Incentive Stock Options and the Alternative Minimum Tax: the Worst Of Times
This article was originally published in Harvard Journal on Legislation, volume 39, issue 2, in 2002.
Congress enacted the Alternative Minimum Tax ("AMT") to stop high-income individuals from escaping their tax liabilities through tax code loopholes. In recent years, increasing numbers of moderate-income taxpayers have been subject to astronomical AMT liabilities. The problem has been especially acute for technology sector employees who exercised stock options while the market was high, sold their stock after its value fell, and found themselves owing AMT they could not afford to pay. In this Essay, Professor Lipman explains the Internal Revenue Code's complicated treatment of Incentive Stock Options ("ISOs"). She argues that the AMT adjustment for ISOs should not be eliminated, but suggests several reforms to simplify tax treatment of ISOs and reduce the number of taxpayers who are subject to AMT.