Congress is finishing work begun in 2006 to remedy an unintended consequence of the Alternative Minimum Tax (AMT)–the treatment of a form of employee compensation called incentive stock options (ISOs).

The House of Representatives passed legislation in May 2008 as part of the Renewable Energy and Job Creation Act of 2008 (HR 6049) fully restoring the economic incentives and benefits Congress intended for ISOs when it allowed companies to offer them beginning in 1981.

Under AMT, thousands of workers who received ISOs have faced enormous unintended tax liabilities. (See “Taxpayers Cry Foul as AMT Affects Millions of Americans,” Budget & Tax News, May 2007, and “Congress Moves to Fix Tax Penalties Against Incentive Stock Options,” Budget & Tax News, January 2008).

Due to an unintended flaw in the tax code, ISO AMT victims–employees of small and large companies across America–were forced to pay taxes sometimes exceeding 300 percent of their annual salaries, based on phantom “income” they never received. In many cases, families were unable to pay, leading the IRS to seize their houses and savings and garnish their wages.

The ISO correction and relief provision in HR 6049 was based on the AMT Credit Fairness and Relief Act, HR 3861, introduced by Rep. Chris Van Hollen (D-MD) and lead co-sponsor Rep. Sam Johnson (R-TX), with original co-sponsors Reps. Richard Neal (D-MA) and Jim Ramstad (R-MN).

“The goal of this legislation is to restore a basic sense of fairness to a provision in the tax code that has gone tragically awry,” said Van Hollen in a press statement. “While everyone should pay a just and proportionate amount of tax on money they actually make, no one should lose their homes, savings, and retirement to a wildly disproportionate tax on phantom income they never saw, because our tax laws failed to anticipate the circumstances in which a number of our citizens now find themselves.”