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Remember Section 402 of the Tax Relief and Health Care Act of 2006, enacted on December 20, 2006, adds Internal Revenue Code Section 53(e) to the rules for the tax credit for prior year minimum tax to permit a refundable credit for certain old unused minimum tax credits. A change included in the Tax Technical Corrections Act of 2007, enacted December 29, 2007, has enhanced the refundable credit.

The minimum tax credit eligible for the AMT refundable credit is the portion of the credit carryover attributable to taxable years before the third taxable year immediately preceding the taxable year. For 2007, minimum tax credit carryovers attributable to tax years before 2004 would be eligible. Credits are considered to be used on a first-in, first-out basis.

Here is how the refundable credit is determined, as defined in the amended Internal Revenue Code after technical corrections:

"The term ‘AMT refundable credit amount’ means, with respect to any taxable year, the amount (not in excess of the long-term minimum tax credit for such taxable year) equal to the greater of –

(i) $5,000

(ii) 20 percent of the amount of the long-term unused minimum tax credit for such taxable year, or

(iii) the amount (if any) of the AMT refundable credit amount determined under this paragraph for the taxpayer’s preceding taxable year (as determined before any reduction under subparagraph (B))."

For example, assume John has unused AMT credit carryover from 2003 to 2007 of $3,000, and doesn’t have enough adjusted gross income for a phaseout. John would be refunded $3,000 under (i) above.

Another example, assume Jane has unused AMT credit carryover from 2003 to 2007 of $100,000, and doesn’t have enough adjusted gross income for a phaseout. Jane would be refunded $20,000 under (ii) above. If Jane only had the $100,000 credit from 2003, her refundable credit for 2008 would also be $20,000 under (iii) above. (Before the technical correction, it would have been ($100,000 - $20,000 used 2007 = $80,000 X 20% = $16,000. She is eligible to receive $4,000 more refundable credit because of the change.)

If the minimum tax credit determined under the "old law" for a taxable year is greater than the refundable credit, no additional refundable credit is allowed.

The refundable credit is phased out for higher-income taxpayers based on the same ratio as applies to phase out personal exemptions. The phase out is two percentage points for each $2,500, or $1,250 for married persons filing a separate return, (or fraction thereof) by which the taxpayer’s adjusted gross income¹ exceeds certain threshold amounts, to a maximum of 100%.² For 2007, the threshold amounts are $234,600 for joint filers or a surviving spouse, $195,550 for a head of household, $156,400 for single taxpayers, and $117,300 for married persons, filing separately.³

For example, Jane, a single person who is not a head of household, would otherwise qualify for a refundable credit of $20,000 for 2007. Her adjusted gross income is $200,000. Her phaseout is $200,000 - $156,400 = $43,600 / $2,500 = 18% (rounded) X 2% =36%. Her allowable credit is 100% - 36% = 64% X $20,000 (tentative refundable credit) = $12,800.

The refundable credit is treated similarly to an estimated tax payment or withholding, and is, therefore, refundable even if there is no tax to offset.

This special provision is effective for "taxable years beginning after December 20, 2006" (2007) for any taxable year beginning before January 1, 2013, or 2007 through 2012 for most individual taxpayers.

If you want help in evaluating whether you can benefit from the refundable AMT credit, our tax planning software has been updated so that we can help you in that effort. For an appointment for a tax planning consultation, call Dawn Siemer at 408-918-3162 Monday through Friday, 1 to 5 p.m. Pacific time.

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this website was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

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1 Determined without regard to the exclusion under Section 911 for citizens or residents of the U.S. living abroad, the exclusion under Section 931 for income from sources within Guam, American Samoa, or the Northern Mariana Islands, and the exclusion under Section 933 for income from sources within Puerto Rico. (Internal Revenue Code § 53(e)(2)(B)(ii).) RETURN
2 Internal Revenue Code § 151(d)(3)(B)RETURN
3 Internal Revenue Code § 151(d)(3)(C), RIA’s Complete Analysis of the Tax Provisions of the Tax Relief and Health Care Act of 2006 ¶ 1201.RETURN