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Sam Johnson e-Newsletter

Sam Johnson Journal

The E Newsletter

October 2007

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Helping folks battle the punitive alternative minimum tax

The alternative minimum tax was created to prevent high-income individuals from using special tax breaks to pay little or no taxes. The AMT is a parallel tax system that requires taxes to be calculated twice, using different rules each time; the higher of the two tax bills must be paid. Since the AMT is not indexed for inflation, the AMT traps more people each year, including some moderate-income people and some who don't use special tax breaks.

Things are even more complex when it comes to Incentive Stock Options (ISOs). Think back to the late 1990s when many tech companies offered Incentive Stock Options. While employees thought they would be able to ride a wave of success with their companies, what they got was a financial and emotional tsunami that ruined lives.

Upon purchasing ISOs, people were automatically, and for many unknowingly, thrown into AMT in which they were taxed on the paper gain of their stock before they were allowed to sell it and get any money to pay this tax. Shortly thereafter the tech bubble burst and the IRS began to require payment of income taxes on this paper gain or "phantom income". On Halloween, when talking about phantom income, it is only fitting to make a comparison to a Nightmare on Elm Street or AMT zombies taking over the tax code.

Some say it was not wise for companies to grant ISOs which differed from regular options, or that people who got these options should have known better. However, 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.

For the last several years, I worked to fix this mess. Last year, I was successful in getting a big chunk of the problem fixed when most of my bill H.R. 3385, the AMT Credit Fairness Act, was included in a bigger bill that got enacted at the end of 2006. Unfortunately, not every aspect of my bill was enacted. To complete the job, I have worked in a bipartisan way to introduce another bill H.R. 3861, the AMT Credit Fairness and Relief Act. This bill would eliminate the income caps that were put into the law last year and would speed up the relief from a five year timeline to just two years.

I remain hopeful that as the larger AMT issue is handled this year, that this problem with ISOs is finally brought to a close.

According to the non-partisan advocacy group, Reform AMT, many of those affected by the tax never made a cent selling their incentive stock options, or ISOs, and never will. Many hit with the AMT are middle-class folks from all across America and range from administrative assistants and designers to accounting managers and business executives.

Putting a face on the AMT-ISO travesty in the Third District

Nelson Allen of North Texas writes, "Most all of us were forced into bankruptcy by the I.R.S. but many were hard pressed to afford legal council or CPAs who really understood AMT and could give proper guidance. To see my Congressman champion - and win - a great victory for AMT reform last year allowed me to celebrate the victory with a full heart, even though my wife and I were not covered by this victory."

"I'm also proud and appreciative to have a Congressman who didn't stop with that victory, but instead has continued the good fight for the rest of his constituents", he said.

"Congressman Johnson's new legislation if passed would allow my wife and me to complete our settlement with the I.R.S. and allow us to move on with our lives. It will not return our home or our credit which was devastated by the malicious tactics of the I.R.S. but it would allow us to move forward in building back our retirement fund. Win or lose - we appreciate the efforts of our Congressman and we hope that our great country gets stronger from reacting to the injustice of AMT."

Stories like this are many, and heartbreaking. I will keep up this fight!