|
PureBytes Links
Trading Reference Links
|
Here's a couple of more stories on this phenomena that may provide a
clearer picture. Whether the law is unfair or not isn't the issue
(hey, the whole tax code is full of unfairness, loopholes and
inequities). And yes, the tax code in the USA is used for social
engineering, so we don't want to go there either. If you're going to
play then it's your RESPONSIBILTY to understand all the rules and
possible consequences of your actions. No one forced anyone to
exercise their options. They could have let them. Ignorance or pie-
in-the-sky enthusiasm is no excuse for a bail-out.
JW
*******************
http://www.thestandard.com/article/0,1902,21902,00.html
*******************
*******************
http://www.thestreet.com/funds/investing/1347188.html
Blame It on the AMT
By Jamie Heller
Editor-At-Large
3/15/01 6:24 PM ET
Consumer confidence, energy prices, Japan, Dick Cheney's heart
condition. Everyone's got a favorite explanation for the market's
recalcitrance.
But there's another possible factor: the alternative minimum tax.
As many New Economy-type employees have learned, this nasty tax can
kick in if you exercise incentive stock options. Many exercisers sold
their company stock last year as a way to avoid the AMT. But if, per
chance, they didn't, they might be scrambling now to raise cash by
April 15. This AMT action can only put another weight on this already
overloaded market.
Here's how it works. The AMT is a taxing scheme that was meant to
ensure that high-income folks don't avoid taxes through deductions
and credits. They need to calculate their tax both the regular way
and under AMT; if AMT's higher, that's what they pay.
Exercising incentive stock options is a way to get catapulted into
AMT land. The AMT applies to the difference between your exercise
price and the price of the stock the day you exercised. So if you
exercised at $5 on a day the stock was at $100, your AMT liability is
$95 -- at a tax rate of up to 28%. It wouldn't be the worst thing if,
down the line, the stock ended up trading at, say, $150. But since
many stocks moved in precisely the opposite direction last year,
folks found themselves with a whopping AMT liability and little if
any paper gain to show for it.
To avoid the tax, year-2000 exercisers had to sell by Dec. 31 and pay
ordinary income rates on whatever gain they could eke out (ordinary
rather than long-term capital gains rates because a year hadn't
elapsed since exercise). In our example, if the stock went down to
$7, the gain would be $2, taxed at ordinary income rates. But at
least it wouldn't be $95.
Feel bad for those sellers? It can be a lot worse for people who
didn't get or follow good tax advice last year, or who decided to
gamble on upward market momentum and didn't sell. They're now staring
down AMT liability and can't avoid it by selling. They simply have to
raise the money to pay the tax. If they worked at an eToys
(ETYS:Nasdaq - news), with now worthless shares, that means turning
to other assets or borrowing to cover what could be an enormous
liability.
It's happening to clients of Bill Fleming at
PricewaterhouseCoopers. "Not everybody hit the tank in October,
November and December of last year," Fleming says. "They knowingly
went into AMT. They took the chance that ... the stock would
rebound." It didn't. Now some of those clients are facing AMT spreads
of $30 to $40 on stock prices of $1 or $2. They're selling even
though they're still within a one-year holding period and will have
to pay ordinary income tax rates on any gain. Still, Fleming suspects
such sales are not a cause of the market downturn, but merely an
effect.
Martin Nissenbaum, director of income tax planning at Ernst & Young,
also can't gauge the market impact. But he can speculate on what the
most dire cases spell for AMT-strapped individuals. "Some of those
employees could very well be bankrupt as a result."
To unsubscribe from this group, send an email to:
realtraders-unsubscribe@xxxxxxxxxxxxxxx
Your use of Yahoo! Groups is subject to http://docs.yahoo.com/info/terms/
|