Refundable Alternative Minimum Tax Credit Available for 2008

Updated October 7, 2008
© 2008, 2007 by Michael C. Gray

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. Changes included in the Tax Technical Corrections Act of 2007, enacted December 29, 2007, and in the Tax Extenders and Alternative Minimum Tax Relief Act of 2008, enacted on October 3, 2008, have enhanced the refundable credit.

The minimum tax credit eligible for the Alternative Minimum Tax (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 2008, minimum tax credit carryovers attributable to tax years before 2005 would be eligible. Credits are considered to be used on a first-in, first-out basis.

A provision of the Tax Extenders and Alternative Minimum Tax Relief Act of 2008 abates (forgives) unpaid tax liabilities for AMT incurred before 2008 relating to the exercise of an ISO and the related penalties and interest. The minimum tax credit carryover is reduced for the abated tax.

The refundable credit is the greater of:

  1. 50% of the unused minimum tax credit that is more than three years old, or
  2. The refundable minimum tax credit from last year’s income tax return. (Any amount added to the refundable credit for penalties and interest relating to an AMT imposed for the exercise of an ISO is not counted for this test. See below under “other minimum tax credit changes.”)

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

“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 –

  1. 50 percent of the amount of the long-term unused minimum tax credit for such taxable year, or
  2. the amount (if any) of the AMT refundable credit amount determined under this paragraph for the taxpayer’s preceding taxable year (as determined without regard subsection (f)(2)).” (Note – subsection (f)(2) allows a tax credit for interest and penalties paid before October 3, 2008 relating to an alternative minimum tax imposed for the exercise of an ISO. See below under “other minimum tax credit changes.”)

(A $5,000 alternative was repealed, effective for tax years beginning after 2007.)

For 2007, the credit rate was 20 percent, and the refundable credit was phased out when adjusted gross income (AGI) exceeded certain thresholds. The AGI phaseout was eliminated by the Tax Extenders and Alternative Minimum Tax Relief Act of 2008.

For example, assume John has an unused AMT credit carryover from 2003 to 2008 of $5,000, was allowed a $5,000 refundable credit for 2007. John would be refunded $5,000 under (B) above.

As another example, assume Jane has an unused AMT credit carryover from 2003 to 2008 of $100,000, and was allowed a $25,000 refundable credit for 2007. Jane would be refunded $50,000 under (A) above. If Jane only had the $100,000 credit from 2003, her refundable credit for 2009 would also be $50,000 under (B) above.

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

The refundable minimum tax credit is scheduled to expire after 2012. Hopefully, it will be extended together with the annual AMT exemption inflation adjustment in “AMT patch” legislation. Under the current law, it appears the last year for which the 50% refundable credit will be allowed in 2012 will be 2008.

Other minimum tax credit changes, starting 2008.

Effective October 3, 2008, unpaid AMT plus related penalties and interest incurred before 2008 relating to the exercise of an ISO has been abated (forgiven). The minimum tax credit carryover is reduced for the abated tax.

The AMT refundable credit amount and the minimum tax credit for 2008 and 2009 are each increased by 50% of the interest and penalties paid before October 3, 2008 for an AMT incurred before 2008 relating to the exercise of an ISO (for a total of 100%).

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, Wednesday or Friday, 9 a.m. to 5 p.m. Pacific time.

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