Incentive Stock Options and the Alternative Minimum Tax: The Worst of Times

Abstract:     
Congress enacted the Alternative Minimum Tax (AMT) to preclude high income individuals from escaping their federal income tax liabilities by artful manipulation of certain tax provisions. In recent years, increasing numbers of moderate-income taxpayers have been subject to AMT. The problem has been especially acute for technology sector employees who exercised incentive stock options (ISOs) while the market was high, sold their stock after its value fell, and found themselves owing AMT they could not afford to pay. This Essay explains the complexity of ISOs and the AMT and argues that the AMT adjustment for ISOs should not be eliminated, but rather that other reforms should be enacted to target more appropriately the AMT. The proposed reforms should simplify tax treatment of ISOs and reduce the number of ISO exercisers who are subject unknowingly to AMT.

Number of Pages in PDF File: 37

Keywords: alternative minimum tax, tax policy, incentive stock options, employee compensation,

Accepted Paper Series