Alternative Minimum Tax Credit

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.

(pdf file) substitutes methods with longer schedules for the regular (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 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 (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

Alternative Minimum Tax

The second tax system known as the alternative minimum tax (AMT) is a federal policy subject to a basic tension: Congress believes taxes should be a shared burden, but at the same time, Congress has crafted the Internal Revenue Code so that wealthy individuals and large corporations can avoid or drastically reduce their tax liability. Add to this tension the tendency of Congress to soothe the public’s complaint about federal income taxes with the apparent saving power of attractive riders and supplements to the Code that are ultimately negated by the broad reach of the AMT.

This tension notwithstanding, the AMT is a second regime that subjects individuals and corporations to a broader at somewhat lower rates (26 or 28%) than the (top rate of 35%). (Note: In this article I focus on the AMT for individuals.) To determine whether a taxpayer is at risk for the AMT, it is first necessary to determine the AMTI, abbreviation for alternative minimum taxable income.

The first step in calculating AMTI is to make several adjustments to regular taxable income. Under the AMT system, on a 40 year schedule substitutes for under the (MACRS) for real property acquired before 1998, and a 150 percent method replaces other methods for property not subject to straight line depreciation under the regular system. In short, under the AMT, the taxpayer loses the substantial deferrals associated with accelerated depreciation under the regular tax system. In calculating AMTI, the taxpayer also substitutes the for other methods, including the and the ; adds back ; adjusts for the excess of the stock’s at (pdf file) over the amount paid; refigures any (pdf file) and any gain or loss on ; removes ; takes out (pdf file); and recomputes (pdf file) to reflect the higher 10% of for these expenses under the AMT system. For a complete listing of adjustments to regular taxable income see (pdf file) and (pdf file).

Second, add back tax preference items forbidden by the AMT to regular taxable income. These tax preference items include (pdf file) in excess of (pdf file) for oil, gas, and all other mineral resources; in excess of 65% of net income from oil, gas, and geothermal wells; interest earned on (pdf file); accelerated depreciation or amortization on properties acquired before 1987; and the exemption for gains on small business stock.

Third, subtract the exemption amount to arrive at net alternative minimum taxable income. For married taxpayers filing jointly and surviving spouses, the exemption amount is $62,550; for single individuals, $42,500; and married taxpayers filing separately, $31,275. The exemption is phased out or reduced 25% of the amount by which AMTI exceeds $150,000 for surviving spouses and married filing jointly (exemption completely phased out at $400,200), $112,500 for single individuals (exemption exhausted at $282,500), and $75,000 for married filing separately (exemption ends at $200,100).

Fourth, multiply the net AMTI by either a 26 or 28% rate. The first $175,000 of AMTI is taxed at 26% and AMTI over $175,000 at 28%. But the AMT system uses the same rates as the regular tax system for dividends (15%) and (15% or 25%).

Fifth, from this subtotal, subtract any and the . Compare this amount, the tentative minimum tax (TMT), with the regular tax. If the TMT is greater than the regular tax, the result is known as the AMT. Add this net amount to the regular tax to show the taxpayer’s new, and greater, tax liability for the year.

Several additional resources on the alternative minimum tax for individuals follow below:

Many happy returns, Roger