On Friday, the departing Congress passed a tax bill that extended several important tax provisions, including extending the R&D tax credit, the deductibility of state sales taxes, and tax breaks for teachers and families paying college tuition.
But, surprisingly, the bill also contained a special provision containing relief from one onerous effect of the alternative minimum tax (AMT) that affected people who exercised stock options and then saw the value of their stock plummet when the tech stock bubble burst.
Here's the story: Some of the lucky folks who received stock options during the heady market of the late 1990s incurred large tax liabilities when they exercised their stock options. Among their tax liabilities was the the AMT--a parallel tax system that runs along side the normal (if you can call it that) federal tax code. The AMT was designed to keep the clever and wealthy from finding ways to avoid paying "their fair share" of income taxes. But what the AMT really does these days is force many taxpayers to do their taxes twice, and pay the higher of the two tax calculations.
The AMT is an enormous compliance burden--but that's not the worst of it. Because tax brackets are not indexed for inflation, increasingly the AMT is hitting not just the wealthy, for which there isn't much of a sympathetic political constituency--but also upper middle class taxpayers.
Which brings us back to our stock options beneficiaries, who paid a big AMT on their stock option gains, but who could have gotten at least some of their AMT back by using it as a credit against the capital gains taxes they would have owed when they sold their valuable stock.
The problem, of course, is that for many of these people, their valuable stock soon became worthless in the collapse of tech stocks. So, because of a quirk in the tax code that required them to pay taxes on the value of the stock options even though they were just paper gains, these taxpayers ended up paying AMT taxes on worthless stock.
The real problem here is the AMT. We're delighted for this group of taxpayers that got some relief from one of the more onerous effects of the AMT, which will cost the federal government $1.7 billion over five years. But we were just wondering: Next time, could the rest of us be relieved of the burden of the AMT as well?
With every year that goes by, more and more Americans are going to suffer from the AMT. How about some AMT relief for all Americans?