AMT Credit Technical Correction
A flawed fix
By Kaye A. Thomas
Posted December 31, 2007
Legislation does only part of the job.
Beginning in 2007 there's a new way to claim AMT credit. Available only to certain people who have long-term unused minimum tax credit (as defined in the tax law), this version of the credit makes it possible in some cases to receive a refund that's greater than the total amount of tax paid in the year the credit is claimed. For this reason it's known as the refundable AMT credit. The regular AMT credit remains in place, but some people will receive far greater benefit from the refundable credit.
The original legislation providing the refundable credit was intended to let people recover their old unused credit over a period of five years, getting back 20% per year beginning in 2007. An apparent drafting error prevented the law from having this effect, though. Instead, people with large amounts of old unused credit start out recovering 20% but in subsequent years recover declining amounts.
Example: You have $100,000 of old AMT credit as of 2007, and claim $20,000. That means you have $80,000 of old AMT credit left when you file your 2008 return. Without the third choice, you would get 20% of that amount, or $16,000, not 20% of the original amount. The amount of credit before phase-out would become 20% smaller each year until it reached $5,000 or until the refundable credit expires after 2012.
The technical correction changes the way the refundable credit base amount is determined for years after 2007. This figure will now be no less than the previous year's base amount, provided that it can never be more than the remaining amount of old unused credit. Under this new provision, most people will recover the full amount of their old unused credit over a period of five years unless their income is high enough to prevent full recovery because of a phase-out rule that applies to this version of the AMT credit.
Glitch for people with increase in old AMT credit
It's possible to have an increase in the amount of old AMT credit after the first year you're eligible for the refundable credit. For example, you might have paid AMT in 2000 and also in 2004. The amount paid in 2000 is old enough to qualify as old AMT credit in 2007, but the AMT you paid in 2004 wouldn't be old enough until 2008. In that situation you won't recover a full 20% of each amount in all years.
Example: You have $100,000 of old AMT credit as of 2007 and claim $20,000. You also have $50,000 of unused AMT credit from 2004, which becomes old AMT credit in 2008. In 2008 your credit before phase-out should be $30,000, but the way the law is now written it will be $26,000 (20% of the total remaining amount of $130,000).
The Ways and Means Committee requested comments on technical corrections before Congress passing this law, and we responded by pointing out this problem. It appears the staff of the Ways and Means Committee either decided not to fix this problem or found that they didn't have time to do so. It's possible the problem will be corrected in a subsequent technical corrections law, but we don't have any assurance this will happen.