Many high-tech workers ended up owing their life savings, and then some, to the government on April 15 after exercising stock options and not realizing that they were caught up in the convoluted taxing scheme.
The alternative minimum tax, or AMT, requires people who exercise certain types of stock options to pay taxes based on the stock price on the day of their exercise, even if they hold the stock and never actually pocket the money.
For example, if people own stock options that give them the right to purchase shares at $10, and they exercise and hold the shares on a day when the price is $30, the IRS treats the gains as if they had earned $20 per share, even if the stock later dove to $5 and they never actually sold the shares or saw the money. Thus, some dot-commers ended up owing thousands, if not millions, of dollars in taxes on money that never arrived in their bank accounts.
"It is a simple issue of fairness," Zoe Lofgren, D-Calif., who represents areas in the Silicon Valley, said in a statement. "We shouldn't tax people on what they never had. Congress needs to fix this problem immediately before we put families into ruin."
Lofgren, along with Richard Neal, D-Mass., Tom Davis, R-Va. and Jerry Weller, R-Ill., introduced a bill that would give those who exercised options in 2000 relief from paying AMT. Instead, the workers would owe taxes only on the difference between their strike price and the price of their shares on April 15, 2001, or--if they exercised shares before then--the amount of actual capital gains on the stock on the day the shares were sold. Sen. Joseph Lieberman, D-Conn., is sponsoring the Senate version.
When unveiling the bill, Lofgren cited cases of several tech workers who face bankruptcy and even the loss of a house because of the AMT. The congresswoman recently held a town hall meeting in Silicon Valley about AMT, where she heard directly from people who owe all that they have to the IRS.
Lofgren had proposed a measure that would have revamped the AMT structure to give more long-term relief. However, the bill faced a steep uphill battle from those who said that tech workers should have done their homework and set aside the tax money at the time of their exercise.
Plus, the AMT has been less of a problem this year, as the stock prices of many dot-coms have tumbled to sub-$1 levels, rendering many options worthless. Thus, dot-com workers didn't have the chance to exercise their options at the exorbitant prices of 2000.
AMT was originally designed to make sure that people who live off interest payments pay their fair share of taxes, but the tax structure also affects options and ended up involving countless high-tech workers as stock became an increasingly popular form of compensation during the dot-com heyday. AMT only affects certain types of options, and there is a minimum dollar amount employees must earn before the taxing structure goes into effect.
The move comes as more federal lawmakers are showing an interest in tech-related tax issues. Earlier this week, the Senate Finance Committee held hearings on extending the Internet tax moratorium. The current moratorium expires in October, and competing bills in the Senate would extend the bill for different amounts of time while considering how to treat Web transactions. State and local governments, which worry about losing local revenue, are behind efforts to give teeth to their attempts to collect taxes on Web sales while some anti-taxing groups and online retailers are backing a bill that would permanently ban access taxes.
Other bills in the House would extend the moratorium permanently or cut states out of the loop completely when it comes to the sale of digital goods via the Web.