Subject: ISO AMT
Comment: Submitter Name: Michael and Laura Aubut
Date of Submission: March 17, 2005
Originating Category: Individual
Contact info: email@example.com
Submitters: Michael and Laura Aubut
Michael and Laura Aubut’s AMT Story / Testimony
During 2000, my (then) fiancée, Laura Perkins, exercised and held ISOs from her company based on advice she received from our accountant. This exercise subjected Laura to the Alternative Minimum Tax (AMT), substantially increasing her 2000 Federal tax liability. Instead of receiving a return of approximately $1,050, Laura owed the IRS $174,272 on what was considered a paper gain. This was a substantial debt given that Laura’s W-2 wages for that year were $84,997. Prior to finding out the magnitude of her 2000 tax liability because of AMT, Laura had exercised more shares in January 2001 and, based on guidance from our tax accountant; she also planned to hold these shares. However, in March 2001, our accountant explained to us the huge tax obligation Laura had for 2000 because of the shares she exercised that year. To pay this debt ($174,272), Laura sold 8000 shares of stock.
After Laura and I wed in September 2001, our accountant again described ways of minimizing our 2001 tax liability based on the January 2001 exercise. Our accountant calculated our approximate 2001 AMT liability as approaching $1 million if we held all the shares exercised in 2001. This liability was greater than the value of all the shares we currently had available to sell. Realizing our only option was to heed our accountant’s advice, we sold the remaining shares of the 2001 exercise. The continued decline in the stock price caused us to realize only 20% of the stock’s original value. Originally, we had planned on selling the shares exercised in 2000 but knew that, due to AMT, this was not an option. The proceeds from the sale of all the 2001 shares were now considered real “income” and would be subject to our actual tax rate instead of being considered for AMT as unrealized gains. This would still create a huge tax amount, but it was one that we could possibly pay by leveraging other assets.
In February 2002, our accountant did the final calculation for our 2001 taxes and determined that our liability was much larger than we could afford. We knew we would have to use the proceeds from the earlier mentioned sale (as this is why we sold them). We also took out multiple margin loans against our balance of shares to pay our anticipated 2001 liability. (We filed an extension in April that resulted in late fees) While we continued working on our taxes throughout the summer we were advised that our liability was ~ $20,000 more than originally filed. We didn’t have any more money to send and at the same time the stock we had margined against was falling through the floor causing us to get weeks of margin calls and eventually the brokers began to sell whatever shares of stock we had left.
To satisfy all of our creditors (that were due to our taxes) we decided to refinance our house. We refinanced through a local bank and even though we expressed our desire to have it go through as quickly as possible it still took them more then a month and a half to finally be ready to settle the new mortgage. (Due to the huge volume of refinancing activity) Once we closed on the new mortgage we filed our final 2001 taxes, paid in full.
While dealing with this financial mess, we planned for, and paid for, our September 2001 marriage. We have now paid our 2000 and 2001 taxes – for a grand total of $294,278 in Federal Taxes, and well over $5,000 in accountant fees to help us understand these complicated provisions of the tax code. This amount greatly exceeds our annual salaries for that timeframe, and we will probably never see the majority of the tax we paid on theoretical stock gains. We live paycheck to paycheck and have to decide which household bills we will to pay late even though my wife has worked for her employer for more than 20 years...
Thank you for your time
Michael and Laura Aubut