MTC

New Code Section 53(e) Provides New Opportunities for
Taxpayers with Minimum Tax Credits

As a result of the tech stock crash in 2000 and 2001, a significant number of
taxpayers incurred large AMT minimum tax credit carryforwards due to the
exercise of incentive stock options. Under current law, the minimum tax credit
allowed in a particular taxable year is limited to the excess of a taxpayer’s
regular liability for the taxable year (less the sum of the taxpayer’s non-
refundable personal credits and business income tax credits) over the
taxpayer’s AMT tentative minimum tax for the taxable year. This limitation
(along with the $3,000 per year limitation on the deduction of AMT capital
losses) has left many taxpayers who have MTC carryforwards due to the tech
stock crash with the prospect of never being able to fully use their MTC
carryforwards or only being able to do so over an extremely long period of
time.

To assist these taxpayers, Congress has included a provision (Code Section
53(e)) in the Tax Relief and Health Care Act of 2006 that will allow many of the
affected taxpayers to recover a major portion of their MTC carryforwards over
the next six years by treating a portion of their minimum tax credit carryforward
as a refundable credit in taxable years 2007 through 2012. Under the
provision, an individual taxpayer’s minimum tax credit allowable for taxable
years 2007 through 2012, is not less than the taxpayer’s “AMT refundable
credit amount." The AMT refundable credit amount for each of these years is
the greater of:

(1) $5,000 or, if less, the taxpayer’s long-term unused minimum tax

credit,

(2) 20 percent of the taxpayer’s long-term unused minimum tax credit.

EXAMPLE 1:

In 2007, Steve has a long-term unused minimum tax credit

of $20,000.

Because

Steve's long-term unused minimum tax credit

amount is greater than $5,000, and

20 percent of

his long-term credit

amount is less than $5,000

Steve’s AMT

refundable credit is $5,000

for

2007

EXAMPLE 2:

In 2007, Gail has a long-term unused minimum tax credit

of $40,000.

Because 20 percent of $

0,000 is $8,000, Gail’s AMT

refundable credit is

$8,000

for 2007.

The long-term unused minimum tax credit for any taxable year is the portion of
a taxpayer’s minimum tax credit attributable to taxable years before the 3rd
taxable year immediately preceding the taxable year. Because the provision is
first effective in 2007, any minimum tax credit that is a result of AMT paid in
2003 or prior taxable years is included in the long-term unused minimum tax
credit.

WARNING:

The long-term unused minimum tax credit is reduced by the

amount of

credit that is used in previous years. For example if a

taxpayer had a long-term

unused minimum tax credit in 2007 of

$40,000, and took a minimum tax credit of

$8,000 in 2007, her long-

term unused minimum tax credit would be $32,000 in 2008,

and her

AMT refundable credit would be limited to $6,400 in 2008.

If a taxpayer’s personal exemption amount is subject to phase-out (because
the taxpayer’s adjusted gross income for a taxable year exceeds the threshold
amount) the AMT refundable credit amount is reduced by the same
percentage that the taxpayer’s personal exemption amount is reduced by.

EXAMPLE

For 2007, Tim has a long-term unused minimum tax credit

of $150,000.

Due to his adjusted gross income level, his personal

exemptions are reduced by 60

percent. Tim must also reduce the

amount of the AMT refundable credit that he would

otherwise be able to

take by 60 percent. His AMT refundable credit is $12,000:

$150,000 x .20 = $30,000

$30,000 x .60 = $18,000

$30,000 - 18,000 = $12,000

The additional credit allowable by reason of this provision is refundable.
Minimum tax credits generated in the preceding three taxable years, which are
not included in the long-term unused minimum tax credit, are allowed under
the regular minimum tax credit rules. Under the regular tax rules they are not
refundable, and must carried forward to future taxable years.

COMPREHENSIVE EXAMPLE:

Assume in 2010 Dan has an adjusted

gross income

that results in a reduction of his personal exemptions by

50 percent, a regular tax of

$45,000, a tentative minimum tax of

$40,000, no other credits allowable, and a

minimum tax credit for the

taxable year (before limitation) of $1.1 million of which $1

million is a

long-term unused minimum tax credit.

Dan’s AMT refundable credit amount for the taxable year is $100,000

(20 percent of

the $1 million long-term unused minimum tax credit

reduced by 50 percent). Dan’s minimum tax credit allowable for the

taxable year is

$100,000 (the greater of the AMT refundable credit

amount or the amount of the

credit otherwise allowable). The $5,000

credit allowable under the regular minimum

tax credit rules is non-

refundable and the additional $95,000 of credit allowable by

reason of

the new provision (Code 53(e)) is treated as a refundable credit. Thus,

Dan has an overpayment of $55,000 ($45,000 regular tax less $5,000

non-

refundable AMT credit less $95,000 refundable AMT credit). The

$55,000

overpayment is allowed as a refund or credit to the taxpayer.

The remaining $1

million minimum tax credit is carried forward to future

taxable years.

Dan’s adjusted gross income did not exceed the personal

exemption

phaseout threshold amount, the AMT refundable credit amount for the

taxable year would be $200,000, and the overpayment would be

$155,000.

Have a question about the new Minimum Tax Credit provision?
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Advisor.