Alternative Minimum Tax Credit
Posted on June 21, 2008
Filed Under Alternative Minimum Tax
In a nutshell, the reason for having a credit or carryover for prior-year alternative minimum tax (AMT) is to avoid double taxation associated with the timing differences between tax deferrals in the AMT and regular tax systems. Although other deferral items such as incentive stock options or depletion could be used to explain the nature of, and rationale for, the AMT credit, this article focuses on the timing differences between regular and AMT depreciation.
Alternative minimum tax depreciation (pdf file) substitutes methods with longer schedules for the regular Modified Accelerated Cost Recovery System (MACRS); these substitutions negate the substantial tax deferrals that accrue in the early years of cost recovery under regular MACRS schedules and increase tax liability down the road when alternative minimum tax depreciation exceeds MACRS depreciation. The reason for this double whammy is (1) any depreciation method is only a deferral and not a permanent exclusion of income because it lowers the tax basis of the asset involved and (2) total depreciation taken under AMT and MACRS is the same. Put differently, in the process of substituting the alternative straight line method for MACRS, at some point in the future, straight line depreciation will exceed MACRS depreciation, and the taxpayer, because he or she has been subject to the AMT, will have higher taxable income at this time. In short, without some form of allowance for this negative deferral effect under AMT depreciation, the taxpayer incurs higher taxable income in the future because of greater straight line depreciation relative to MACRS and loses the significant up-front deferrals associated with accelerated depreciation. This allowance or AMT credit–the amount by which the regular tax liability exceeds AMT tax liability because of a negative deferral effect–may not be used to reduce any future AMT liability, but it can be used to offset timing differences between the two regimes. IRS Form 8801 (pdf file) is used to figure the AMT credit.
For additional information on the credit for prior year minimum tax, consult the following resources:
Many happy returns, Roger
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[...] Historically, itemized deductions comprise medical and dental expenses (subject to a 7.5% of AGI floor), state and local taxes, home mortgage and investment interest expenses, charitable contributions (subject to various percentage-of-AGI limitations based on type of charity and character of gift), casualty and theft losses (subject to a 10% of AGI floor plus a $100 deductible for each casualty or theft loss), job expenses, and miscellaneous deductions (subject to a 2% of AGI floor); taxpayers list these expenses on Schedule A, the official itemized deductions form (pdf file). High income taxpayers should also note that miscellaneous itemized deductions (except for gambling losses to the extent of gambling winnings, impairment-related work expenses, and several other expenses) are not allowed in the calculation of alternative minimum tax, and other restrictions may apply for the “regular” itemized deductions that are allowed, including the imposition of a higher 10% of AGI floor for medical and dental expenses. See my previously published articles on this topic, Alternative Minimum Tax Individuals and Alternative Minimum Tax Credit. [...]