Congress Acts to Address AMT Flaws

Published July 1, 2008

Congress is finishing work begun in 2006 to remedy an unintended consequence of the Alternative Minimum Tax (AMT)–the treatment of a form of employee compensation called incentive stock options (ISOs).

The House of Representatives passed legislation in May 2008 as part of the Renewable Energy and Job Creation Act of 2008 (HR 6049) fully restoring the economic incentives and benefits Congress intended for ISOs when it allowed companies to offer them beginning in 1981.

Under AMT, thousands of workers who received ISOs have faced enormous unintended tax liabilities. (See “Taxpayers Cry Foul as AMT Affects Millions of Americans,” Budget & Tax News, May 2007, and “Congress Moves to Fix Tax Penalties Against Incentive Stock Options,” Budget & Tax News, January 2008).

Due to an unintended flaw in the tax code, ISO AMT victims–employees of small and large companies across America–were forced to pay taxes sometimes exceeding 300 percent of their annual salaries, based on phantom “income” they never received. In many cases, families were unable to pay, leading the IRS to seize their houses and savings and garnish their wages.

House Provides Additional Relief

Congress acted at the end of 2006 to provide some measure of relief in refunding accrued credits, and HR 6049 addresses two remaining issues:

  • Some employees still cannot recover their ISO AMT overpayment credits because of phase-outs based on arbitrary income levels. HR 6049 removes those limits.
  • Thousands of families have been unable to pay their ISO AMT liability, and they have struggled for almost eight years with this ongoing liability and significant accrued interest and penalties (“accruals”). Although the 2006 legislation provided for refunds of amounts paid, it required that the amounts actually be paid, and then a refund sent. HR 6049 immediately abates unpaid liability and accruals, netting the payment obligation and the refund to provide immediate relief.

Considered Long Overdue

The ISO correction and relief provision in HR 6049 was based on the AMT Credit Fairness and Relief Act, HR 3861, introduced by Rep. Chris Van Hollen (D-MD) and lead co-sponsor Rep. Sam Johnson (R-TX), with original co-sponsors Reps. Richard Neal (D-MA) and Jim Ramstad (R-MN).

“The goal of this legislation is to restore a basic sense of fairness to a provision in the tax code that has gone tragically awry,” said Van Hollen in a press statement. “While everyone should pay a just and proportionate amount of tax on money they actually make, no one should lose their homes, savings, and retirement to a wildly disproportionate tax on phantom income they never saw, because our tax laws failed to anticipate the circumstances in which a number of our citizens now find themselves.”

“I am thrilled to see House passage of legislation to put an end to this long nightmare,” said Johnson.

“For too many years I’ve had constituents who were subject to taxation on income they never received,” Johnson continued. “To pay taxes on this ‘phantom income’ my constituents have emptied their retirement accounts, taken money out of their children’s education funds, and put second mortgages on their homes. Others have had their homes sold by the IRS to pay taxes on income they never received. It is long past time to get this important change made law.”

Senate Action Pending

The Senate’s counterpart to HR 3861 was introduced as S 2389 in November 2007 by Sen. John Kerry (D-MA) and co-sponsored by Sens. Maria Cantwell (D-WA) and Joseph Lieberman (I-CT). It is also sponsored by the Senate Finance Committee’s ranking member, Sen. Charles Grassley (R-IA), and Sens. Richard Durbin (D-IL) and Barbara Boxer (D-CA). Their sponsorship demonstrates strong support for this second phase of ISO AMT relief, particularly in America’s high-tech corridors and technology incubator regions.

“With growing, bipartisan support for a permanent ISO AMT fix in the Senate, I am hopeful we will get this correction signed into law this year,” said Van Hollen.

Tim Carlson ([email protected]) is president of the Coalition for Tax Fairness. Brian Trauman ([email protected]) is an attorney specializing in tax issues at Mayer Brown LLP in New York City.