No Relief for AMT Sufferers
For employees, the dangers of the AMT have been highlighted after many dotcommers and technology workers, who had received and exercised incentive stock options as part of their compensation, have been hit with extraordinarily high tax bills (see Option Tax Nightmares Teach Lessons).
So where's the problem? After the stock-market crash, there are now lots of people like 35-year-old Ron Speltz of Cedar Rapids, Iowa, who have racked up hundreds of thousands of dollars in debt and are threatened with bankruptcy after AMT troubles.
“The misconception is that the only people AMT affects are the very, very rich,” says Speltz.”But I’m just very, very screwed and very, very broke.”
The topic has recently come to the forefront again as top executives from Sprint Corp. (NYSE: FON) face possible bankruptcy after participating in tax shelters designed to minimize their tax liability from the AMT (see Sprint's Fun With the IRS).
The AMT was introduced in 1969, designed to prevent wealthy Americans from using deductions and credits to avoid paying any tax. But it has evolved into a stealthy and poorly understood tax that has financially ruined many middle-class taxpayers. In 2001, about 1.5 million tax payers were subject to AMT, and by 2010 that figure is expected to swell to 35.5 million, according to the U.S. Congress, Joint Committee on Taxation.
People are subject to AMT when they exercise incentive stock options and don’t sell them right away. The tax is calculated based on the difference between the exercise price and the value of those options on the open market the day the options are exercised. If the stock continues to increase in value, AMT is generally not a problem, because shares can be sold to pay the tax. But if the stock price falls drastically, the holder of the stock may not have enough value left in the stock to pay the bills.
Speltz, who has worked in the operations and maintenance division of carrier McLeodUSA Inc. (Nasdaq: MCLD) for over 10 years, had 35,000 shares of incentive stock options. In 1999, he began exercising his options, and had hoped to eventually sell his shares to build a new house for his wife and three small children.
He was advised by his accountant and his stockbroker to hold his shares for at least a year, so that he would be subject to a much more favorable long-term capital gains tax rate. In the end, Speltz’s tax bill totaled over $250,000, nearly three times his yearly salary, and McLeod stock fell so far that he didn't have any money left to pay the tax. (McLeod filed for Chapter 11 bankruptcy protection in January 2002 and succesfully completed its reorganization in April of that year.)
“I knew I would likely pay some amount for AMT,” he says. “But no one expected the shares to lose that much value so quickly. And I couldn’t believe how much I owed when I got the tax bill.”
His McLeod stock has plummeted from about $26 a share on the day he exercised his options to about $0.85 today. Speltz and his wife took out cash loans from a bank to begin paying off the tax bill. Today, he still owes $130,000 to the Internal Revenue Service, about $140,000 in loans to the bank, and thousands more on credit cards. He has spent over $5,000 so far on attorneys. Recently, he sold his remaining shares of his McLeod stock for roughly $1,600 to pay an outstanding attorney fee of $1,450. The IRS is about to file a lien on his house. He is currently applying for an Offer in Compromise (OIC) with the IRS to settle his tax bill, but he is not optimistic about the outcome.
”I was actually told by someone at the IRS that my OIC would probably get rejected, because I’ve always paid my taxes, held a steady job my whole working life and have increasingly moved up the pay scale,” he says “I guess they figure they can get a lot more out of me.”
While many government officials, including Congressional leaders, have spoken out about AMT reform, not much has happened in the past two years to relieve those affected by the tax, says Jeff Chou, founder of the grass-roots group called ReformAMT.
The Tax Payer Advocate, Nina Olson, who works within an independent arm of the Internal Revenue Service, has publicly stated in a formal report to Congress in December of 2001, that she recommends repealing all provisions that pertain to AMT for individuals.
Earlier this month at a luncheon in Washington, D.C., Andrew Lyon, Treasury deputy assistant secretary for tax analysis, said more simplification proposals are underway in the tax code, including an overhaul for the individual AMT, which he said is a "growing concern." He suggested there are no easy or inexpensive fixes for the individual AMT and implied that AMT would have to be repealed. These treasury and IRS officials say that little can be done without some action from Congress.
But Congressional solutions have been slow-moving. Over 25 bills have been introduced in Congress over the past six years to reform AMT, according to Olson’s 2001 report. Eight are currently still alive, lingering in committees. One bill, HR-2794, suggests exempting people who exercised options in 2000. Others, like HR-433, are calling for more sweeping change. This bill suggests establishing minimum tax credits that can be applied to the AMT to cap the tax liability at a reasonable level for people who have experienced a loss after exercising their options. And still others, like HR-1487, are calling for the entire AMT to be abolished.
So far, none of these bills has made it out of committee. President Bush’s latest tax reform proposal also offered no relief for AMT sufferers, which angered those affected.
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— Marguerite Reardon, Senior Editor, Light Reading