Are you an AMT victim? You just might be eligible for a generous credit.
ARE YOU ONE of the millions of Americans who has suffered under the dreaded alternative minimum tax, or AMT, over the past few years? (This wretched tax is essentially an additional taxation system for "the wealthy" — although more and more middle-class folks are subject to it each year.) If so, you just might be eligible for a potentially generous AMT credit.
Of course, many people who pay the AMT never claim their rightful AMT credit. Why? Because qualifying can be tricky, and many taxpayers don't even realize that they are eligible for a break in the first place. (Others just flat out forget about it.) So if you generated an AMT credit in years past that you haven't used yet, it could save you some cash on your tax-year 2000 return. Here's what you need to know.
Qualifying for the Credit:
Unfortunately, while there are plenty of things that can trigger an AMT bill, only two scenarios allow you to generate a credit. You earn an AMT credit only if your AMT bill was partially or entirely caused by: (1) Exercising an incentive stock option, or ISO, offered by your employer or (2) claiming accelerated depreciation write-offs. Reason No. 1 is obviously quite common, especially with the stock options doled out by tech companies a few years ago. But to be honest, reason No. 2 isn't very likely — that is, unless you have an ownership interest in a business with fairly heavy investments in depreciable equipment like, say, manufacturing tools.
You also can claim the AMT credit for a previous year's AMT bill only if your regular tax amount for 2000 exceeds your AMT number. Why? Because the credit reduces your regular tax, but not your AMT. In other words, you can't claim the credit on your 2000 return if you owe that blasted AMT again. Only if you are in the "regular tax mode" for 2000 are you eligible. This might sound like a pretty remote combination, but many folks who exercised employer stock options in 1998 and 1999 could easily fall into this category. Fact is, if you exercised an ISO in a prior year and also paid the AMT, the odds are pretty good that you earned a credit. (And even if you can't take the credit this year, your AMT credit can still be used somewhere down the line during a different year.) To find out if you qualify and to calculate the exact amount of your credit (if any), fill out IRS Form 8801 (Credit for Prior Year Minimum Tax — Individuals).
How much is the credit worth? That depends. Your AMT credit can't exceed the difference between your regular tax bill and your AMT amount for the year you claim the credit. So even though you don't owe the AMT for 2000, you must still fill out IRS Form 6251 (Alternative Minimum Tax — Individuals, Estates and Trusts) to calculate your AMT amount. The difference between that number and your regular tax number is the maximum amount of AMT credit you can claim on your 2000 return. Put another way, you can use the AMT credit to equalize your regular tax and AMT numbers for 2000, but that's it. After taking this limitation into account, any leftover AMT credit is carried forward to 2001. Then you'll go through the same process all over again when preparing your 2001 tax return.
Here's an example. Let's say you had to cough up an extra $2,500 for AMT in 1999. (In other words, there was a $2,500 difference between your 1999 regular tax number and the AMT number you calculated on Form 6251.) You ran afoul of the AMT mainly because you exercised a highly profitable ISO in 1999. Now you fill out Form 8801 and discover you earned an $1,800 AMT credit in 1999. So far, so good. Now assume your 2000 regular tax bill (before considering the AMT credit) is $25,000, and your 2000 AMT number (from Form 6251) is $21,000. Congratulations! You can use your $1,800 AMT credit to reduce your regular tax bill by $1,800. So your final 2000 tax bill is $23,200 ($25,000 regular tax minus $1,800 AMT credit).
Now what if your 2000 regular tax bill (before considering the AMT credit) is only $22,000? Your credit is now limited to $1,000, because claiming that amount of credit equalizes your regular tax amount ($22,000 - $1,000 = $21,000) and your AMT amount (still $21,000). You would then have an $800 AMT credit carryover to the 2001 tax year ($1,800 minus $1,000 used with your 2000 return).
Although there's nothing simple about it, the AMT credit can potentially save you big bucks when you file your 2000 return. Claim the credit on Line 49 of your 1040, and check the small box for Form 8801.