Alternative Minimum Tax Credit
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 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.
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The credit is generally a credit against regular tax, NOT the alternative minimum tax.
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The credit is computed in the year following a year in which there was an alternative minimum tax (or AMT credit carryover from some previous year).,
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The AMT credit is computed on Form 8801 in the current year using data from the prior year 6251 and current year 1040.
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The amount of the credit is generally the excess of the AMT computed with deferral items of preference over the AMT computed without the deferral items of preference for the prior tax year.
AMT Credit
The AMT credit is the difference between the tentative AMT and adjusted net minimum tax (ANMT) but not exceeding the AMT itself. The ANMT is generally the AMT recomputed without deferral items of preference, which for most individuals means the AMT recomputed without the Incentive Stock Option (ISO) preference.
Adjusted Net Minimum Tax (ANMT)
For a non-corporate taxpayer, the ANMT for a tax year equals: (a) the alternative minimum tax (AMT) paid for that year; less (b) the amount of AMT that would have arisen if the only applicable preferences and AMT adjustments were “exclusion preferences” plus (c) the amount of any qualified electric vehicles credit not allowed solely by reason of the limitation on that credit that is a function of the taxpayer's tentative minimum tax.
The two illustrations graphically illustrate how the AMT credit is determined where the ANMT is both greater than and less than the
AMT.
Subsequent Year
Once the AMT Credit is determined, it is carried forward to subsequent tax years until used up. IRS Form 8801 – Credit for Prior Year Minimum Tax – is used to carry the credit forward.
Deferral Items
DEFERRAL Items of preference that can create an AMT Credit include:
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Qualified small business stock
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Incentive stock option preference
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Large partnerships adjustments*
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Adjusted gain or loss
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Post-1986 depreciation adjustments
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Passive activities
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Loss limitations
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Circulation expenses differences
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Long-term contract preferences
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Mining cost differences
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Research and experimental costs
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Installment sales (pre-1987)
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Intangible drilling costs preferences
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Depreciation (pre-1987)
*The rules on electing large partnerships were repealed, generally effective for tax years beginning after 2017 (Bipartisan Budget Act of 2018, P.L. 114-74, 1101)
Avoid AMT in a Subsequent Year
Since the AMT tax credit can only be used to reduce the regular tax to the AMT, it can never be used in a year where the taxpayer has an AMT. Therefore, the only way to obtain any benefit from this credit is to have a regular tax that is larger than the AMT. Where a taxpayer is marginally in the AMT or where transactions are creating an AMT, a taxpayer may be able to plan their income and deductions in such a way as to avoid the AMT in intervening years and take advantage of this credit.
Carryover & Preparation Software
Since the carryover credit is computed on Form 8801 for the year to which it is carried, it is frequently overlooked or lost in the transition and not continuously preformed from year-to-year by preparation software. Some will only proforma the 8801 data from the immediately past year and not the information from other prior years. Therefore, it may be necessary to refer to Forms 8801 going back several years to make sure no credit is lost.