Subject: ISO AMT Comment: Submission to the President's Advisory Panel on Federal Tax Reform. Submitted by Gerald M Marx – An Individual Submitted on March 17, 2005 In Year 2000 during my employment at a high technology company, I exercised unvested incentive stock options that were issued by my company with an exercise price that was significantly less than the fair market value on the date of exercise. I wasn’t able to sell these in Year 2000 so I incurred a significant AMT preference item that resulted in my alternative minimum taxable income being much greater than my regular taxable income. As a result, I had to pay approximately $34,000 in AMT to the federal government and approximately $5000 in AMT to the state of California. These AMT values that I paid are over and above the regular tax amounts that I paid in Year 2000. The AMT tax itself that I paid was actually greater than the ordinary tax that I paid. I submitted an 83(b) election which effectively recognizes the AMT income in the year that this election was submitted. In order to pay the tax, I sold all equity holdings that I possessed. The payment of these taxes put me and my family in a very challenging financial situation. I refused to take on any credit card debt in order to maintain our standard of living so we cut our spending dramatically. In fact, I turned off the heat in our house during the winter in order to save a few hundred dollars a month although I did keep a space heater running in our new baby’s bedroom during the night. We did not contribute to our IRA accounts in Year 2001 and I even cut back my bi-weekly 401K contribution rate to one percent of my salary from a contribution rate that would result in me contributing the maximum yearly amount. The AMT that is paid becomes an AMT credit which can be claimed by an amount that equals the regular tax minus the alternative minimum tax. In Year 2004, I will be able to claim approximately $1500 of this AMT credit. The yearly rate of reclamation of the AMT credit is generally low relative to the outstanding AMT credit for people in my situation. This AMT credit provides federal and state governments with an interest free loan that is paid for by the tax payer since the tax payer can’t collect any interest on this money for himself. In fact, I understand that the tax payer actually looses this credit upon his death. Understanding the AMT tax system took many hours of my time. The time was spent reading appropriate tax books, reviewing some message boards on appropriate web sites, and long discussions with my colleagues at work. The time required to understand this tax has a negative effect on productivity at my place of work. I can imagine that Joe taxpayer generally won’t even be able to comprehend this tax even though he will be affected by it sooner or later. I know well over twenty people who were adversely affected by staggering amounts of AMT. I know of one individual that needed to sell his house and move his family in order to pay the tax as he got laid off as well in Year 2001. Many of these individuals suffered psychologically as a result of the financial straits that they were subjected to as a result of the AMT. As a result, work productivity notably suffered as well. I would like to add that many of my colleagues at work were adversely affected by exercising non-qualified stock options where the exercise price was much less than the fair market value on the date of exercise. The tax that is based on the difference between these two values becomes due on the date of exercise. It counts as regular tax and not alternative minimum tax. Unfortunately, my colleagues were not able to sell immediately since the shares weren’t vested. The underlying stock price had already fallen dramatically enough when the exercised shares could be sold. The result is the tax paid in Year 2000 is much greater than the amount for which the shares could be sold. Reclamation of this loss will take decades for most of these individuals as only $3000 of the amount could be reclaimed annually. This regular tax coupled with their AMT burden has adverse financial consequences for my colleagues to this very day. Some Recommendations for Tax Reform: 1. Elimination of the alternative minimum tax and payment of all outstanding AMT credit to individuals that are due this credit. 2. The loss of the billions of dollars from AMT payments by individuals needs to be obtained from other sources. This may be achieved by the following methods: a. Changing the marginal tax rates to their prior values at minimum b. Establish a federal consumption tax. In order to mitigate the regressive effects of this tax on low income families, provide additional income tax relief to people in this group. c. SIMPLIFY! The simplest solution is almost always the best solution and the correct solution. Any lack of coverage by a simplified tax code will be more than made up by the billions of dollars that will be saved by administering a complex tax code, the decrease in worker productivity that occurs when individuals spend many days trying to figure out the best tax strategy, the corresponding loss of tax revenue as companies earn less when the employees are less productive, and anecdotally, the hundreds of millions of dollars that are unnecessarily paid to tax preparers that are required to prepare complex tax returns. The transition to a simplified tax code will be much more complex than the today’s tax code. However, the benefits are worth the effort and risk. Contact Information: gmmarx@san.rr.com San Diego, California |