Sam Johnson to North Texans: AMT-ISO relief is on the way!
Washington,
Dec 8, 2006 -
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.