Minimum Tax Credit (MTC)
As discussed below, a taxpayer who was subject to the AMT in a previous year may be entitled to a credit against his or her regular tax called the Minimum Tax Credit (MTC). To determine whether a taxpayer is entitled to the credit, she must complete Form 8801, Credit for Prior Year Minimum Tax - Individuals, Estates and Trusts.
In calculating alternative minimum taxable income (AMTI), a taxpayer starts with regular tax adjusted gross income and adds or subtracts from it any AMT adjustment or preference items. AMT adjustment or preference items can be split into deferral (temporary items) and exclusion (permanent) items.
Exclusion items: Exclusion items are adjustment or preference items that affect only one tax year and cause a permanent difference between regular taxable income and AMTI. For individuals, an example is state and local income taxes. These taxes are never deductible for AMT purposes, and are added back to AMT income in the calculation of AMTI in the year they are paid (or accrued in the case of accrual taxpayers).
Deferral items: Deferral items are adjustment and preference items that affect more than one tax year. These items cause a difference in regular taxable income and AMTI in two or more years, but do not cause a permanent difference over time. This commonly is referred to as a timing difference. All deferral items cause a timing difference between regular tax and AMT.
For individuals, an example of a deferral item is income from the exercise of incentive stock options. This income is included in AMTI in the year the taxpayer exercises the options, but is not included in his regular taxable income until the year the taxpayer sells the stock he received when he exercised the options. Assuming that the price of stock is above its price on the date the taxpayer exercised the options, the amount of income attributable to the exercise of the incentive stock options that is included in regular taxable income and AMTI is the same after the stock from the exercise is sold.
This difference in the timing of income and expenses for regular tax and AMT purposes could work against a taxpayer if the taxpayer is subject to AMT in the year or years that a deferral item is included in calculating AMTI but is not subject to AMT in the year or years when the item is included in calculating regular taxable income. In the case of an income item that is a deferral item, such as income from the exercise of incentive stock options, the taxpayer would end up having to pay tax on the income twice in this situation. In the case of a deduction that is a deferral item, such as post- 1986 depreciation, the taxpayer would lose the benefit of the deduction in both years.
Minimum Tax Credit: To prevent either of these situations from occurring, a taxpayer is allowed a credit called the Minimum Tax Credit (MTC) when the taxpayer pays AMT in a year due to a deferral adjustment or preference item. Although this credit arises due to the payment of AMT, the credit is regular tax credit and a taxpayer can only use it to offset regular tax. However, from tax years 2007 to 2012, in certain cases the credit was refundable.
How the MTC is Calculated
Sec. 53(a) of the Code allows a credit against the regular tax imposed for any taxable year of an amount equal to the minimum tax credit for that year. Sec. 53(b) states that the minimum tax credit for any taxable year is the excess (if any) of:
- the adjusted net minimum tax imposed for all prior taxable years beginning after 1986, over the amount allowable as a credit under subsection (a) for such prior taxable years.
Net minimum and
adjusted net minimum tax: Per Sec. 53(d)(1)(A), the net minimum tax for a year is the AMT liability for that year. Per Sec. 53 (d)(1)(B), the adjusted net minimum tax is:
- the net minimum tax, less the net minimum tax calculated taking into account only exclusion adjustment and preference items.
Stated another way, the adjusted net minimum tax amount for a year is the AMT liability attributable to deferral adjustment and preference items.
Limitation on MTC: A taxpayer may not be able to use all of the minimum tax credit available in a particular year. The amount of the credit a taxpayer is allowed to take in a year is limited to:
- The taxpayer’s regular tax liability, less the non- refundable personal and business income tax credits, over The taxpayer’s tentative minimum tax for the year.
Refundability and carryover of the MTC: For tax years beginning in 2013 and later years, the minimum tax credit is not refundable. However, because, per Sec. 53(b), the minimum tax credit is determined cumulatively, the taxpayer carries forward the amount of the credit that he cannot use due to the limitation to future tax years. In addition, as discussed below, for the years 2007 to 2012, if a taxpayer had a long- term unused minimum tax credit, the taxpayer might be allowed a refundable minimum tax credit in addition to the non- refundable credit.
Refundable Credit for Long- term Unused MTCs
In tax years from 2007 to 2012, if a taxpayer has a long- term unused minimum tax credit, the amount of the minimum tax credit for the year is not less than the AMT refundable credit amount for the year. The AMT refundable credit amount for a tax year is the greater of:
- 50 percent of the long- term unused minimum tax credit for such taxable year, or the amount (if any) of the AMT refundable credit amount for the taxpayer's previous tax year.
In 2007, the amount of the credit was generally limited to 20% of the long- term unused minimum tax credit for the year.
Long- term unused minimum tax credit: The long- term unused minimum tax credit for a tax year was the portion of the minimum tax credit attributable to the adjusted net minimum tax for tax years before the 3rd tax year immediately preceding the tax year.
EXAMPLE: X has a minimum tax credit carryforward to 2011 of $10,000. $6,000 was attributable to 2007, and $4,000 was attributable to 2008. He had no long- term AMT refundable credit in 2010. X’s long- term unused minimum tax credit was $6,000 in 2011. Because X’s AMT refundable credit in 2010 was not greater than $3,000 (50% of $6,000), his AMT refundable credit for 2011 was $3,000.
EXAMPLE: Same facts as in the previous example, except that X had an AMT refundable credit in 2010 of $4,000. His AMT refundable credit in 2011 was $4,000.
A taxpayer used long- term unused minimum tax credits on a first- in, first- out basis.
Additional refundable credit: In 2008 and 2009, certain taxpayers who had paid interest and penalties related to AMT caused by an AMT adjustment for the exercise of incentive stock options were entitled to increase the amount eligible for the credit by 50% of the interest and penalties paid.
Taxpayers who had AMT abated in 2008: Certain taxpayers who owed AMT for years prior to 2008 due to the AMT adjustment for the exercise of incentive stock options had the AMT, along with penalties and interest, they owed abated. However, these taxpayers were required to reduce their MTC in 2008 by the amount abated.
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