A remarkable thing may happen in the next few days or….it may not. Congress may actually act in a bi-partisan effort to do something that is right, fair and good. But it may take your support. Let me explain.

In 2000, after five years of tech stock exuberance, the stock market tech bubble burst. The NASDAQ Composite lost 78% of its value over the next 18 months. Boo-hoo!! So a bunch of rich investors and money managers lost their shirts, right? Unfortunately, due to a peculiarity in the US Tax Code, a lot of every day people working in tech firms, lost even more.

At the heart of the problem is the Alternative Minimum Tax, created to prevent high-income individuals from using special tax breaks to pay little or no taxes. Who would argue with that? Unfortunately, the AMT has reached far beyond just high income individuals. In submitted testimony to the House Ways and Means Committee, the grass roots organization, ReformAMT stated that the AMT

"hit hardest those honest, hard-working employees who traded longer work hours, lower salaries, fewer benefits, and job security for stock options that might someday provide for their children’s education, assist in purchasing a home, or help fund their retirement.”

It all started in the tech boom between 1995 and 2000. Employee stock options were often issued to employees by companies that typically did not have the cash to pay market salaries. A stock option was the right to buy a company’s stock at a later date (you have the option to buy). Many of these employee stock options were issued during the start-up stage when the company had a low value and stock price and little cash. Later, if the company was successful, the employee stock option could be exercised, and the employee would benefit from the appreciation in the stock value that occurred since start-up.

Now it gets a little more complicated. Many people (yours truly included) were forced to pay taxes on phantom gains related to stock options. That is, the IRS taxed citizens on income that they never received and had no realized gain for which to pay the tax. Confused? Don’t feel ashamed. The Alternative Minimum Tax confuses many and it is so complex that it has a spurred a growing number of accounting firms to seek U.S. patents on tax avoidance strategies.. There  

So, the IRS required taxes to be paid on stock that might be sold in the future. That amounts to an interest-free loan to the government. The tax was due in 2000 even though stock had not yet been sold. After the stock market fall in 2000, the value of the stock that could be sold to pay the tax was well below the value placed by the IRS and the tax due. In April 2001, individuals owed hundreds of thousands of dollars and in some cases millions of dollars on stock that was worth only thousands. Many had to empty savings accounts, (401)k plans, and take out second mortgages. 

AMT Credit Fairness and Relief Act HR3861, and the identical Senate counterpart S2389, hopes to correct this ridiculous tax law. It is currently being debated on Capitol Hill and HR 3861 was co-sponsored by Congressman Chris Van Hollen (D-MD) and Lead Republican Co-sponsor Rep. Sam Johnson (R-TX). Rep. Johnson explains the situation like this.

“This is a case of taxpayer “gotcha” and it has never made any sense to tax paper gains that never materialized. An example of what happened is that an employee bought stock options for $10 a share and the stock climbed to $100 a share that year. They were required to pay tax on the $90 gain despite the fact that they did not sell the stock so the gain was never cash-in-hand. It was at roughly that same moment in time that the tech bubble burst and the price of the stock may have fallen to $1 per share.

Despite facing a $9 economic loss, the IRS still pursued them for a $90 gain per share. For individuals who had hundreds or thousands of shares, the economic consequences of this meant that they had to empty their bank accounts, cash out their 401(k) and their kids college savings funds, and get a second mortgage on their house. The AMT in this case was meant to be a prepaid tax on this phantom income and these people scraped together this money to give the government an interest free loan until such time as they could use up their prepaid tax credits. The problem is that the system doesn't work correctly and it would take many lifetimes before some of these interest free loans would ever be returned to the taxpayers.”

In a report to the House Ways and Means Committee, ReformAMT provided the following data about its membership,

• 65% of our members affected by AMT are secretaries, engineers, lower level managers and other rank & file employees
• Our members owe or owed an average of $322,428 in ISO AMT over and above what they would owe under the regular tax code (100 times what the average taxpayer hit with AMT pays in additional taxes).
• Our members’ average tax rate was 355% of their income.
• Our members have an average outstanding AMT credit of $213,620. It will take 71.2 years – more than a lifetime – to finally recover their overpayment credit.
• About 3% of ReformAMT members have filed bankruptcy, with another 18% admitting they are considering bankruptcy.
• For every 2 people who complied with the AMT regulations, there were 3 people who did not, taking advantage of the fact that no independent reporting exists.
• For every 4 people who complied, there was 1 person who expatriated rather than have their lives destroyed by working the rest of their lives to pay taxes on income they never received.
• We know of 2 members who committed suicide due to the horrendous effects this ISO AMT tax had on their lives.

“The AMT as it affected us due to ISO stock options has forced us into bankruptcy, and due to the extremely large amount of tax it calculates, it may cause us to lose everything we own, including our house. Our effective tax rate was over 600%.”

The Alternative Minimum Tax affects more than those receiving Incentive Stock Options. According to Leonard Burman, a senior fellow at the Urban Institute and director of the Tax Policy Center,

”The AMT adds another layer of complexity to U.S. tax laws, which creates a sense of unfairness among many taxpayers.”

The Christian Science Monitor reports that up to 22 million Americans may have to pay more than $2,000 under the AMT as part of their 2007 tax bill. That does not sound like just high-income individuals that have used special tax breaks to pay little or no taxes. Twenty-two million sounds like a lot of middle America.

Last December, the 109^th Congress acknowledged this egregious mistake and unfair tax. It passed HR 3385 that provided a refund of the tax over the next five years but with several restrictions attached. The AMT Credit Fairness and Relief Act seeks to shorten the pay back period and remove the restrictions. That is even better news and substantial in its impact and fairness to all that were affected (yours truly included).

Please take five minutes and go to this site where you can contact your Senator and encourage him/her to support this bill.

Please help by contacting your Senator today. Click here and you can easily send a message to your Senator seeking support of this important legislation. It is not a political issue but a wrong that needs to be made right.

“Come on people now, smile on your brother, everybody get together”