Incentive stock options. Under regular rules, no tax is triggered by the exercise of these options. Regular tax is levied only when you sell the underlying shares. However, you are AMT-taxable on the difference between the price at which the option allows you to buy the stock and the current market value of the stock. So anyone who exercised such options this year needs to watch out for the AMT.
Indeed, this feature proved murderous for many tech-company employees who exercised options when the market was riding high and held onto the stock hoping for further gains. When the stock tanked instead, these people found themselves holding valueless shares and facing a big AMT bill.
There are a number of other items that can help throw a taxpayer into the AMT. These include certain kinds of losses from pass-through entities such as Subchapter S corporations as well as passive activity losses, which are not deductible for the AMT, and income from private-purpose municipal bonds, which is not exempt from the AMT.
A certain amount of planning can ease or avoid the AMT's bite. Strategies include paying state and local taxes early if you expect to be hit by the AMT next year, or late if you expect it this year. But it takes a sharp pencil or, more likely, a computer.
But cheer up, said John Battaglia of accountants Deloitte & Touche. As distasteful as it may be to contemplate devoting holiday time to financial records and tax forms, work done now is work you won't have to do in the spring.
"What people don't realize is that . . . year-end planning will save you some dollars, and you will gather some of the information you will need to prepare your tax return. Come April 15 you will be more organized," he said.
Employer groups are endorsing a call by the chairmen of the congressional tax-writing committees for the Treasury Department to modify the "use-it-or-lose-it" rule that now applies to health care flexible spending accounts (FSAs). Senate Finance Chairman Charles E. Grassley (R-Iowa) and House Ways and Means Chairman Bill Thomas (R-Calif.) say the rule, under which unspent funds in these accounts revert to the employer at the end of the year, makes no sense and discourages FSA participation by workers. They say the rule was created by proposed regulations that were never finalized, so Treasury has the authority to change it.
Most workers remain "surprisingly satisfied" with their employers' health insurance plans, despite sharply higher costs in recent years, according to a survey of nearly 13,000 workers by benefits consultant Watson Wyatt Worldwide. The study found that 61 percent of workers are satisfied with their health plans, the same percentage as in 1994 and 1999, while 17 percent are dissatisfied, and the remaining 23 percent have mixed feelings.