The alternative minimum tax (AMT) credit is a dollar-for-dollar reduction for any additional taxes you have paid in previous years due to the alternative minimum tax.
If you exercised incentive stock options (ISOs) and paid AMT in prior years, you may be able to reduce your tax bill this year due to the credit.
How do I claim the AMT credit?
The AMT is similar to a rebate system where you pay upfront and get a portion of that back in the future. Think of the AMT credit as a refund on taxes you paid in prior years.
You or your equity strategist need to make sure to keep track of the AMT credit every year going forward to ensure that you get your money back.
- Review your tax returns from the year you exercised stock options to determine if you paid the AMT.
- Review your prior year tax returns to determine if you claimed the AMT credit in any previous year and determine if you have a credit leftover for this year.
- Claim the AMT credit while filing your current year tax return by filling out Form 8801 and filing it along with your tax return.
- Carry forward and track the remaining credit you were not allowed to use in the current year.
Are there limitations on the AMT credit?
Unfortunately, the AMT credit is not as simple as paying the tax in year one and claiming a refund of the entire amount in year two.
Instead, the amount of AMT credit you can take in a given year is limited to the amount that your regular tax liability exceeds your AMT calculation in that given year.
Given the limitation, it may take you years to recover the AMT credit depending on how big the initial bill was. But don’t worry too much — if your company has a successful exit, you should be able to recover the rest of the AMT credit in the year you sell your shares.
It’s worth noting that this limitation also means that you cannot claim any AMT credit in a year that you generate the AMT, so you must plan your stock option exercises accordingly to ensure that you maximize your benefit.