On 28 Nov 2012
in
The Worst Tax,
taketheplunge said:
I personally find the Alternative Minimum Tax (AMT) to be the worst tax. Yes, I realize that it's mostly paid by wealthier tax payers, but the reason I dislike it so much is the way it can work out in practice for the less affluent. If one receives stock options that have large gains at the time they are exercised, there can be a large tax liability. Then if the stock crashes before the stock is sold, there may be little to no value in the stock to pay the tax on it.
During the Dot-Com boom, some people had stock options that had become worth millions at the time the stock was exercised. Then the stock plummeted and often, the company filed for bankruptcy making the stock worthless. But because there was a big paper gain on the stock at the time of exercise, there was a huge AMT tax liability.
Some people not only lost the entire value of the stock that they had purchased, but they also had millions of dollars of tax liability for a worthless stock that they still had to pay. The AMT drove people to bankruptcy.
With capital gain taxes, there at least is a gain that can be used to pay the taxes. (I realize inflation might make this gain not an true economic gain.) Unfortunately, the AMT applies to stock options that have theoretical gain, that may never have been realized.
People often times work for stat-ups that have below market base pay but generous stock options to make taking the risk worthwhile. The AMT too often is devastating.
