AMT/Stock Options/Min. Tax Credit

Fed Tax Question: Last year we got socked with a huge AMT tax bill for some ISO stock options that we exercised, but didn't sell. Since then, surprise, surprise, the value of the stock has tanked. We sold the shares this year at a huge AMT loss (though still a gain for normal tax purposes).

As I understand it, we're entitled to a Minimum Tax Credit for the AMT tax we paid last year on the options. My question is, can the MTC offset ALL of our normal tax liability this year (payroll, cap. gains, etc.) or just the capital gains? I tried following the 2000 instructions & filling out the forms, and it appears that I can offset the whole liability, but I want to confirm.

Also, is it correct that we can carry forward any unused credit to offset our tax liability in future years?

If anyone has any additional information on how this all should be handled, I'd appreciate it!

You were correct about being able to offset the your entire liability for the regular tax with the minimum tax credit. The credit, however, can not be used against any liability for other taxes, such as the self-employment tax, the tax on IRAs, etc. If you look at your return for 2000, the credit can bring line 51 down to 0, but not below that.

And you are also correct in that you can carry forward any unused credit to offset your tax liability in future years until the credit is used up.

The authority for the credit is IRC Sec. 53.

Originally posted by loku
You were correct about being able to offset the your entire liability for the regular tax with the minimum tax credit. The credit, however, can not be used against any liability for other taxes, such as the self-employment tax, the tax on IRAs, etc. If you look at your return for 2000, the credit can bring line 51 down to 0, but not below that.

And you are also correct in that you can carry forward any unused credit to offset your tax liability in future years until the credit is used up.

The authority for the credit is IRC Sec. 53.

loku,
Your assertion that "the credit [Form 8801(?)] can bring line 51 [Form 1040(?)] down to 0" perhaps should include a warning pertaining to the Tentative Minimum Tax limitation, at least, that's what I encountered when I did my year 2000 taxes and subsequently got a letter from the IRS. I tried to apply the Form 8801 Credit for Prior Year Minimum Tax but the IRS stopped me, claiming that I could not reduce my tax obligation below the Tentative Minimum Tax. The result was that I only got to apply a very small portion of the credit. This restriction on the Form 8801 credit is specified in Publication 17, but not on the form [8801] nor the instructions for the form. The restriction is also specified in IRC Title 26, Sec. 53c. Having said this, though, I still question whether the IRC has correctly interpreted legislation that passed on December 17, 1999, that is, "The Tax Relief Extension Act of 1999". That law temporarily allows certain non-refundable credits to be applied beyond the limits of the Tentative Minimum Tax. I can find nothing that says the Credit for Prior Year Minimum Tax is to be excluded from the benefits of this tax relief but that's how it wound up in the IRC. [Note: I am not a tax professional. The above is only my personal opinion and should not be construed as advice.]

I agree with you that the credit can not reduce the tax below the tentative minimum tax, as specified in IRC Sec. 53(c). However, I have to disagree with you about the IRS interpretation of the Act of 99. The provision in that Act related to “certain non-refundable credits” that can be applied beyond the limits of the Tentative Minimum Tax are contained in IRC Sec. 26. IRC Sec. 26(a)(1) gives some tax relief related to the “credits allowed by this subpart.” “The subpart referred to is Subpart A or Part IV of the Internal Revenue Code, consisting of Sections 21-26. The credit for Prior Year Minimum Tax is granted under IRC Sec. 53. IRC Sec. 53 is in Part IV, Subpart G; therefore the provisions do not apply to that credit.

Originally posted by loku
I agree with you that the credit can not reduce the tax below the tentative minimum tax, as specified in IRC Sec. 53(c). However, I have to disagree with you about the IRS interpretation of the Act of 99. The provision in that Act related to “certain non-refundable credits” that can be applied beyond the limits of the Tentative Minimum Tax are contained in IRC Sec. 26. IRC Sec. 26(a)(1) gives some tax relief related to the “credits allowed by this subpart.” “The subpart referred to is Subpart A or Part IV of the Internal Revenue Code, consisting of Sections 21-26. The credit for Prior Year Minimum Tax is granted under IRC Sec. 53. IRC Sec. 53 is in Part IV, Subpart G; therefore the provisions do not apply to that credit.

Thanks for the clarification. Since there appears to be no legal remedy pertaining to the TMT restriction on the Credit for Prior Year Minimum Tax, those impacted, such as myself, will need to seek new legislation through our elected representatives to achieve justice. I would recommend to anyone who reads this thread to check out [url]http://www.ReformAMT.org[/url] as a starting point to obtaining better legislation on what I feel is the most insidious tax law in America, that is the tax on UNREALIZED gains as it pertains to incentive stock options.

Regarding the Tentative Minimum Tax limitation, since I will have a huge capital gains loss this year for AMT calculation purposes, if I'm reading the form 6251 (AMT - Individuals) correctly, can't I just put the whole loss (difference between reg. tax cap gains and AMT cap. loss) as an adjustment to the AMT (on line 9 of Form 6251), effectively setting my TMT to 0 for the year?

Also, since the loss will more than offset my total AMT taxable income, can I then carry forward any AMT capital loss that is unused to future years?

Thanks for all of the advice so far!

Iif your AMT cap loss is greater than your regular tax cap loss, then you can enter the difference as a negative number on line 9 of form 6251. That can result in 0 alternative minimum taxable income and 0 alternative minimum tax. It would therefore result in 0 Tentative Minimum Tax for the year. However, this would be a negative number only if the AMT cap loss is greater than the ordinary tax capital loss.

The way the computation is done, the AMT loss is based on the regular tax loss, so the regular tax loss carryforward automatically brings in the AMT carryforward.