Have you been exercising stock options or selling company stock in 2026? There may be more at stake than the tax generated by the transaction itself.
For higher-income taxpayers, a large equity transaction can affect another part of the tax picture that is easy to overlook: the federal deduction for state and local taxes, commonly known as the SALT deduction.
The 2026 SALT Deduction Has an Income-Based Phaseout
The federal rules governing the SALT deduction changed beginning in 2025, and the expanded limits continued into 2026.
For 2026, taxpayers who itemize can generally deduct up to $40,400 in qualifying state and local income, sales, and property taxes. However, the maximum deduction begins phasing down when MAGI exceeds $505,000.
The phaseout applies at a rate of 30% of MAGI above the threshold.
For most filing statuses, that means:
- At or below $505,000 of MAGI: The maximum SALT deduction is $40,400.
- At $555,000 of MAGI: The deduction is reduced by $15,000, leaving a maximum deduction of $25,400.
- At approximately $606,333 of MAGI: The deduction reaches its $10,000 floor.
For married taxpayers filing separately, the corresponding figures are generally half: a $20,200 maximum deduction, a $252,500 phaseout threshold, and a $5,000 floor.
One important clarification: these are maximum deduction amounts, not necessarily the amount every taxpayer will deduct. You must itemize to claim the SALT deduction, and your actual deduction depends on your qualifying state and local taxes and the other limitations that apply to your tax return.
Why Stock Options Can Trigger the Phaseout
With most nonqualified stock options (NQSOs), the difference between the fair market value of the shares at exercise and the exercise price is generally treated as compensation income when the options are exercised.
Consider a simplified example.
Suppose you have options with a $20 exercise price, and the company's stock is trading at $70 per share. If you exercise 2,000 shares, the $50-per-share spread represents $100,000 of additional compensation income.
That doesn't mean you'll owe $100,000 in taxes. But it could change your overall tax picture and potentially push your MAGI into the SALT phaseout range.
Incentive Stock Options Work Differently
Exercising an ISO doesn’t create regular taxable income at the time of exercise. The difference between the stock's fair market value and the exercise price can create an alternative minimum tax (AMT) adjustment. The IRS specifically identifies the ISO spread as an adjustment for AMT purposes.
A later sale can produce capital gain or ordinary income depending, among other things, on whether the required holding periods are satisfied. The IRS requires the shares to be held until the later of two years after the option was granted or one year after the shares were transferred to the employee to receive the favorable tax treatment associated with a qualifying disposition.
The distinction between NQSOs and ISOs is one reason equity compensation decisions should be evaluated based on the specific type of award, not simply the number of shares or the current stock price.
A Large Equity Transaction Can Have Multiple Tax Effects
Stock options aren't the only source of equity-related income that can affect your tax picture.
RSU vesting, bonuses, sales of previously acquired company shares, and other compensation can all occur in the same year. When several events overlap, a taxpayer who expected to remain below the SALT phaseout threshold can move into the phaseout range faster than anticipated.
This is relevant for executives and other highly compensated employees who may already have substantial W-2 income before an equity transaction.
The result is that the tax impact of an exercise or sale shouldn't necessarily be evaluated in isolation.
Why This May Be Especially Relevant in 2026
Some employees may have postponed exercising options or selling company shares during periods of stock-price weakness.
If a company's share price has recovered, an equity transaction may look more attractive in 2026. But a higher share price can also mean a larger spread between the exercise price and current fair market value for employees holding NQSOs.
That can translate into:
- More taxable compensation income
- A potentially larger tax liability
- Greater exposure to the SALT phaseout
- Increased concentration in company stock
- A greater need for liquidity to cover taxes and exercise costs
And for options approaching their expiration dates, waiting indefinitely may not be an option.
The decision therefore shouldn't be reduced to a simple question of whether the stock price has recovered. It is also a tax, cash-flow, timing, and portfolio-planning decision.
Questions to Address Before Exercising or Selling
Before completing an equity-compensation transaction, consider working with your financial advisor and tax professional to estimate:
1. What income will the transaction create?
Will the transaction generate ordinary income, capital gains, or an AMT adjustment? The answer depends heavily on the type of equity compensation and how the transaction is structured.
2. Where will your MAGI fall before and after the transaction?
If your projected MAGI is near the $505,000 SALT phaseout threshold, the size and timing of an equity transaction could affect your available deduction.
3. How much of the SALT deduction could be lost?
The 2026 phaseout reduces the maximum deduction by 30 cents for every dollar of MAGI above $505,000, until the $10,000 floor is reached.
4. Will withholding and estimated payments be sufficient?
A large equity transaction can create a major tax liability. Don't assume that withholding associated with the transaction will necessarily cover the final federal and state tax bill.
5. Would changing the timing or size of the transaction improve the outcome?
Depending on the circumstances, it may be worth evaluating whether to exercise or sell in stages, coordinate transactions with other income or deductions, or incorporate strategies such as charitable giving, retirement contributions, or tax-loss harvesting.
6. How does the transaction affect concentration risk?
Tax considerations shouldn't be the only factor. If a large portion of your net worth is already tied to your employer, exercising options and continuing to hold the shares can increase your exposure to a single company. The right decision may involve balancing tax efficiency against diversification, liquidity needs, career considerations, option expiration dates, and your overall financial goals.
The Planning Window Is Before You Click "Exercise"
Stock option decisions are often irreversible, or at least difficult and expensive to undo. That's why the most valuable planning opportunity usually comes before the transaction.
If you're considering exercising stock options or selling a meaningful amount of company stock in 2026, a tax projection can help you understand the potential consequences before making the decision.
A proactive review can help you:
- Estimate the potential tax liability
- Prepare sufficient liquidity
- Evaluate the timing and size of the transaction
- Understand potential SALT deduction impacts
- Assess AMT exposure for ISO exercises
- Consider the effect on your overall concentration in company stock
The goal isn't simply to exercise or sell. It's to understand how that decision fits into the bigger picture and make sure your equity is working toward your long-term financial goals. If you’d like to discuss this further, please feel free to contact me today.
Disclaimer: Neither MML Investors Services nor any of its subsidiaries, employees or agents are authorized to give legal or tax advice. Consult your own personal attorney, legal or tax counsel for advice on specific legal and tax matters.
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