| Middle-class
taxpayers caught in tax trap | | |
| Should you find yourself in this
catastrophic situation, be sure to sell your stock in the same year that you exercise
options.
"I represent six to 10 people that have had
that very thing happen to them," Sommers says. "Not only was their AMT
two or three times the value of their stock, their AMT was more than everything
they owned, it dwarfed their net worth by two or three times because with the
boom in Silicon Valley, when these guys exercised their stock, it was worth $2
to $3 million. People have had to get second mortgages, file for bankruptcy. I
have heard of a couple suicides." "You talk about
a sleeper. Most people say, 'All I got was the stock; I never sold it. You're
taxing me on phantom income, income I never realized.' Even though you were locked
out for six months or whatever, you are still taxed on the fair market value on
the date of exercise." No sympathy
for this devil
The AMT has few defenders. Because of the tax's
structure, the usual tax-reduction strategies are ineffective. Accountants blanch
at having to deliver the AMT news to their clients (and more professional money
managers are facing the monster themselves). Analysts also
point out that the AMT is undermining the very economic incentives that IRS deductions
were created to promote. The tax dodgers it was created to
thwart now make up a measly 3 percent of the growing number of taxpayers being
penalized for having kids or earning stock options at work. And the few experts
in this field work for high-priced accounting firms far out of reach of the average
Joe. In her January report to Congress, Nina Olson, the national
taxpayer advocate within the IRS, called the AMT the taxpayer's equivalent of
Public Enemy No. 1. Olson herself was blindsided by the AMT on her 2002 tax return. The
solution seems simple enough: If we risk fiscal catastrophe to scrap the AMT entirely,
at least index it for inflation and give us some deductions with which to defend
ourselves. The one group that seems noncommittal on the issue
is the only group that can change it: Congress. Democrats and Republicans alike
have let the AMT grow from mini-me to maxi-tax. President Bush made no mention
of AMT in his State of the Union address, although his tax cuts threaten to double
the number of taxpayers who will be subject to it within the next six years. Sommers
says the mother of all "stealth" taxes amounts to a sneaky sleight-of-hand
by which tax-slashing congressmen can wow the populace without actually decreasing
collections. "All of this is political. None of this makes
any sense whatsoever. Politicians, all of them, rush out there and say we can
cut your taxes," says Sommers, "but they aren't explaining that for
every dollar in tax cuts, you're going to pay 90 cents in the AMT. "They
get to campaign on cutting taxes, but they don't really disrupt the Treasury because
the Treasury is going to make up through the AMT whatever they just cut in the
regular system. That's why they cut taxes, because they have the AMT to bail them
out." Jay MacDonald is a contributing
editor based in Mississippi. | 
