Case study: exercising NSOs during a sabbatical

What does timing an NSO exercise for a low-income year actually save? Watch it play out. Maya, a product manager at a public tech company (a composite, not a real client), planned a six-month unpaid sabbatical to travel. She also held vested NSOs with a $300,000 spread she had been sitting on for years. Instead of treating those as two separate facts, she lined them up. The sabbatical year is what made the exercise cheap.

The setup

The spread on an NSO is taxed as ordinary income the day you exercise, stacked on top of whatever else you earn that year. Maya’s strike was low and the stock had climbed, so exercising would drop $300,000 of ordinary income onto her return. In a normal year, sitting on a $220,000 salary, most of that $300,000 would pile into her top brackets.

The sabbatical changed the base. By taking the half-year off, her wages for the year came in around $110,000 instead of $220,000. That left a lot of room lower on the bracket ladder for the spread to fill before it reached the high rates.

The two scenarios, on 2026 single-filer brackets 2026

Here is the same $300,000 spread, exercised in a full-salary year versus the sabbatical year. I am using the confirmed 2026 ordinary-income brackets for a single filer.

In a full-salary year, her $220,000 salary (about $203,900 of taxable income after the standard deduction) has already climbed past the top of the 24% bracket on its own. Pile the $300,000 spread on top and the whole spread is taxed starting from there, running through the 32% bracket (which for 2026 starts at $201,775 of taxable income) and deep into the 35% bracket (starting at $256,225). The spread sees none of the lower rates.

In the sabbatical year, her $110,000 of wages lands around $93,900 of taxable income, sitting in the 22% band (which ends at $105,700). Now the spread fills the rest of that 22% band, then the entire 24% band (up to $201,775), then 32% (to $256,225), and only the top portion reaches 35%. A large chunk of the same $300,000 gets taxed at 24% or less instead of 35%.

The traps she had to clear

This is where the second-order thinking earned its keep, because a low-income year creates its own hazards.

First, withholding. With little or no salary running during the sabbatical, almost nothing was being withheld. Her company still withheld on the exercise itself at the flat 22% supplemental rate 2026, but 22% on a $300,000 spread is well short of what she actually owed, even at the lower brackets. She set the difference aside and paid it as a quarterly estimate so the savings did not get eaten by an underpayment penalty. That is the same under-withholding gap that catches people in normal years, just sharper when no paycheck withholding is running.

Second, price risk. Waiting for the sabbatical meant waiting, and if the stock had spiked before her exercise, the spread (and the tax) would have grown with it. The bracket break only wins if the stock does not run away while you wait. In her case the price was roughly where she would have exercised anyway, so the timing was a clean bonus rather than a gamble.

What this means for you

Maya did not save money by being clever about the stock. She saved it by noticing that a year with half her usual income was the cheapest year she would ever have to recognize a big spread, and by funding the tax before she left. A sabbatical, a job gap, or an early-retirement valley all do the same thing to your brackets. If a low-income year is on your calendar and you are holding a large spread, map the exercise around it with someone first, and read the fuller NSO exercise playbook before you commit.