| The AMT Advisor |
| Answers to All Your Alternative Minimum Tax Questions |
Minimum Tax Credit (MTC) Background In calculating alternative minimum taxable income (AMTI), a taxpayer starts with regular tax adjusted gross income and adds or subtracts from it any AMT adjustment or preference items. AMT adjustment or preference items can be split into deferral (temporary items) and exclusion (permanent) items. Exclusion items: Exclusion items are adjustment or preference items that affect only one tax year and cause a permanent difference between regular taxable income and AMTI. For individuals, an example is state and local income taxes. These taxes are never deductible for AMT purposes, and are added back to AMT income in the calculation of AMTI in the year they are paid (or accrued in the case of accrual taxpayers). Deferral items: Deferral items are adjustment and preference items that affect more than one tax year. These items cause a difference in regular taxable income and AMTI in two or more years, but do not cause a permanent difference over time. This commonly is referred to as a timing difference. All deferral items cause a timing difference between regular tax and AMT. For individuals, an example of a deferral item is income from the exercise of incentive stock options. This income is included in AMTI in the year the taxpayer exercises the options, but is not included in his regular taxable income until the year the taxpayer sells the stock he received when he exercised the options. Assuming that the price of stock is above its price on the date the taxpayer exercised the options, the amount of income attributable to the exercise of the incentive stock options that is included in regular taxable income and AMTI is the same after the stock from the exercise is sold. This difference in the timing of income and expenses for regular tax and AMT purposes could work against a taxpayer if the taxpayer is subject to AMT in the year or years that a deferral item is included in calculating AMTI but is not subject to AMT in the year or years when the item is included in calculating regular taxable income. In the case of an income item that is a deferral item, such as income from the exercise of incentive stock options, the taxpayer would end up having to pay tax on the income twice in this situation. In the case of a deduction that is a deferral item, such as post-1986 depreciation, the taxpayer would lose the benefit of the deduction in both years. Minimum Tax Credit: To prevent either of these situations from occurring, a taxpayer is allowed a credit called the Minimum Tax Credit (MTC) when the taxpayer pays AMT in a year due to a deferral adjustment or preference item. Although this credit arises due to the payment of AMT, the credit is regular tax credit and a taxpayer can only use it to offset regular tax. However, until 2013, in certain cases the credit is refundable. How the MTC is Calculated Sec. 53(a) of the Code allows a credit against the regular tax imposed for any taxable year of an amount equal to the minimum tax credit for that year. Sec. 53(b) states that the minimum tax credit for any taxable year is the excess (if any) of:
beginning after 1986, over (2) the amount allowable as a credit under subsection (a) for such prior taxable years. Net minimum and adjusted net minimum tax: Per Sec. 53(d)(1)(A), the net minimum tax for a year is the AMT liability for that year. Per Sec. 53 (d)(1) (B), the adjusted net minimum tax is:
(2) the net minimum tax calculated taking into account only exclusion adjustment and preference items. AMT liability attributable to deferral adjustment and preference items. Limitation on MTC: A taxpayer may not be able to use all of the minimum tax credit available in a particular year. The amount of the credit a taxpayer is allowed to take in a year is limited to:
and business income tax credits, over (2) The taxpayer’s tentative minimum tax for the year. Refundability and carryover of the MTC: The minimum tax credit in general is not refundable. However, because, per Sec. 53(b), the minimum tax credit is determined cumulatively, the taxpayer carries forward the amount of the credit that he cannot use due to the limitation to future tax years. In addition, as discussed below, for years beginning before 2013, if a taxpayer has long-term unused minimum tax credits, the taxpayer may be allowed a refundable minimum tax credit in addition to the non-refundable credit. Refundable Credit for Long-term Unused MTCs In tax years before 2013, if a taxpayer has a long-term unused minimum tax credit, the amount of the minimum tax credit for the year is not less than the AMT refundable credit amount for the year. The AMT refundable credit amount for a tax year is the greater of:
taxable year, or (2) the amount (if any) of the AMT refundable credit amount for the taxpayer's previous tax year. Long-term unused minimum tax credit: The long-term unused minimum tax credit for a tax year is the portion of the minimum tax credit attributable to the adjusted net minimum tax for tax years before the 3rd tax year immediately preceding the tax year.
$10,000. $6,000 is attributable to 2007, and $4,000 is attributable to 2008. He had no long-term AMT refundable credit in 2010. X’s long- term unused minimum tax credit is $6,000. Because X’s AMT refundable credit in 2010 was not greater than $3,000 (50% of $6,000), his AMT refundable credit for 2011 is $3,000.
an AMT refundable credit in 2010 of $4,000. His AMT refundable credit in 2011 would be $4,000. A taxpayer uses long-term unused minimum tax credits on a first-in, first-out basis. Interest and Penalties Attributable to the Exercise of Incentive Stock Options To provide relief to the many taxpayers who had incurred large liabilities for tax, interest, and penalties due to the AMT adjustment for the exercise of incentive stock options, Congress enacted Sec. 53(f)(1), which allows abatements of tax, interest, and penalties for some taxpayers and increased AMT refundable credits based on interest and penalties paid by others. Abatements: Taxpayers who had outstanding liabilities as of January 1, 2008 for tax, interest, and penalties due to the AMT adjustment for the exercise of incentive stock options received an abatement of those liabilities as of January 1, 2008. To prevent a double tax benefit, the taxpayers who received an abatement under Sec 53(f)(1) can no longer include the abated taxes in the minimum tax credit calculation. Increased AMT refundable credit: Because some taxpayers had underpayments of tax and related penalties and interest due to the exercise of incentive stock options in periods before 2008, but had been able to pay these amounts before January 1, 2008, Sec. 53(f)(2) allowed these taxpayers to increase their refundable credit amounts in 2008 and 2009 by 50% of the interest and penalties paid. This, along with the refundable credit for the tax they had paid, put these taxpayers in the same position as taxpayers who had their outstanding liabilities abated. to find out how to submit a question to the AMT Advisor. |
How to submit a question to the AMT Advisor *************************** What is the AMT? AMT Adjustments AMT Preferences AMT Exemption AMT Forms *************************** Alternative Minimum Tax Amounts AMT Rates: 26%, up to Alternative Minimum Taxable Income of $175,000 ($87,500 for Married Filing Separately) 28% on AMTI over $175,000 ($87,500 for Married Filing Separately) AMT Exemption Amounts Before Phase-Out: Taxpayers Filing Single or Head of Household : 2007 - $44,350 2008 - $46,200 2009 - $46,700 2010 - $47,450 2011 - $48,450 Married Filing Jointly or Qualifying Widower: 2007 - $66,250 2008 - $69,950 2009 - $70,950 2010 - $72,450 2011 - $74,450 Married Filing Separately: 2007 - $33,125 2008 - $34,975 2009 - $35,475 2010 - $36,225 2011 - $37,225 AMT Exemption Phase-Out Thresholds: The AMT exemption is reduced by 25% of the amount that alternative minimum taxable income exceeds for: Single or Head of Household - $112,500 Married Filing Jointly or Qualifying Widowers - $150,000 Married Filing Separately- $75,000 AMT Exemption for Children Under 18 (Kiddie AMT) For 2007 The lesser of $44,350 or the child's earned income plus $6,300 For 2008 The lesser of $46,200 or the child's earned income plus $6,400 For 2009 The lesser of $46,700 or the child's earned income plus $6,700 For 2010 The lesser of $47.450 or the child's earned income plus $6,700 For 2011 The lesser of $48,450 or the child's earned income plus $6,800 |
 | |  | |  |