The alternative minimum tax credit is Congress's way of refunding to you in a later year a tax you were forced to pay due to "timing preferences," that is, a tax the alternative minimum tax forces you to pay sooner rather than later.
The credit stems from the fact that the alternative minimum tax attacks two different kinds of tax benefits: those that defer your tax liability, such as accelerated depreciation and the bargain element of incentive stock options, and those that eliminate part of your tax bill completely, such as itemized deductions.
There is a catch, however. The AMT credit can be used only in a year you are not subject to the AMT. If you find yourself facing the alternative minimum tax year after year, the credit will be of no use. Also, no part of the credit can be used to pull your regular tax liability below the alternative minimum tax liability in a future year. Remember, reducing the regular tax bill below the alternative minimum tax obligation would toss you back into the alternative minimum tax quagmire. Any unused part of the alternative minimum tax credit can be carried forward to future years, however, when you have regular tax to offset.
Before the introduction of the alternative minimum tax credit, year-end planning for the alternative minimum tax was relatively straightforward.
Conventional wisdom called for standing the standard year-end strategy on its head. Rather than accelerating deductible expenses, for example, you would have wanted to push them into the future. Not only would that have preserved the tax-saving power of itemized deductions, which is ignored by the alternative minimum tax, but even write-offs that counted for alternative minimum tax would have been worth more when you were subject to the higher regular tax rate than in a year you were subject to the lower AMT rate.
On the other side of the coin, the AMT encouraged accelerating income rather than putting it off. After all, realizing $100,000 in extra taxable income in a year you were subject to the lower alternative minimum tax would cost less in tax than if the income were assesed the higher regular tax rate. When boosting taxable income, you had to be careful, though, not to push the regular tax bill above the alternative minimum tax levy. Doing so would have backfired by pulling you out of the alternative minimum tax and subjecting income to regular tax rates.
The AMT credit does not alter that strategy for the four preference items that do not give rise to the credit. If you are subject to the alternative minimum tax, for example, try to minimize expenses that are itemized deductions disallowed by the AMT. Otherwise, you lose forever the regular tax benefit of writing off untaxed appreciation.
But things are trickier when it comes to other items. Accelerating income may not save you money at all, despite the advantage of the 26% or 28% rate over your regular tax bracket, but only accelerate your payment of taxes. Why? Because taking extra income in an alternative minimum tax year can result in reducing the alternative minimum tax credit available in future years.
When blending the alternative minimum tax credit into your tax planning, remember that it is available only in years you are subject to the regular tax.