If you´ve been working for an IT firm and exercised but didn´t sell your stock options last year, you´ll be finding out soon (if you haven´t already) about a little known tax called the Alternative Minimum Tax (AMT). Â
The reason that the AMT has been causing so many IT workers
so much anxiety is that some of them who fall into the above category are
finding that they owe upwards of $250,000. Â
According to San
Francisco-based accounting firm Burr Pilger & Mayer, some executives are
discovering their tax bills are close to $3 million. Â And Monday, April 30th is the income tax submission deadline.
A typical case is
that an IT worker is given stock options as part of their compensation
package. Â If the company ever IPO´s or
is publicly traded, this gives the holder the right to exercise their options
and buy the stock at an extremely discounted price. Â Therefore, if the stock is trading at $50 per share and the
employee only paid 50 cents a share; on paper, the value of the stock is 100
times what it was purchased at and if sold, the holder gets to keep the
difference. Â Â The downfall to the AMT is
that stockholders are now required to pay taxes on the stock options that were
never converted to cash. Â The amount
owed is based on the shares´ value on the date they were purchased, not taking
into account that the shares are literally worthless at this point.
This year alone, it is estimated that 1.5 million people in the U.S. will have to pay the AMT. Â With the increase of stock options as an increasingly large component of performance pay in both the IT and traditional industry, the numbers are expected to rise dramatically. Â Tax experts are concerned that if the IRS doesn´t make changes to the AMT guidelines, that many more ordinary taxpayers will be faced with extraordinary tax bills.
The AMT was
originally established with good intentions as many of the rich had found tax
shelters and tax law loopholes during the 1970´s and 80´s. Â This tax unfavorably recalculates income
taxes for those outside ordinary tax brackets; for example, certain deductions
such as for purchasing a home, or dependent children are not allowed.
In California,
Democratic lawmakers are attempting to pass a bill such that taxpayers will
only have to pay taxes on the actual gains from individuals selling their
stocks, their actual wealth, instead of on their paper-based wealth. Â Some predict that it is unlikely that the
California government isn´t likely to agree to an entire AMT overhaul. Â As an alternative, tax experts predict that
the IRS may agree to case-by-case, individual reconsiderations determined by
their previous tax records, if they´ve already sold the worthless options, and
their amount of savings to pay the AMT.