If you exercised incentive stock options (ISO) in the last several years, you may have been hit with a hefty 澳洲幸运5官方开奖结果体彩网:alternative minimum tax (AMT) bill.

The AMT is charged when you exercise your ISO, hold on to your shares, and sell them after the 澳洲幸运5官方开奖结果体彩网:calendar year in which they were awarded to you.

The AMT is calculated based on the difference between the 澳洲幸运5官方开奖结果体彩网:fair market value (FMV) of the shares on the date that you exercised the option and the 澳洲幸运5官方开奖结果体彩网:exercise price.

But a tax law provision allows taxpayers to offset the AMT tax that they incur when exercising their ISOs. For a few years, the refundable AMT credit made unused AMT credits refundable. Here's how.

The AMT Credit

While no one likes to pay tax on a stock transaction, there is a tax law provision called the AMT credit that benefits taxpayers. The credit is a way for stockholders tಌo offset the tax that they incur when exercising their ISOs.

When you pay your AMT bill, the AMT credit is automatically triggered. It can be used to lower your federal 澳洲幸运5官方开奖结果体彩网:income tax bill when the amount you owe on taxes is more than what it 🌊would﷽ have been under the AMT.

That's because, unlike a 澳洲幸运5官方开奖结果体彩网:deduction that lowers the total amount of income on which you are taxed, a credit lowers your actual tax bill dollar-for-dollar.

The Refundable AMT Credit

No longer available, however, is the tax benefit available to investors from 2007 to 2012, which made their unused AMT credits 澳洲幸运5官方开奖结果体彩网:refundable. 

This tax benefit was instituted in 2007 to help investors who found that the AMT credit did not significantly lower their federal income tax bill. Congress passed🌼 these tax law changes in 2007 and then amended them again in 2008.𝕴

However, the refundable AMT credit was not extended at the end of 2012.

Understanding Refundable AMT Tax Credits

Here is how the refundable AMT tax credit usཧed to work.

The tax law changes that took effect in 2007 were designed to help people who exercised their ISOs and✱ had to☂ pay the AMT.

As a result, the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS) deemed unused AMT credits that were at least three years old (sometimes referred to as "long-term unused AMT credits") to be refundable. That meant that taxpayers could claim those credits to✨:

• Reduce their current AMT bill
• Lower their current federal income tax bill dollar-for-dollar
• Carry qualified refundable credits over indefinitely (applying them to subsequent income tax bills)
• Collect leftover credits as a cash payment from the IRS

The law that went into effect in 2007 (for taxes paid in 2007 on 2006 earned income) permitted people to claim the greater amount of either 20% of their long-term unused AMT credit or $5,000. However, the IRS also put income limits in place to reduce the amount of credit that higher-income earners could claim.

Congress amended the law for 2008 by increasing the amount considered refundable.

Calculating the AMT Credit

People who had exercised ISOs in the past could calculate their potential refundable AMT credit by using the 澳洲幸运5官方开奖结果体彩网:1040 Form worksheet for 澳洲幸运5官方开奖结果体彩网:Form 6251 (line 45), talking to a tax filing professional, consulting with an 澳洲幸运5官方开奖结果体彩网:accountant, or using the IRS's online AMT Assistant.

Changes implemented in 2008 did not limit a taxpayer's credit to the total amount of income tax owed. Therefore, they could claim AMT credits that totaled more than the amount of money that was withheld for taxes, already paid in quarterly 澳洲幸运5官方开奖结果体彩网:estimated tax, or that was owed on the current tax bill.

Effective in 2008 (for taxes paid in 2009 on 2008 earned income), taxpayers could claim the greater amount of 50% of long-term unused credit accumulated three years or more prior to the filing year or the amount of refundable AMT credit listed on the previous year's 1040 form.

Example

Let's say you had earned $80,000 in AMT credit in 2004 and none in subsequent years; you could have claimed $40,000 (50% of the qualified unused credit) when filing your 2010 taxes in April 2011.

To coll𓆏ect your ღrefundable credit of $40,000, you would have needed to complete and send IRS Form 8801 to the IRS along with their 1040 Form.

However, let's say that you owed $11,425 in 澳洲幸运5官方开奖结果体彩网:federal income taxes for filing year 2009. When the IRS received your Form 8801 (to claim your refundable credit of $40,000) it would have first deducted the amount you owed ($11,425) and then mailed you a check for the difference: $28,575.

As a taxpayer, you would have been able to use the refundable credit to pay your federal income tax bill and receive a cash refund.

What's more, in 2011 you would have been able to claim $40,000 in refundable credit—the balance remaining from the 2008 refundable credit amount. You could have collected that remaining credit when submitting Form 1040 for 2010 taxes.

Unfortunately, for taxpayers who could have continued to benefit, the refundable AMT credit provision was only available for six years (2007-2012) and Congress d🌞id not extend it or make it permaneꦇnt.

The Bottom Line

From 2007 to 2012, the refundable AMT credit prღovision helped some taxpayers pay their AMT bill, recoup the money they paid out on their AMT bill, and pay their federal i🅘ncome tax bills.

Going forward, you may want to work with a professional tax preparer or tax attorney to ensure that you're correctly claiming credits (and deductions) to maximize your tax benefits, according to current tax laws.