ATTN all tax/ personal finance/ business/ technology writers
FOR IMMEDIATE RELEASE:
Contact: McCall Avery, 202/225-4201
December 8, 2006
Sam Johnson to North Texans:
AMT-ISO relief is on the way!
Today Congressman Sam Johnson (3rd Dist.-Texas) hailed last-minute legislation to help North Texas families struggling with the Alternative Minimum Tax (AMT) and their incentive stock options (ISO).
For years, Johnson has championed eliminating the Alternative Minimum Tax all together - and at the very least - fixing a particularly thorny problem at the intersection of AMT and ISOs. A major re-write of the AMT law will have to wait until next Congress, but a major step forward in fixing the AMT-ISO problem was added to a larger tax bill that passed the House today. A scaled-down version of Johnson's legislation, H.R. 3385, the AMT Credit Fairness Act, has been included in H.R.6111, the Tax Relief and Health Care Act of 2006.
When it comes to laws dealing with AMT and ISOs, many American families have been required to pay taxes on paper gains, also known as "phantom gains", from stock option transactions where they never received any economic gain and in some cases suffered economic losses. The taxes paid on these phantom gains were "pre-paid" taxes and were supposed to earn the taxpayers pre-paid tax credits against future tax liability. However, because the law never worked as intended, the pre-paid credits earned have not been usable. For many Texans, the pre-paid taxes have become long-term interest-free loans to the government.
The new law will rebate the pre-paid taxes over a period of roughly five years.
"The time has finally come for the federal government to rebate these interest-free loans from working families. The phantom gains were money my constituents never saw, never spent, and yet they had to pay taxes on. That's a crying shame! It's heartbreaking to hear stories of people who had to get a second mortgage on their home or empty retirement savings or education savings accounts all because of a tax technicality on a phantom gain," exclaimed Johnson. The highest-ranking Texan on the tax-writing Ways and Means Committee, Johnson has championed legislation to end the AMT-ISO penalty for several years.
"Getting in early on incentive stock options was an employee's dream-come-true in Texas' Telecom Corridor in the 1990s. However, the heavy-handed tax on incentive stock options turned people's personal financial situations into something worse than Nightmare on Elm Street. This new tax bill will help fix that," said Johnson.
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. But for several reasons, the AMT reaches more people each year, including moderate-income families.
Under the current AMT scenario, if an employee exercises an ISO to buy 2,000 shares at $10 a share, the employee pays $20,000 for his stock. If the market price is $100 per share, the $90 spread produces $180,000 of paper gain, also called a 'phantom gain,' that is included in income for tax purposes that year. At a 28% tax rate, the tax on the $180,000 gain would be $50,400. If the price of the stock fell from $100 to $25, the stock would be worth only $50,000, which if sold, would not cover the taxes due on the paper gain that never materialized. Under AMT rules, the taxpayer has now prepaid $50,400 of taxes, which amounts to an interest-free loan to the government. Johnson's legislation rebates the pre-paid taxes in 20% installments.
The pending comprehensive tax bill mirrors the Johnson measure except that it includes an income cap on those eligible for the rebates to $218,950 for married taxpayers filing jointly.
"I want to thank the numerous constituents who brought this issue to my attention. This bill would not have been possible without their help," said Johnson. Several residents and employees of the Third District contacted the Congressman, urging him to remedy the problem. Similarly, Johnson worked with Members of Congress from other hard-hit areas, like Silicon Valley.
"This AMT-ISO situation demonstrates once again why we should repeal the AMT altogether, but this particular problem deserves attention now" said Johnson. "I'm glad that we took the first bite of the apple and got to help the rank-and-file employees hurt by the AMT-ISO inequity. I hope that we can build on that success and next year end this problem for everyone."
Efforts to address the AMT-ISO problem have been bipartisan, with 60 cosponsors of Johnson's bill, split roughly equally between Republicans and Democrats. The lead Democratic cosponsor of the bill has been Rep. Richard Neal (D-MA), a long-time advocate of AMT reform. "I hope that our bipartisan work on this bill will continue next Congress," said Johnson.
Johnson represents portions of Dallas and Collin Counties.
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