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Long-term minimum tax credits: what are they?
October 10, 2008
Cash is king right now, and the new tax law turns "long-term minimum tax credits" into cash over the next two filing seasons. This prompts a reader question:
In your very informative article 10/6/08 I have a Question on terms; long-term unused minimum tax credits vs. long-term AMT credits. Are they the same under this new legislation? Are they the "minimum tax credit" on from 8801, LIne 28?
The minimum tax credit arises when taxpayers incur alternative minimum tax from items whose timing differs for computing regular tax and AMT. The most famous example of this is incentive stock options, which are taxable upon exercise for computing AMT, but not until the option stock is sold for regular tax. The credit can also be generated by differences in AMT depreciation, amongh other things. Minimum tax credit does not result when AMT is caused by itemized deductions, like state income taxes, miscellaneous deductions, or home equity loan interest.
Minimum tax credits carry forward to reduce regular tax, but only to the level of AMT in a subsequent year. As a practical matter, many minimum tax credits have languished unusable for years.
The new rules enacted in the bailoug bill treat mimimum tax credits that were generated by AMT more than three years before the current tax year as a refundable credit, like wage withholding; half of existing long-term credit can be claimed as a refund in 2008, and the rest in 2009. That means credits generated by AMT in 2004 and earlier will create refunds in 2008.
You may have a long-term mimimum tax credit if you have an amount on your 2007 Form 8801, line 28. To see whether you are eligible to cash out some minimum tax credit in 2008, you need to dig out your 2005 return and turn to Form 8801. If there is is a number on line 19, you may have a long-term minimum tax credit you can use in 2008. If the number doesn't get smaller on your 2006 8801 line 19 or your 2007 8801 line 19, and your 2007 form 8801 line 28 is at least as high as your 2005 8801 line 19, the 2005 amount is your long-term minimum tax credit carryforward. If your line 19 declined in any of the years after 2005, your smallest line 19 amount for the period should normally be your long-term mimimum tax credit carryforward.
So if you have a Form 8801 on your 2007 1040, it's time to dig out your old returns and see if the IRS might have some extra cash for you next April.
Related: How the refundable AMT credit works
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Comments
I posted this long question here:
http://fairmark.com/forum/read.php?5,36390
I am trying to determine what my long term minimum tax credit from 2004 is.
To keep things simple, I exercised ISOs and paid AMT of $164k in 2004. In 2005 sold the shares and used up $108 of the AMT credit.
Line 19 of the 2005 Form 8801 shows $0. Does this mean that none of the AMT tax I paid for the 2004 tax year qualifies as the "long-term minimum tax credit" and up to 50% refund when I do my 2008 1040? Do I have to wait until 2009 to benefit from this?
I am a CPA (not practicing) and should understand this stuff:-)
I would appreciate any response!
Thank you.
DP
Posted by: DP | January 10, 2009 6:02 PM