for your situation. Rules and thresholds change, so please talk with a qualified advisor before acting.