The New Refundable AMT Credit

Matthew Azares, CFP®, CPA, Director of Tax

Most of you have heard, whether from tax advisors, media or friends, of another way the IRS requires you to determine your income tax liability and to pay this amount if it is greater than the regularly computed tax liability.

This alternative minimum tax (AMT) method outright disallows certain deductions such as taxes, unreimbursed employee related expenses and investment fees. Moreover, the AMT method disallows certain income exclusions and also slows down certain accelerated deductions. The latter adjustments are collectively known as “timing adjustments.”

You are probably affected by the AMT timing adjustments if you participate, or have ever participated, in your company’s Incentive Stock Option plan or have taken accelerated depreciation on your business or rental property.

You may be thinking “Something is wrong with this picture? Isn’t there a way to recoup the AMT tax when these deferrals turn around?” Yes, but it won’t be easy! The IRS gives you an AMT recovery method, but be forewarned; the method is a lot less understood than the AMT itself. It is called the AMT Credit. The AMT credit could wipe out most, if not all, of your regular taxes and could be carried forward (but not back) indefinitely.

In determining your AMT, you are more or less forced to maintain a second set of books, one for regular method and another for AMT method, since without them, it would be virtually impossible to figure out the calculation. The good news is your second set of books also tracks the movement of your timing adjustments. As these timing adjustments crossover into negative yet favorable AMT items, they trigger usable AMT Credits. Yes, you are about to reap the benefits of your well kept second set of books!

From 2007 until 2012, your AMT Credits may no longer be limited to offsetting your regular income tax. If you have “long-term unused AMT Credits” from more than three years ago, this “extra” credit will be refunded to you. The refund of your long-term unused AMT credits is limited to the greater of $5,000 or 20% of your long-term unused AMT credits. Like many other tax benefit provisions, there are complicated phase-out rules for higher-income earners.

Until this confusing and seemingly unfair second tax system is revamped or repealed, you are (or your tax preparer is) well advised to maintain that second set of books!

If you would like to discuss how the new refundable AMT credit impacts you and whether there is a credit or refund opportunity available to you, please give the Tax Department of Centara Capital a call.

© Centara Capital Management Group, Inc., 2008. All rights reserved.

Centara Capital Management Group, Inc.
8880 Rio San Diego Drive, 4th Floor
San Diego, CA 92108
(619) 398-1700
www.centaracapital.com
info@centaracapital.com

Securities offered through Registered Representatives of Centara Capital Securities, Inc., Member FINRA/SIPC. Investment advisory and financial planning services offered through Centara Capital Management Group, Inc., a Registered Investment Advisor. Insurance #0D85861. CA DRE License No. 01519824. Legal services provided by Centara Legal Group, APC, David Gebhardt, Principal.