Posted: Jun 01, 2005 By: Hendy Lund

Subject: California dreamin? Try California Nightmare thanks to AMT

Comment: In 2000, I was living a dream. I was working for Redback Networks in a job I loved, was married to a great guy, and had just bought a house thanks to stock options I'd been granted when I started at Redback. With the rest of the options, I'd done an "exercise and hold", with the intention of avoiding short term capital gains by holding the shares for a year, then selling them to pay the taxes on the shares I'd sold to buy the house. Convoluted? Perhaps... but it was based on the "common wisdom" of the time. After all, "the shares aren't going to go down anytime soon, and this way you'll save a bunch on taxes!"

Then the bubble burst. Come April 2001, when it was time to pay taxes, the shares were worth 1/50th of what they were in 2000. Still, if I sold those and took out a mortgage on the house, I could cover the regular income tax. I wouldn't have the luxury of owning a home free and clear, but a mortgage is "normal", and I still had a house, something that isn't easy to make happen in California.

Imagine my horror when my accountant presented me with a Federal tax bill of $1.2 million. Why? That "exercise and hold" - a transaction in which I received no actual money - was treated as income for AMT purposes. My accountant explained that it was a "prepayment", and that it would be applied as a credit when I actually sold the shares.

Excuse me? The government is taking my money before I even have it?!? And now that the stock is effectively worthless, they're taking money I'll *never* have?

Now it's 2005. I've sold that home for 2/3 of what I paid for it. That "great guy" and I are divorced - and yes, the fights over money and the associated stress contributed. I still owe the IRS $1.2 million thanks to compounding interest and penalties. The only reason I'm not in collections with the IRS is that I hired a tax attorney. My financial future - my retirement, my daughter's education - is on hold until someone flinches and figures out what to do with my debt.

I think I'm a good citizen. I pay taxes on the money I earn with hardly a grumble, and I'm honest about how much I earn. But I'm screwed because AMT considers a "Monopoly money" gain to be cold hard cash... and that's just not right.