Middle Class Tax Bill Shocker

[dArKeR]

They are a picture perfect family. But as CBS News Correspondent Lee Cowan reports, these Iowa taxpayers are also the picture of desperation.

June and Ron Speltz have been pursued into bankruptcy after they were forced to pay a huge income tax on money they never even made.

"I had an IRS agent tell me, 'I can't believe the federal government is doing this to you. If it were me, I'd be looking for a building to jump off of,'" says June Speltz.

The Speltzs owed the government $210,065 on top of the $53,000 they owed the state.

"How could our tax bill be higher than the president's tax bill?" asks June Speltz. "That just doesn't make sense."

The tax bill was nearly three times their annual income.

http://www.cbsnews.com/stories/2003/10/01/eveningnews/main576053.shtml

Show this story the Californians so they know what liar Ah-no gots instore for them.

[unblock]

1. i have some sympathy, but ....

anyone who's middle class and exercises $800,000 worth of incentive stock options had better know what they're doing or talk to a professional tax advisor who does.

the prudent thing to do is, when exercising $800,000 worth of incentive stock option is to calculate your alternative minimum tax liability and then immediately sell enough stock to cover your tax bill. this will be likely be around 25% of your stock.

it's actually bit more complicated even than that, because by selling that 25% early, you forfeit the tax benefits of the incentive stock options. so that 25% is taxed higher. so you have to recheck your liability and keep adjusting the amount you sell until you're safe.

that takes care of your tax liability.

next, you have to examine your investment portfolio. after paying taxes you've got around $600,000 worth of this one stock, and, if you're middle class, you probably have less than $100,000 of all other investments combined. probably way less.

so you're horribly undiversified. so from a pure portfolio management standpoint, you should sell a further chunk of the stock and reinvest in unrelated investments. again you lose a bit on taxes, which you again need to set aside for, but you gain in diversification.

do all this and you've got a safe portfolio worth a cool $500,000 after taxes.

yes, it's complicated, but a tax professional should be able to walk you through this, and by the way, i figured all this out even without anyone's help.

ignorance is understandable, but no excuse. to those of us who actually understand the law, those who fail to take these steps are simply being greedy, trying to save a few percent on taxes by risking everything and then some all on a single stock.

where i DO have sympathy is that employers and tax professionals often fail in THEIR duty to properly recommend all this. then it's hard to blame those who actually did seek advise from the proper sources and simply didn't get the right info.

[Jeff in Cincinnati]

4. This isn't uncommon

Many folks who were paid in stock options during the dot-com days found their stocks worthless to everybody except the IRS, which demanded that taxes be paid based on the value of the stock at the time the option was exercised.

Had the Spelz portfolio retained its value, they would be able to pay the tax bill with no problem. It's the cratering of stock prices (exacerbated on by the Bush Recession) that's put them in this situation. In the case of McLeod, the company filed for bankruptcy protection in 2002 and its stock was selling for around $0.50 per share recently.

The Spelz' weren't been ignorant or greedy, as far as I can tell. They are simply the continuing "collateral damage" of the high tech stock collapse. What a truly "compassionate conservative" government could do is take into consideration the fact that the Spelz family never realized any benefit from the stock option (other than its eventual sale price of $1,500) and tax them accordingly.

[ikojo]

2. IMHO, I think the corporate media does stories such

as this because they know the AMT (alternative minimum tax) really affects few in the middle class. It is a way of demonizing the tax and hopefully leading to it's abolition.

Who would feel sorry for Bill Gates or the "millionaire next door" if they got a $200k bill from the IRS? Not me that's for sure. But it angers people when they see hard working Iowans (the picture of middle America "heartland") getting socked by the evil IRS.

It's all part of the game. Just like Monday's "report" on defrauding the Social Security Disability program. Sure a few do it but by far the program helps truly deserving individuals that we don't hear about.

[izzie]

3. Interesting. I can believe it.

My mother did all the book keeping for my father who had many businesses. Once they told her that they needed 25 years of books from one of his businesses. He had sold this and they were trying to get something from it as he then died. Well she thought about it and went back and said 3 years only and the guy laughted and said I wondered if I caould scare you into it.What a way to treat people.It is like they get drunk with power.

[salin]

5. "But when he sold that stock it was worth only $1,500. "

Your system doesn't make as much sense when what you are selling is only worth $1,500.

Looks like the company stock was like Enron's.

[salin]

6. oops - meant to respond to post #1.

coffee... need to get that coffee...

[LeftHander]

7. This is not the worst

I heard of a fellow in the news on NPR last year. He was a single guy living in an apartment....was working at a dot com as a programmer. Got stock options to the tune of over a couple of million. The company went bust but the IRS demanded over 750,000 in taxes. He just said...I am ruined...I can never pay that much...I think he sold at a very low price and made only a ten or so thousand.

This is an old story and congress will NOT do aything about it. It is a carefully guarded political leverage the Repukes don't want brought up. Every time it pops up in the news it quickly dissapears.

There are tens of thousands of people who will be drastically ruined by AMT...and stock options.

[AP]

8. I'm of two minds about this one.

On the one hand, I've no sympathy for people who had a tax burden ignored it and took a chance with their stocks. (The obligation to pay tax vests when the options vest. If you don't cash in some of the stock to pay that burden at that point, you're running a huge risk.)

On the other hand, I just know that politicians knew this was going to be a problem, and that part of the whole scheme to make insiders rich was to make sure that average people didn't get rich from their stock options. Had all these people (employees) with options flooded the market when the rights vested, it would have left less money for the insiders who were selling their vested options.

Where were the politicians who should have asked the IRS to send out scary letters, and who should have waged a publicity campaign telling people of the dangers? Well, from 98-01, the media and many politicians were interested in one thing: pretending that buble was going keep getting bigger and never burst.

So, on the one hand, the law is clear, and these people should have known. On the other hand, they're never going to get the money to pay those tax bills, and those values weren't real anyway -- they were part of a big covert operation to make insiders, Wall St bankers, and Ken Lays rich.

[eyesroll]

9. The problem with selling to pay the tax bill

is that sometimes, you're locked in for a period after you exercise options. I suppose this is to prevent a huge sell-off after an IPO or other major event.

I know of people who exercised options at $13, but during the lock-in period, the stock dropped to $7. These were small amounts of stock -- a few hundred shares -- but they still needed to pay taxes.

I'm all for having people who make money in the stock market pay taxes, but I think there needs to be some compromise.

[AP]

10. That's why you should sell as soon as the option vested.

I do agree, however, that those lockout periods were designed to do ONE thing, and that was make sure the little guys didn't flood the market and drive down prices when the insiders wanted to unload their shares. That's what happened with Enron. Mgt claimed that they had that lockout period planned for a year in advance. I say that means they had their collapse planned for at least a year in advance.

[jiacinto]

11. This is horrible

It really is. I do hope that someone can help them out.