Look up three dates before you decide anything. First, the last day your plan lets you exercise, set in your grant agreement. Second, three months after your employment ends, when ISO treatment expires under Internal Revenue Code section 422(a)(2). Third, December 31, because the 2026 AMT exemption of $90,100 for unmarried filers applies to the year you exercise in.
Those are three different clocks. They start on the same day and they end on three different days, and most of the advice written for people in your position collapses them into one deadline.
Clock one: what your plan lets you do
The post-termination exercise window is set by the plan document and by your individual grant agreement. It is not set by tax law. It is not necessarily the same across the grants you hold, and two grants issued in different years can carry different terms.
This is the first thing to pull, before you price anything out. Look for the section on termination of service in the plan document, then check the grant notice for each grant separately. If a grant was amended, the amendment controls.
Keep in mind this window sets the outer edge of what is possible, not what is smart. Nothing in your plan document extends the second clock.
Clock two: how long the option stays an ISO
Under Internal Revenue Code section 422(a)(2), an incentive stock option must be exercised no later than three months after employment ends to keep ISO treatment. That is federal law and applies regardless of what your plan allows. Your former employer cannot waive it.
Exercise after that three-month mark and the option is treated as a nonqualified option. The spread between your strike price and the fair market value at exercise becomes ordinary compensation income in the year you exercise, taxed at ordinary rates.
So an option can still be exercisable under the plan and already be past the point where it is an ISO. Two different dates, and the plan will not tell you the second one.
Losing ISO treatment is not automatically the wrong outcome. If you were going to exercise and sell in the same window, a same-day sale is a disqualifying disposition anyway and the spread is ordinary income either way. The date matters most when you intend to exercise and hold. (One year applies instead of three months if you are disabled within the meaning of section 22(e)(3).)
Keep in mind holding is rarely only a tax call. It is also a decision about how much of one balance sheet sits in one ticker, which is the same tension that was there before the separation date existed. We wrote about how a compensation package makes career decisions harder separately.
Clock three: the tax year the exercise lands in
Exercise an ISO and hold the shares, and you have created an alternative minimum tax preference item in the year of exercise. Nothing was sold. No cash came in. As IRS Topic No. 427, Stock Options puts it, "you may be subject to alternative minimum tax in the year you exercise an ISO". We walk through the mechanics of that in a separate post on how the AMT calculation actually gets triggered on an ISO exercise.
For tax year 2026, per the IRS tax year 2026 inflation adjustments announcement (Revenue Procedure 2025-32), the AMT exemption is $90,100 for unmarried individuals and phases out beginning at $500,000. For married couples filing jointly it is $140,200, phasing out beginning at $1,000,000.
Now look at what else is landing in that same year. Severance, final pay, accrued PTO paid out, and any vesting that hits before your separation date are all income in the year you separate. Severance is supplemental wages, and per IRS Publication 15 (Circular E), 2026 edition, federal income tax is withheld on supplemental wages at a flat 22%, rising to 37% on supplemental wages above $1 million in a calendar year. That flat 22% is withholding, not the tax owed. If your marginal rate is higher, the gap shows up at filing, not on the severance check.
Splitting an exercise across two tax years is a real lever, but only if the first two clocks leave room for it. A September separation puts the three-month ISO deadline in December, so the entire ISO-qualified window sits inside one tax year and there is nothing to split. A November or December separation puts part of that same window in the following January, which is what actually creates a two-year decision.
Which clock hits first
| Clock | What sets the deadline | What happens if you miss it | Where to look it up |
|---|---|---|---|
| Plan exercise window | Your plan document and your individual grant agreement. Not tax law. | The option is gone. There is no tax question left. | Termination of service section of the plan document, plus each grant notice separately. |
| ISO qualification | Internal Revenue Code section 422(a)(2). Three months after employment ends. One year if disabled within the meaning of section 22(e)(3). | The option is treated as a nonqualified option. The spread becomes ordinary compensation income at exercise. | IRS Topic No. 427, Stock Options. Your last day of employment, in writing. |
| Tax year of exercise | December 31. Exercising and holding creates an AMT preference item that year. | The exercise stacks on severance, final pay and PTO in one year instead of two. | 2026 AMT exemption: $90,100 unmarried, phasing out at $500,000. $140,200 married filing jointly, phasing out at $1,000,000. |
Exercising after you leave, in order
First, confirm your actual last day of employment in writing, because both of the other clocks run off it and the date on the separation agreement is not always the date payroll used. Second, pull the exercise window for each grant. Third, count three months forward from the last day. Fourth, compare that date to December 31 and see whether you have one tax year to work with or two.
Only then does the arithmetic on strike price, current value and cash required mean anything. That order is also how we run it when we sit down with someone in biotech and life science in San Diego whose separation date is already on the calendar.
One thing the above does not cover. The 401(k) is a separate decision on a separate clock, and none of the three dates here apply to it. If that balance is the bigger number, start with what an old 401(k) is actually costing you once nobody is watching it and come back to the options.
Questions we get on this
My plan still lets me exercise. Doesn't that mean it is still an ISO?
No. The plan controls whether you can exercise. Section 422(a)(2) controls whether the exercise still qualifies for ISO treatment. An option can be fully exercisable under your grant agreement and already past the three-month mark, in which case it is treated as a nonqualified option.
What actually changes if I exercise after the three-month mark?
The spread between your strike price and the fair market value at exercise becomes ordinary compensation income in the year you exercise, rather than an AMT preference item. If you were going to sell right away, that is close to what a same-day sale would have produced anyway. If you were going to hold, it is a different result.
Can I split an exercise across two tax years?
Sometimes. It depends on whether your plan window and the three-month ISO deadline both extend past December 31. A separation in the fall usually leaves the entire ISO window inside one tax year. A separation late in the year is what puts part of the window into January.
Does my severance change the AMT math?
It changes the income the AMT calculation runs against. Severance, final pay, accrued PTO and any vesting before your separation date all land in the same year. For 2026 the AMT exemption is $90,100 for unmarried individuals and phases out beginning at $500,000, so the exemption you expect to have can shrink as that other income stacks up.
If the date is already set
Pull your grant agreements and write down your last day. If the three dates land in an order you don't like, there is usually still something to do about it, but the room to do it shrinks every week. The first conversation is complimentary. Do you want to map the three dates before you pick an exercise date?