Tax planning and compliance for investors
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Kaye A. Thomas
Updated March 14, 2009
Credit reduced at higher income levels.
The rule described on this page has been repealed. It applied only for the year 2007. This page is only for people who need to determine what was the correct way to calculate the credit for the year 2007.
Once you've determined your refundable credit base amount for 2007, you have to apply a rule that reduces or eliminates the credit for people with higher levels of income. This rule is extraordinary, because for some people an added dollar of income will reduce the credit by more than a dollar. In effect, some people face an effective tax rate of more than 100% because of the way this rule was written.
The phase-out rule has enormous, complicated consequences,
but the rule itself is relatively simple. It says the amount of
credit you can claim in any year is phased out over the same
income range used to phase out personal exemptions. For 2007
those ranges are as follows:
|Head of household||195,500||318,000|
If you're married filing jointly and your 2007 modified AGI is at or below 234,600, your refundable AMT credit won't be reduced under this rule. (Modified AGI for this purpose is your adjusted gross income increased to take into account certain foreign items that are otherwise excluded.) If your modified AGI is above $357,100, your refundable AMT credit is completely eliminated. You can still claim AMT credit under the normal rule, but the refundable credit is unavailable. Between those two levels your refundable credit is a fraction of the base amount.
The phase-out works in increments of 2 percentage points for each $2,500 of income ($1,250 if married filing separate). If you're exactly at the border, just $1 of additional income will eliminate another 2 percentage points, but the next $2,499 will have no effect.
To get an idea where you stand, estimate your income, subtract the "begin" number from the table above and divide by $125,000 ($62,500 if married filing separately). Round up to the next higher 2%.
Example: You're single and expect your modified AGI to be about $200,000. Subtract $156,400 to get $43,600. Divide by $125,000 to get 34.9%. You can expect this rule to reduce your AMT credit recovery by about 36%.
As I mentioned, this rule is tied to the same phase-out range used for personal exemptions. The rule for phasing out personal exemptions is itself being phased out, but that will have no effect on the operation of the rule for AMT credit relief. The credit will be phased out in the same percentage as personal exemptions under the old rule, before we started phasing out the personal exemption phase-out.
People who have large amounts of old AMT credit can expect to see huge consequences when their income rises into the phase-out range.
Example: You're a single filer and your modified AGI for 2007 is $218,000, which puts you at a level where you lose 50% of the credit. You have $1,100,000 of unused AMT credit, of which $1,000,000 is long-term unused minimum tax credit.
If your modified AGI had been at or below $156,400, you would
have received a $200,000 credit. The added income that took you
into the phase-out range reduced your credit (and refund) by
$100,000. However, the amount of added income that caused that
reduction was only $61,600. Earning another $61,600
reduced your refund by $100,000.
Even if your income isn't usually in the phase-out range, you could be hit by this phase-out rule because of an unusual event, such as a large capital gain. (Long-term capital gains are taxed at special rates but they go into modified AGI the same as any other income.) Careful planning will be important for people affected by this rule.
The result after you apply the phase-out rule is the tentative refundable credit. There's still one more step in determining your actual refundable credit: coordination with the regular AMT credit.
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