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Frequently Asked Questions

What is the Alternative Minimum Tax?
The Alternative Minimum Tax (AMT) is a complex tax that operates in parallel to the regular income tax. Dating back to 1969, the AMT was originally designed to prevent ultra-wealthy taxpayers from offsetting their incomes with big deductions. In more recent years, however, the AMT has crept up on middle-class taxpayers - leaving many of them financially devastated.

How have middle-class Americans fallen prey to AMT?
Middle-class families who happen to own homes are extremely vulnerable to the clutches of the AMT. For many of these hardworking taxpayers, virtually all of their deductions, including taxes, personal exemptions for children, interest on home-equity loans not used for home improvements and miscellaneous itemized expenses are wiped out under the AMT.

Also, during the past decade of rapid growth, many companies began to offer rank-and-file employees Incentive Stock Options (ISO's) on a widespread basis. This innovative practice, which helped to drive employee productivity while keeping salary expenses low for these companies, has resulted in an unprecedented number of middle class workers falling prey to the AMT.

How does the AMT affect individuals who exercise ISO's?
The 2000 tax year was the first time in history when tens of thousands of middle-class Americans have been required to pre-pay a tax on income they never earned. Many of these taxpayers have found themselves in this situation because their companies compensated them with ISO's. For those taxpayers falling under the AMT through exercising stock options, it requires them to pay taxes on the "paper" value of the stock rather than the actual income they would receive from the sale of the stock. For many middle class Americans this means tax liabilities equal to 100% and, in some instances, 200-400% of their annual gross salaries.

What makes the AMT's treatment of ISO's so unfair?
The AMT taxes a person on "phantom gains" or "virtual income" that he or she has never actually earned.

Contrast this situation with the one that most general investors in the stock market face: Whereas most people pay taxes on their actual earnings and can take a deduction on losses in the stock market, holders of ISO's must pre-pay tax on the difference in the price of the stock between their exercise price and the market price on the day they exercise. So if the stockholder's shares lose value after the day of exercise, he or she will owe tax at the higher price, even if the stock falls to $0/per share. In addition, the Government holds onto the pre-payment of tax, interest-free, in the form of a credit that may be impossible to fully recoup in a life-time. Members alternately refer to this as "Legalized Extortion, Taxed out of our homes and into bankruptcy by outdated policy, A life-time Interest-Free Loan to the United States Government, Taxed into Indentured Service, Slow Death by Options."

How many people will be affected by the AMT in the future?
Conservative estimates point out that by 2010, 35 million, or nearly one-third of American taxpayers, will get caught by this stealth tax.

Why is it good public policy to reform the AMT's treatment of ISO's?
The granting of employee stock options for middle class workers as compensation is a unique innovation that has helped fuel the explosive growth of the technology sector and spur innovation and productivity in many industries. Moreover, companies that offer stock options as part of their overall compensation package are able to operate with a better bottom line based on lower salary costs per employee.

If the AMT is not reformed, we threaten to destroy a powerful catalyst for economic growth by stunting the more widespread adoption of employee stock option compensation by other industries. America's continuing economic and technological leadership will depend on our ability to permit this innovative form of compensation to grow unhindered by penalty taxes.

In addition, the AMT conflicts with the broader policy of encouraging stock ownership, as expressed in the Internal Revenue Codes' favorable treatment of long-term capital gains. The AMT's penalty for losing money on employee stock options is a vastly greater deterrent against stock ownership than is favorable long-term capital gains treatment an incentive for encouraging stock ownership.