Death and Taxes
[2007-01-10 17:15]

"In this world nothing can be said to be certain, except death and taxes." -- Benjamin Franklin

Only one of those two things scares me and, as I've said before, it ain't death.

Back during the dot-com bubble of the late 1990s, I exercised a bunch of stock options from a high-tech startup company where I worked. Unfortunately, I didn't completely understand the tax laws, particularly those governing stock options and the Alternative Minimum Tax. Let me break it down for you.

Suppose someone has a car that is worth $31,000, and he sells it to you for $1000. If cars were taxed like stock options, you'd now owe a tax on the difference between what you paid and what the car was worth at the time you bought it. In this case the difference is $30,000. Let's say the tax rate is 30%. That means you owe 30% of $30,000 or $9,000.

Now suppose that someone discovers a design flaw in the car which causes the car's value to drop from $31,000 to $1. If cars were taxed like stock options, you'd still owe $9,000 because the current value of the car isn't important -- only the value of it when you bought it.

That means you'd owe $9,000 worth of tax on a car which you bought for $1,000 that's worth only a $1. This stupidity is due to the Alternative Minimum Tax.

Now, with stock options, if you sell the stock in the same calendar year as you bought them, then you pay tax on the profit you made at the time you sell it. Once the next calendar year rolls around, however, you're screwed. If you sell the stock after the year in which you bought it ends, then you owe the Alternative Minimum Tax no matter what.

So, that's what happened to me. I didn't sell the stock during the same calendar year as I bought it. Now, it's worth a fraction of what I paid for it, and I still owe a buttload of tax on it. Since I could not afford to pay the tax on this stock, I accrued an enormous tax debt that put me at the mercy of the IRS. End result: I have to pay the Intestinal Revenue Service more-or-less everything I earn for 10 years (as of this post, 5 down, 5 to go).

While this debt (and the IRS' lien against Everything I Own) is aggravating, it's not even the worst part of this experience.

The worst thing is that I've caught a glimpse of the internal workings of the United States, and it ain't pretty. More importantly, it's not consistent and doesn't make any sense. Nor does it serve any purpose, or benefit anyone or anything -- not even itself. Ever see the movie The Cube? It's exactly like that. [Update: I just realized I linked to the wrong movie. Cube is the one I meant.]

What it boils down to is this: the one who can hire the most lawyers wins. Since the IRS can hire more lawyers than I can, that means the IRS wins.

As a result, since this experience, I'm pretty much shell-shocked when it comes to taxes (and the United States, in general).

And now that I'm dealing with the estates of a couple of dead relatives and have no idea what I'm doing, my gut is perpetually all a-twist wondering when the taxman is going to cometh to cart me off to jail.

Happy new year to you too.