The Alternative Minimum Tax (AMT) credit available to you this year will depend on the AMT you paid in prior years and the AMT you calculate for this year. If this sounds complicated, that's because it is. Follow these simple steps to understand how to claim your AMT benefit this year.
Step 1: Review your Prior Tax Forms
To be eligible for an AMT credit, you must pay the AMT in at least one tax year. The AMT was developed in 1969 to prevent individuals with very high income from reducing their tax to a low amount by built-in deductions. Today, the AMT may apply to even middle income individuals. It is a formula to determine the "minimum" you will have to pay given the income your receive in a given year. If your taxable regular income is lower than the income calculated for your AMT, you will have to pay the AMT amount. The good news is: by paying the AMT, you receive a credit for future use.
Step 2: Fill out Form 8801
Form 8801, Credit for Prior Year Minimum Tax-Individuals, Estates and Trusts, calculates how much AMT you paid beyond your regular taxes in a given tax year. For example, if your regular income was $50,000 but your AMT income was $54,000, you paid on an additional $4,000 due to the AMT regulation. This would give you $4,000 in income to report on future AMT credit forms. Keep this figure in mind as you move forward.
Step 3: Determine if you are Eligible this Year
The regular rule allows you to claim AMT credit in the year following the year you paid the AMT. However, there may be some exceptions. If you are not permitted to claim the credit this year, you will likely have been alerted to the reason and know you must wait.
Step 4: Determine How Much Credit You May Use
This year, you must again determine your regular taxable income and your AMT. If your AMT is actually lower than your regular income this year, you may be eligible to claim your credit in part or in full. You can only claim as much as the difference between your two incomes (regular and AMT) or your credit limit, whichever is lower. In our previous example, you have a credit on $4,000 worth of income. If you have an income of $56,000 this year and your AMT is $55,000, you can claim $1,000 of your AMT credit. You would still have $3,000 of credit remaining for future use.
Step 5: Claim the Credit
You will claim the credit on Line 54 of IRS Form 1040. You must also check a box showing you have filled out and filed Form 8801. This will reduce the tax you owe in the current year, and you can pay accordingly. In addition, you should be aware of any credit you have remaining according to Form 8801. Continue to calculate your AMT every year to see if you can claim that credit again in the future.