AMT limit on personal credits.

• Author: Fletcher, Eric S.
• Position: Alternative minimum tax

Congress eliminated the reduction in credits available to individuals because of the alternative minimum tax (AMT) for 1998, but the reduction will affect 1999 and later years unless Congress takes further action. In some cases, the AMT limitation actually increases the tax on a family that has another child after 1998.

Sec. 26(a) limits allowable nonrefundable credits to the excess of the regular tax over the tentative minimum tax. However, a taxpayer with three or more children may claim a refundable credit for the lesser of (1) the child tax credits without regard to Sec. 26(a) or (2) the amount by which the aggregate nonrefundable credits would increase if the Sec. 26(a) limit were increased by the excess of the taxpayer's Social Security taxes for the tax year over the earned income credit (EIC) (without the supplemental child credit under Sec. 32(n)) (see Sec. 24(d)(1)).

However, if a taxpayer is subject to the AMT, Sec. 24(d)(2) reduces this refundable credit by the excess of the AMT over the AMT's reduction of the EIC. This provision may cause a tax increase for a family with three or more children, subject to the AMT, if that family has another child. For instance, a taxpayer in the 28% bracket will reduce his regular tax by $770 with another dependency exemption, but the tentative minimum tax will not change. Therefore, the AMT increases by $770. This family, with an additional $500 child tax credit, will have its total refundable credits reduced by the $770 AMT increase, costing it $270 in tax.

Example: H and W have six children under age 17. Their 1999 modified adjusted gross income (AGI) is $80,000. They will claim the standard deduction on a joint return without any credits (except child credits for all their children). H's and W's 1999 tax will increase by $270 if they have another child (see Exhibit 1 on page 290).

Exhibit...