Compliance August 3, 2005

Tax Bill To Ease Burden Of Phantom Gains For Stock Options

August 3, 2005 (PLANSPONSOR.com) - US Representative Sam Johnson (R-Texas) introduced a bill intended to give a tax break to those who were granted stock options that generated "phantom" gains that were hit with a high alternative minimum tax (AMT).
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According to a BNA report, the AMT Credit Fairness Act (H.R.3385) will allow taxpayers with AMT credits more than four years old to rebate them at the greater of 20% annually or $5,000 per year.   Those who support the bill say the credits for “stranded” AMT overpayments otherwise would not likely ever reach the taxpayer.

The alternative minimum tax (AMT) is a parallel income tax system created by Congress to ensure that the wealthy do not avoid paying taxes at all by the use of tax breaks, the BNA report notes.   The AMT system does not have many of the deductions and credits in the conventional system.  

Incentive stock option grants put many workers into the AMT system, according to BNA.   The stocks’ prices could create a gain called a “phantom gain” because the stock is not actually sold for profit.

“This legislation serves as a real ray of hope for my family and thousands of other families across the nation who are facing financial ruin from the unintended consequences of the Alternative Minimum Tax as applied to incentive stock options,” said Nina Doherty, cofounder of the Washington-based Coalition for Tax Fairness in a news release, according to the BNA.

The bill has been referred to the House Ways and Means Committee.

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