AMT Credit

[NameRedacted]

For 2016 I had a huge tax bill, both Federal and State. That year I sold a large amount of ISO stock and got hit really badly by both AMT (for the first time) and the fact that I had some large capital gains. I retired in early 2017 and the main reason for selling the stock was so that I didn't enter retirement with a large portion of my net worth in a single stock.

Now looking at my 2017 taxes I have a fairly large AMT credit; plus my income this year is much lower. I played around figuring my 2017 taxes (with 2016 year's tax forms) and found that I'll only use a small amount of my AMT credit. Essentially, it looks like I may pay no Federal taxes for 5-6 years!

While this may seem like a good thing, I do have a dilemma. The latest tax bill in Congress may eliminate the AMT entirely. If that goes I can see the AMT tax credit just disappearing. So I'd like to claim as much of the credit as soon as possible. I do have some stocks in a non-taxable account that have large unrealized capital gains that I can sell. When I do this the tax program shows no increase in my Federal refund (as expected) but my State tax bill increases. The only gain I get is that I have eliminated future taxes.

However, capital gains are taxed at a much lower rate than regular income so I feel that I may not be getting the best value from the credit.

Anyone have suggestions as to other options I may have?

 

[RunningBum]

Do you have a tIRA that could be converted to a Roth? That would be taxed at a regular rate and make better use of the credit.

 

[HadEnuff]

How does the AMT credit work?

 

[audreyh1]

How does the AMT credit work?

It reduces your AMT owed on capital gains from the ISO stick that was sold in a given year. This lowers your AMT. But unless you actually owe AMT for that same year it doesn't help your taxes, I think.

 

[CoolChange]

How the AMT Credit Works, I Think

How does the AMT credit work?

I believe the credit is the difference in what you paid under AMT and what you would have paid if not AMT rules existed. This can be used in later years, has to be a year where you don't find yourself in AMT land, which can be used like any other credit to offset taxes due.

I am in a similar situation to OP, except that I expect to be pushed into AMT land again this year and reduce income significantly next year. So, I am very interested in this subject and even more concerned about losing my AMT credit.

 

[NameRedacted]

Here's a reasonably simple explanation. It's a bit out of date but still applies ... for now.

https://www.marketwatch.com/story/an-upside-to-the-alternative-minimum-tax-2014-04-01

 

[NameRedacted]

Do you have a tIRA that could be converted to a Roth? That would be taxed at a regular rate and make better use of the credit.

Thanks. I hadn't thought of that. I was loosely planning to use my IRA to generate some income once I hit 59 1/2 so that I qualify for ACA credits, but that may or may not be available when the time comes anyway.

However, my IRA is big enough at the moment, I think, that I could do a partial conversion and generate the necessary tax to clear out the credit and still have enough IRA left to generate enough income between 59 1/2 and 65 I think.

I'll have to run the numbers.

 

[RunningBum]

Thanks. I hadn't thought of that. I was loosely planning to use my IRA to generate some income once I hit 59 1/2 so that I qualify for ACA credits, but that may or may not be available when the time comes anyway.

However, my IRA is big enough at the moment, I think, that I could do a partial conversion and generate the necessary tax to clear out the credit and still have enough IRA left to generate enough income between 59 1/2 and 65 I think.

I'll have to run the numbers.

So you'll need income to stay out of medicaid? How about taking those cap gains then? Too far away? Also, you said they were in a "non-taxable" account, is that really what you meant? When I hear non-taxable, I think of a Roth.

 

[NameRedacted]

So you'll need income to stay out of medicaid? How about taking those cap gains then? Too far away? Also, you said they were in a "non-taxable" account, is that really what you meant? When I hear non-taxable, I think of a Roth.

Yes to the medicaid question. I actually meant taxable account. My bad. Gains in a non-taxable account wouldn't help of course.

The problem is that by the time I need the income they may no longer be gains. Who knows what will happen in the future.

I think the partial IRA conversion will work and still leave plenty left over. I don't need that much additional income to get me over the limit even over 5 1/2 years and since a reasonable amount of the IRA is in bonds with a short enough maturity that ought to hold its value enough to generate the income that I need.

 

[HadEnuff]

This is from the IRS instructions for form 8801, the form you file to claim an AMT credit:

"The AMT is a separate tax that is imposed in addition to your regular tax. It is caused by two types of adjustments and preferences—deferral items and exclusion items. Deferral items (for example, depreciation) generally don't cause a permanent difference in taxable income over time. Exclusion items (for example, the standard deduction), on the other hand, do cause a permanent difference. The minimum tax credit is allowed only for the AMT caused by deferral items"


I take that to mean that if in the year I had an AMT, the only deductions not allowed were the typical Schedule A deductions ( Real Estate Taxes, NY State Income Taxes, Mortgage Interest) that I can't claim a credit.
Am I correct?

 

[Rianne]

That's why we kept a 4 year cash reserve, already taxed, to offset selling stocks and bonds. The balance will work out nicely, even when SS kicks in. Works well with ACA.

 

[RunningBum]

That's why we kept a 4 year cash reserve, already taxed, to offset selling stocks and bonds. The balance will work out nicely, even when SS kicks in. Works well with ACA.

I don't follow. How does it offset selling of stocks and bonds?

I get the ACA part, with a stash of cash you can avoid selling stocks and keep your MAGI down by using cash (until the cash runs out), but the OP had ISO stock options and usually there's a time limit on those, plus it's good to diversify.

 

[JoeWras]

We don't know the future. Maybe we'll get some clarity today. But as for credit carry-forwards: I doubt any new AMT rules will immediately eliminate old carry overs. In the past, when they changed the rules, there usually was a provision to handle old rules for a phase period, and sometimes forever. I'm thinking of the changes in 1986, many which were phased.

But who knows? I'm just betting that even if they completely eliminate AMT from the new tax law, there still will be a provision for the carry over for at least a while.

EDIT: You are going to have to follow this closely. As of a few moments ago, they released a "talking points memo" that repeals AMT. But it says nothing about credit carry-over. Those kind of things are devils in the details.

 

[NameRedacted]

We don't know the future. Maybe we'll get some clarity today. But as for credit carry-forwards: I doubt any new AMT rules will immediately eliminate old carry overs. In the past, when they changed the rules, there usually was a provision to handle old rules for a phase period, and sometimes forever. I'm thinking of the changes in 1986, many which were phased.

The whole thing seems a bit rushed and not very well thought out to me, so who knows what stuff will have been overlooked. I didn't really pay much attention in 1986 but my understanding is that it was a 3 year process - not something put together in a couple of weeks.

 

[JoeWras]

The whole thing seems a bit rushed and not very well thought out to me, so who knows what stuff will have been overlooked. I didn't really pay much attention in 1986 but my understanding is that it was a 3 year process - not something put together in a couple of weeks.

Similar to health care law, some things will come out of the implementing agencies. In this case, the IRS. Not saying this specific provision, but other rules. I'm suspecting this is a well known issue and will be in the law though.

Stuff was overlooked in 1986 and tweaks have occurred since. The AMT mess today goes back to 1986 when it was expanded.

 

[JoeWras]

The bill is out https://waysandmeansforms.house.gov/uploadedfiles/bill_text.pdf

Hard to read since you have to know what the 1986 bill said first.

But from my reading of section 2001 (search it yourself under "repeal of alternative"), it sounds like credits are carried forward, but are going to be limited starting in years 19, 20 and 21, with a return to full credit allowed in 22.

I.E. they won't throw away the credits, but might get people with huge credit to deplete it on a slower schedule by limiting it in those 3 years.

YMMV. I am not a tax lawyer. I don't typically read house bills.

 

[CoolChange]

@JoeWras

Thanks for the quick summary. Sounds like we may be OK as long as things don't change too drastically.

 

[audreyh1]

The new bill does address AMT credits specifically, but you'll have to parse the language!!!

 

[NameRedacted]

Looks like I'm going to have to reconsider this plan.

When I look at this in more detail I'm finding that since my credit reduces my tax liability to zero, as soon as I get to more than $53,900 in income I become liable for AMT again

Of course it's always possible I screwed up somewhere.

 

[JoeWras]

It is very thick language, which also requires knowledge of the 1986 law. But yeah, this could cause some grief:

"LIMITATION.—The credit allowable under sub-section (a) shall not exceed the regular tax liability of the taxpayer reduced by the sum of the credits allowed under subparts A, B, and D.’’.

Then you have to parse A, B and D.