Some prior-year MTCs will be refundable beginning in 2007.

• Author: Zainer, Timothy P.
• Position: Minimum tax credits

A growing number of individual taxpayers have been subject to tax under the alternative minimum tax (AMT). Sec. 53(a) provides a minimum tax credit (MTC) for AMT paid in prior years that was attributable to deferral adjustments. The MTC is carried forward to offset regular tax liability in future years. Frequently, however, little or none of the MTC is allowable because in subsequent years the individual's tentative minimum tax under Sec. 55(b) is close to (or exceeds) the individual's regular tax.

Some individuals have Large amounts of MTC, frequently caused by AMT resulting from the exercise in past years of incentive stock options (ISOs). Many of those taxpayers exercised their ISOs and paid significant AMT in the year of exercise but were caught in the "tech bust" of the early 2000s and saw the value of the exercised shares plummet so quickly that they were lucky to receive enough in the shares' sale proceeds to cover the previous year's AMT. Given the nonrefundable nature of the MTC and the limitations of Sec. 53(c), many of these individuals are unlikely to recoup much of the MTC during their lifetimes.

In December 2006, Congress added Sec. 53(e) to address this situation. New Sec. 53(e)(4) states that the MTC allowed under Sec. 53(e) "shall be treated as if it were allowed under subpart C" which refers to the refundable credits of Secs. 31-36. Thus, MTC generated by Sec. 53(e) is refundable, even when it exceeds the taxpayer's liability. Many individuals will begin in 2007 to draw down a portion of the accumulated unused MTC, but in many cases planning will be needed if they are to maximize the amount of refunds allowed by this new provision.

The New Rules

The changes cover tax years beginning after December 20, 2006, but before January 1, 2013. Taxpayers who have long-term unused MTC are entitled to an MTC equal to the greater of the AMT refundable credit amount or the amount of allowable MTC under the preexisting Sec. 53(c) limitations, but subject to important adjusted gross income (AGI) phaseouts. "Long-term unused MTC" is defined as unused MTC from tax years before the third tax year immediately preceding the tax year in which the credit is taken. The "AMT refundable credit amount" is equal to the greater of (1) the lesser of $5,000 or the amount of long-term unused MTC for the tax year or (2) 20% of the amount of long-term unused MTC. The exhibit above summarizes these provisions.

Exhibit: New refundable MTC rules If long-term...