Tax planning and compliance for investors
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Kaye A. Thomas
Posted December 31, 2007
This number is used for the normal AMT credit and the refundable AMT credit.
The first step in determining the amount of AMT credit you can claim is to determine the amount of available AMT credit. This is your starting point under the normal rule for claiming AMT credit, and also under the refundable AMT credit, which is available to certain people who have long-term unused minimum tax credit.
Important: This page describes how to determine the amount of available AMT credit, but this is not necessarily the amount of credit you'll actually claim. This is just one step in the process of determining how much credit you can claim under either the normal AMT credit or the refundable AMT credit.
Broadly speaking, when you pay AMT it is because of certain items that receive different treatment under the AMT rules. For example, if you claim itemized deductions you're allowed to deduct state and local taxes. This deduction isn't allowed under the AMT rules, so a deduction for this item may cause you to pay AMT.
The AMT rules don't always completely disallow a tax benefit. Sometimes they change the treatment so that income reported in one year under the regular tax rules is reported in a different year under the AMT rules. For example, the profit from exercising an incentive stock option may be taxed in the year you exercise the option under the AMT rules, but in a different year when you sell the stock under the regular income tax rules. Items that can end up in different years under the AMT rules are called timing items.
Without the AMT credit, the income from timing items could end up being taxed twice: first under the AMT, and in a later year under the regular tax rules. The AMT credit is designed to prevent this result, so it is allowed only for the part of your AMT payment attributable to timing items. Any portion of your AMT payment that relates to other items (such as the itemized deduction for state and local taxes) is not eligible for later recovery as AMT credit.
In essence, the AMT functions as a parallel tax system in which we determine how much tax you would have paid if a different set of rules applied to your income. When we determine how much of your AMT is eligible to be used as a credit in later years, we actually do another parallel calculation under a third set of rules: the AMT rules without the timing items. This tells us how much AMT you would have paid without the timing items.
We compare the outcome of this calculation with the actual amount of AMT paid for the year in question. If the actual AMT is greater than the calculation without the timing items, we know the additional amount is due to the timing items.
In practice, this calculation appears on Form 8801 for the year after you paid AMT. The IRS hasn't taken my suggestion to calculate this number in the same year you pay AMT. Calculating it on the following year's form can create problems for people who change their filing status. For example, two unmarried individuals may both pay AMT in one year and then file jointly the following year. Form 8801 will not provide the correct result in this situation.
Apart from this glitch — and the mind-boggling complexity of the overall process — this method of calculation is generally favorable to the taxpayer. Calculating the available credit this way maximizes the amount that's considered attributable to timing adjustments, and therefore eligible for later recover as AMT credit.
Example: You pay $8,000 of AMT for a year in which you have a $20,000 adjustment from exercising an incentive stock option and a total of $20,000 in other adjustments. It might seem logical that only half of the $8,000 payment would qualify for later use as AMT credit. However, the calculation described above shows that you would have paid $2,400 in AMT without the timing item from the option. That means the amount available to be claimed as AMT credit in later years will include $5,600 from this year.
Available AMT credit that isn't used or otherwise absorbed will carry over to the following year. In effect, your available AMT credit for any given year is the amount created in the preceding year (as a result of paying AMT that year) plus any amount carried over from earlier years.
You can claim available AMT credit under the normal rule to the extent your regular income tax exceeds the tax calculated under the AMT rules. To claim the refundable AMT credit you need to continue with a more complicated calculation, where the next step is to determine how much of your available AMT credit qualifies as long-term unused minimum tax credit.
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