The Alternative Minimum Tax Credit is a frequently misunderstood and overlooked tax credit. Oversimplified, the alternative minimum tax credit is the result of incurring an alternative minimum tax (AMT) in a prior year, which generates a credit that can be used to offset the excess of the taxpayer’s regular tax over the alternative minimum tax in a subsequent year, with unused credit carried forward to future years.
It doesn’t mean that you will have an AMT credit just because you were affected by the AMT. The credit is the result of having an AMT adjustment known as a “deferral item of preference.” Sound complicated? It can be, but generally the deferral item that affects most taxpayers is the result of exercising a qualified stock option (frequently referred to as an Incentive Stock Option or ISO). Roughly speaking, the credit amount is the difference between the AMT computed with and without the deferral item of preference.
Refundable Minimum Tax Credit Provision - If you were unfortunate enough to have been affected by the alternative minimum tax (AMT) in a prior year, then you may have a carryover of unused minimum tax credit. This primarily applies to taxpayers who exercised qualified (incentive) stock options and held the stock to qualify for long-term capital gains. Before 2007, the prior year AMT credit could only be used to the extent that the regular tax exceeded the AMT for the current year. That, in effect, made the credit useless for taxpayers who are perpetually taxed by the AMT.
A provision that took effect in 2007 allowed taxpayers to use a portion of the taxpayer’s minimum tax credit carryover that is attributable to the 4th prior year or older (long-term unused minimum tax credit) in the current year, even if taxed by the AMT in the current year.
However, beginning in 2008, the law was changed yet again, essentially allowing a taxpayer to deduct up to 50% of their long-term AMT credit carryover in 2008 and the other 50% in 2009. Prior to this change and for purposes of claiming the long-term unused minimum tax credit, the refundable credit amount was limited to the greatest of (1) $5,000, (2) 20% of the long-term carryover or (3) the AMT refundable credit amount (if any) for the prior year– before any reduction by reason of AGI. Under the Act, the $5,000 limitation has been removed, and the 20% limit has been increased to 50%. This effectively allows taxpayers with existing long-term unused credits to utilize the entire amount of the unused credit in 2008 and 2009.
In addition, the Act provides for abatement of any underpayment of tax outstanding on October 3, 2008 which is attributable to AMT on incentive stock options for any taxable year ending before January 1, 2008. The abatement extends to any related interest or penalty. Any penalties and interest previously paid is added to the long-term AMT credit carryover and thus refunded as part of the credit in 2008 and 2009.