Refundable AMT Credit

Different rules for old unused credit

By Kaye A. Thomas
Posted December 31, 2007

Beginning in 2007, certain taxpayers are able to claim old unused AMT credit even if it means getting a refund that exceeds the current year's tax.

This is the first in a group of articles providing complete coverage of the refundable AMT credit, which provides a way for many people to use more AMT credit than under the regular rules.

Background on AMT credit

Some people who pay AMT are allowed to claim a credit in later years. This credit is allowed only if you previously paid AMT paid on certain items, such as the exercise of incentive stock options. It doesn't apply to AMT paid on many other items that are encountered more often, such as the itemized deduction for state and local taxes. The part of your AMT payment that's eligible to be treated as a credit in later years is your available AMT credit.

Merely having available AMT credit isn't enough to provide you with a tax benefit. You need to meet the requirements to actually use the credit. Prior to 2007 there was only one way to do that, using what we'll call the regular AMT credit. Under these rules you can claim AMT credit only in a year your regular income tax is higher than the tax calculated under the AMT rules, and only to the extent of the difference between the two taxes.

Example: Last year you paid $100,000 of AMT because you exercised an incentive stock option. This year your regular income tax is $80,000 and your tax under the AMT rules is $50,000. You have $100,000 of available AMT credit, but you can claim only $30,000 this year (the amount your regular tax is higher than the tax under the AMT rules). You have $70,000 of unused AMT credit, which carries over to the next year.

People who pay large amounts of AMT in connection with the exercise of incentive stock options often find they aren't able to use all their AMT credit even after several years have passed. The unused credit continues to carry forward indefinitely, but may be providing little or no benefit on each year's tax return.

Refundable AMT credit

Beginning with the 2007 tax year (returns filed in 2008), you have another possible way to claim AMT credit if some or all of your available AMT credit is at least four years old. This rule doesn't limit the credit to the amount your regular tax exceeds the tax under the AMT rules. You can claim credit under this rule even in a year you pay AMT. What's more, the amount of credit allowed under this rule can be greater than the total amount of tax on your income. In other words, your refund can be larger than the amount you paid in the form of withholding or estimated tax. This is why we call it the refundable AMT credit.

You don't necessarily get to claim the full amount of your old AMT credit. People with larger amounts claim no more than 20% in a single year, and an income limitation will cause some people to claim a smaller portion or none at all. Yet this rule will allow some people to receive sizeable checks from the IRS.

Example: You earn about $120,000 per year and have $22,000 in income tax withholding, which is roughly equal to the amount of tax you would otherwise owe. You also have $1,000,000 in old AMT credit from a stock option you exercised in 2000. You've been recovering about $1,500 each year using the regular AMT credit. That's better than nothing but doesn't put much of a dent in the $1,000,000. In 2007 you can claim 20% of that credit. When you file your return that year, the Treasury is going to send you a refund check of about $200,000.

Most people will receive much smaller refunds, of course, but for a number of people the refunds will be even larger.

A temporary provision

Current law allows the refundable AMT credit only for the years 2007 through 2012, a total of six years. Congress sometimes imposes time limits on tax benefits as a way to meet budgetary constraints, with the intention of extending the benefit or making it permanent at a later time. It isn't clear that this is the case here, however. The main justification for the refundable AMT credit (and the only one that holds water, in my opinion) is to provide relief to people who suffered extraordinary disasters when the bubble in tech stocks collapsed beginning in 2000. By 2012 most of those people will have fully recovered any credit they have relating to the tech stock collapse, and the tax benefit of this provision will flow primarily to other taxpayers for whom relief is harder to justify. An extension beyond that year is possible, but we can't include the refundable AMT credit in the list of items Congress is more or less certain to extend.