Enhanced Refundable AMT Credit

Easier to claim credit for past tax

By Kaye A. Thomas
Posted October 6, 2008

Abatement of unpaid tax, too.

Amid all the drama of the economic bailout legislation it went almost unnoticed that the tax provisions the Senate added to that law included an enhanced version of the refundable AMT credit that first became available in 2007. The refundable AMT credit, like the regular AMT credit, offers a tax benefit only to people who paid AMT as a result of timing provisions, primarily tax paid as a result of exercising incentive stock options. If you paid AMT for other reasons, such as having a large number of dependents or having a large itemized deduction for state and local tax, your AMT payments are not eligible for later recovery as a credit. Also, the refundable credit is allowed only for unused AMT credit that is old enough. For 2008 this means the credit relates to tax incurred in years earlier than 2005.

The enhanced benefits described here will be available on the tax returns for 2008 and later years.

Income phase-out eliminated

The previous version of the refundable AMT credit was phased out at higher income levels. This aspect of the refundable credit had strange consequences, because it could result in a situation where an additional $100 of income could reduce your income tax refund by more than $100. Some people would literally be better off quitting their job or working for nothing.

Meanwhile, even for people who were not in this bizarre situation, the income limitation on the refundable credit stood in the way of obtaining a tax benefit that was available to others.

The new law eliminates the income phase-out. If you're otherwise eligible for the refundable AMT credit, your other income won't affect the amount of credit you can claim. High-income individuals who were not able to claim the credit at all under the previous law will now receive this benefit. People who were engaging in various forms of tax planning to reduce their income to a level where they would qualify for the refundable AMT credit will no longer have to do so.

Recovery period reduced to two years

The previous version of this credit allowed people with old unused AMT credit to recover that amount over a period of five years. Under the new law, recovery will be over a period of two years.

Example: Suppose you had $100,000 of unused credit from the year 2000, and your income was below the level where the credit is phased out. For 2007 you would have claimed $20,000 of credit. Without the new law you would have continued to claim $20,000 per year for 2008 through 2011. Instead, you'll now be able to claim $40,000 for 2008 and the remaining $40,000 for 2009.

Note that your credit for 2008 isn't 50% of the original amount, but rather 50% of the amount you still have to recover as of 2008.

$5,000 floor

The previous version of this credit allowed someone with less than $25,000 of old unused AMT credit to recover $5,000 (or the available amount, if less) rather than 20% of the available amount (subject to the income phase-out).

Example: As of 2007 you had $10,000 in old unused AMT credit. Rather than claim 20% ($2,000) per year for five years, you were allowed to claim $5,000 in 2007 and the remaining $5,000 in 2008.

As part of the new changes, the language containing the $5,000 floor was eliminated from the law. It appears that as a result some people will actually have their credit amount reduced, rather than increased, for 2008, although this aspect of the legislation may be subject to interpretation.

Recovery of interest and penalties

Some people failed to pay this tax when it was due and subsequently incurred interest and penalties. The credit you're allowed to claim beginning in 2008 is increased by the amount of interest and penalties previously paid as a result of failing to pay AMT.

This provision and the abatement provision described below apply only to AMT owed as a result of exercising incentive stock options. Relief is not available for AMT owed for other reasons, including other timing provisions.

This provision may seem unfair to people who paid the tax on time, particularly if they had to borrow money for that purpose. Some people endured significant hardship to come up with this money, mortgaging their homes or taking out other loans. They may end up worse off than people who paid later, after incurring interest and penalties, or people whose tax, interest and penalties still remain unpaid (as described next).

Unpaid tax abated

In addition to helping people recover credit for AMT paid in the past, the new law provides tax relief to people who owed this tax but didn't pay it. Tax abatement applies to "any underpayment of tax outstanding on the date of enactment" attributable to the AMT adjustment for incentive stock options for all years prior to 2008. It isn't clear why the went so far as to include the year 2007. Does this mean people who haven't paid tax on this item for 2007 get out of paying it? At what point do you have an underpayment of tax that is outstanding?

The provision also abates any interest or penalty with respect to the underpayment which is outstanding. It appears that if the only reason you owe back taxes is AMT from exercising an incentive stock option, the new law wipes the slate clean.