Tax planning and compliance for investors
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Kaye A. Thomas
Updated March 14, 2009
The refundable AMT credit can be used only for credit that is old enough.
One of the requirements to use the refundable AMT credit is to have available AMT credit that is old enough to qualify as long-term unused minimum tax credit. Applying this rule is the second step in the process of determining how much refundable credit you can claim.
You can't use the refundable AMT credit to recover AMT you paid last year or the year before. It allows recovery only if you have unrecovered credit from years that are more than three years earlier. The first year this provision applied was 2007 (returns filed in 2008), and for that year you were potentially able to use this rule to recover AMT paid for any year up to and including 2003 (returns filed in 2004). If you have unused credit for more recent years, you'll have to either recover it under the normal rule or wait until the credit ages enough to be recoverable under this rule.
There are people who pay AMT in some years and recover AMT credit in other years. Some people intentionally create this situation, believing it produces a more efficient use of the AMT credit. (I've seen this strategy recommended by experts, but generally it's a poor strategy. As Fermat once said, the proof is too long for me to provide it here.) In any event, an alternation between paying AMT and using the credit raises a question about whether the remaining credit pertains to the older years or the more recent ones. The answer is supplied by the first-in, first-out rule, or FIFO. This rule says that whenever you use AMT credit, you're treated as using the oldest credit.
On its face this seems like a plausible enough rule, but it can have unexpected consequences.
Example: You paid $100,000 AMT on the exercise of an ISO in 2000 but didn't recover any of this amount as credit after the stock price collapsed. In 2006 you again paid $100,000 AMT on exercise of an ISO and this time you had better luck: you recovered the full amount when you sold the stock for a profit in 2007. You still have $100,000 of unused AMT credit because of what happened in 2000.
Your ability to claim AMT credit in 2007 related directly to the sale of stock that produced AMT liability in 2006, so it seems fair that you should be able to treat the remaining amount as long-term unused minimum tax credit. The law provides otherwise. You're treated as having used the credit from 2000, and you're left with credit from 2006, which won't qualify as long-term unused minimum tax credit until 2010.
If you have long-term unused minimum tax credit, the next step is to use this number in determining the tentative refundable credit.
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