An alternative minimum tax bill might be rather large if incentive stock options (ISO) were exercised in the previous several years. If you decide to sell your shares after the calendar year you received the ISO, you will owe the AMT. To determine your AMT liability, subtract the exercise price from the shares' fair market value (FMV) on the day of exercise.

The Alternative Minimum Tax Credit

No one likes paying tax on a stock purchase, but the AMT credit is a welcome part of the tax code. This AMT credit is automatically applied when you pay your AMT charge. If your tax liability is more than it would have been without the AMT, you can use that credit toward paying it.

That's because a credit reduces your tax bill dollar for dollar, but a deduction reduces the income subject to tax. This provision is Congress's attempt to compensate investors for the tax hit they took when they cashed in their ISOs.

But, the "refundable" status of unused AMT credits enjoyed by investor-taxpayers from 2007-2012 is no longer an option. Investor-taxpayers who discovered that the AMT credit did not considerably reduce their federal income tax payment can now take advantage of this tax benefit established in 2007.

These revisions to the tax code were initially enacted by Congress in 2007 and then revised in 2008. 4 Nevertheless, Congress did not vote to renew the refundable AMT credit at the end of 2012, meaning taxpayers had just one more chance to take advantage of it in the 2012 tax year. 5

Knowing The Basics of Tax Refundable AMT Credits

Those who exercised ISOs and were subject to the AMT were intended beneficiaries of changes to the tax legislation that took effect in 2007. As a result of these alterations, the Internal Revenue Service now considers unused AMT credits that are at least three years old to be "refundable" (IRS). 6 So, filers might use the deductions to:

• decrease their existing AMT payment
• reduce their tax liability to the federal government by the same amount.
• perpetually bank-eligible refundable credits.
• Request a cash refund from the IRS for any unused tax credits

On 2007 tax returns based on income generated in 2006, whichever was more extensive. The IRS, however, imposed income restrictions that reduced the benefit available to those with higher incomes. 7 In 2008, Congress passed a statute to expand the scope of what qualifies as a refund. 8

How To Figure Out Your AMT Refund

Those who have already cashed in ISOs can determine whether or not they are eligible for a refundable AMT credit by filling out the 1040 Form worksheet for Form 6251, visiting an accountant, or utilizing the IRS's online AMT Assistance.

The 2008 amendments did not restrict taxpayers' ability to claim a credit to the full extent of their income tax liability. This implies that they may receive more in AMT credits than they owed in taxes, whether from previous years' withholding, quarterly anticipated tax payments or the most recent tax bill.

Starting with 2008 tax returns, taxpayers may take advantage of whatever was more extraordinary: the amount of refundable AMT credit from the previous year's 1040 or 50% of any long-term unused credit accrued three years or more before the filing year.

When Do ISOs Cause Automatic Matching Tax?

If any of the many criteria are satisfied, taxpayers will be subject to AMT when they cash their ISOs. Examples of such situations include but are not limited to realizing a sizable capital gain or exercising stock options that carry a sizable paper gain, both of which would result in a much higher after-tax income for the family as a whole.

When Does AMT Become Applicable?

The AMT adjusts annually with inflation. The AMT exemption for 2022 started at $75,900 and decreased gradually, starting at $539,900. The AMT exemption for 2023 started at $81,300 and decreased gradually, starting at $578,150. If you're filing your taxes as a married couple, you get a more extensive AMT exemption.

Conclusion

Some taxpayers could pay their AMT charge, recover the money they had already spent on their AMT bill, and pay their federal income tax bills thanks to the refundable AMT credit provision, which was in place for six years from 2007 to 2012. Consult a tax preparer or attorney to be sure you're taking advantage of all deductions and credits available to you under the law going ahead.