Tax planning and compliance for investors
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By Kaye A. Thomas
Updated April 10, 2011
A valuable tax benefit for some people who paid AMT.
Here's good news: a portion of your AMT liability — perhaps all — may come back to you in the form of a reduction in the tax you pay on future tax returns, or even a refund that exceeds the tax you pay in a later year, because of the AMT credit. To claim this credit you need to have paid AMT in a previous year, and it has to be the right "flavor" of AMT. Generally this means you need to have paid AMT as a result of exercising an incentive stock option, or because of certain other "timing items" such as an AMT adjustment relating to accelerated depreciation. Any AMT you pay for other reasons, such has having a large number of exemptions or a large itemized deduction for state and local taxes, will not qualify you for the credit.
Working with this AMT credit is a two-step process. First you find out how much credit is available, then you find out how much of the credit you can use.
The first part of your task is to find out how much of the AMT liability from a prior year is eligible for the credit. This involves calculating the alternative minimum tax under a different set of rules — sort of an alternative AMT. What you're doing here is finding out how much of your alternative minimum tax liability came from timing items: items that allow you to delay reporting income, as opposed to items that actually reduce the amount of income or tax you report. If you're lucky, your entire AMT will be available as a credit in future years. But some people find that only a small portion, or none at all, is available for use as a credit.
details: Available AMT Credit
If you have some AMT credit available from a prior year, you have to determine how much of the credit you can use in the current year. There are now two ways to claim AMT credit. Under the normal rule you may be able to begin claiming the credit the first year after you paid AMT, but the amount you can claim is limited as described below. A different rule provides more generous recovery to some people whose available credit remains unused four or more years after the AMT was paid.
Under the regular rule you can only use the AMT credit in a year when you're not paying alternative minimum tax. The amount of credit you can use is limited to the difference between your regular tax and the tax calculated under the AMT rules.
Example: Suppose you have $8,000 of AMT credit available from 2010. In 2011 your regular tax is $37,000. Your tax calculated under the AMT rules is $32,000. You don't have to pay AMT because your regular tax is higher than the tax calculated under the AMT rules. Better still, you're allowed to claim $5,000 of AMT credit, reducing your regular tax to $32,000.
In this example, you would still have $3,000 of AMT credit you haven't used. That amount will be available in 2012: it's carried over to the next year. Unused AMT credit carries over for an unlimited number of years.
Of course, you can't claim more than the amount of the available credit. In the example, if the AMT credit available from 2010 was $2,700, then you would use the full amount of the credit in 2011. You would reduce your regular tax by $2,700 — not by the full $5,000 difference between regular tax and alternative tax.
Beginning in 2007, people with old unused AMT credit have another possible way to claim AMT credit. This rule allows you to claim the credit without regard to the limitation described above, but only if you have unused AMT credit from four or more years earlier.
details: Refundable AMT Credit
Many people assume that if the AMT credit arises from exercising an incentive stock option, they can't claim the credit until they sell the shares they acquired by exercising the option. That's not the case. Selling ISO shares may help you claim a larger AMT credit, but you can claim the credit without selling shares. Under the general rule you can claim the credit whenever your regular income tax is larger than the tax figured under the AMT rules.
Example: Suppose you exercised an incentive stock option in 2009, planning to sell the shares when they matured in 2010. You paid $10,000 of AMT on your 2009 tax return, but the share value dropped before you had a chance to sell. You decided to hold on and see if the value of the shares would recover. In 2012 you still hold the shares, and now you're wondering if you can sell the shares to claim the credit.
Chances are that you could have recovered thousands of dollars in AMT credit already, on your tax returns for past years beginning with 2010. You didn't have to sell the shares to claim the credit. You simply had to file Form 8801 with your tax return. Depending on your situation — income level, filing status, number of personal exemptions and so forth — you may find that you were entitled to hundreds or even thousands of dollars of credit each year without selling the shares.
Here's the rule: If you pay AMT because of exercising an incentive stock option, you need to file Form 6251 for the year of exercise. Then every year after that you need to file both Form 6251 and Form 8801 until you've claimed the entire credit.
If you didn't file Form 8801 with your prior year returns, you need to amend those returns, for two reasons. One is that you could have a nice refund check coming. And the other is that there's no way to claim the credit in a later year without filling out this form for the years intervening between the year you paid AMT and the year you claimed the credit.
That's because the amount of credit available for you to claim depends on what happened in each year. You don't know the amount of your credit carryover to 2012 without filling out this form for 2011. But to fill it out for 2011, you need the numbers from Form 8801 for 2010 — and so on, back to the year you paid AMT.
As a general rule you're allowed to go back and amend tax returns for three years. If you failed to claim AMT credit that was available for your year 2008 tax return, you need to file the amended return by April 15, 2012 (or three years after the actual filing date if you applied for an extension and filed within the extension period).
Why not just forget about those prior years and claim the credit beginning in some later year? The answer is that it doesn't work that way. The amount of credit that carries over from one year to the next depends on the specifics of your tax return for each intervening year, not that amount of credit you actually claim. In other words, use it or lose it!
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