The Relationship Between AMT Liability and AMT Credit

Hi everyone. My name is Tan and I am an independent Certified Financial Planner Practitioner at TAN Wealth Management. In today’s educational video, I want to share with you what happens when we add a Federal AMT credit of $100,000 and a California AMT credit of $20,000 to the scenarios from the previous video.

Luna Phan
Single
California resident
Federal’s standard deduction is $12,950
California's standard deduction for state income taxes is $5,202

Scenario 6
Salary of $100,000
Available Credit for Prior Year AMT of $100,000 for Federal
Available Credit for Prior Year AMT of $20,000 for California
Federal AMT liability is $0
Federal Credit Applied: $8,502
Total Federal Tax is $6,266
California AMT liability is $0
California Credit Applied: $4,348 Total California Tax is $1,082

Scenario 7
Salary of $100,000
Available Credit for Prior Year AMT of $100,000 for Federal
Available Credit for Prior Year AMT of $20,000 for California
Bargain element of $300,000
Federal AMT liability is $71,858
Federal Credit Applied: $0
Total Federal Tax is $86,626
California AMT liability is $17,963
California Credit Applied: $0
Total California Tax is $23,393

What did we learn from scenario 6 and scenario 7?
● We cannot use the AMT credit if we are subject to AMT liability.
● In scenario 6, we were able to applied the AMT credits. In scenario 7, we cannot apply the AMT credits because of the bargain element of $300,000.

Let’s go back to scenario 1 from video 45. [thumbnail of video 45] Scenario 1: Salary of $100,000 Federal AMT liability is $0 Total Federal Tax is $14,768 California AMT liability is $0 Total California Tax is $5,430

What did we learn from scenario 1 and scenario 7?
● The total federal tax includes the regular federal tax liability and the federal AMT liability. From scenario 7, the total federal tax of $86,626 minus the federal AMT liability of $71,858 equals $14,768.
● The total California tax includes the regular California tax liability and the California AMT liability. From scenario 7, the total California tax of $23,393 minus the California AMT liability of $17,963 equals $5,430.

Scenario 8
Salary of $500,000
Available Credit for Prior Year AMT of $100,000 for Federal
Available Credit for Prior Year AMT of $20,000 for California
Bargain element of $300,000
Federal AMT liability is $72,613
Federal Credit Applied: $0
Total Federal Tax is $219,533
California AMT liability is $10,784
California Credit Applied: $0
Total California Tax is $56,000

Scenario 9
Salary of $1,000,000
Available Credit for Prior Year AMT of $100,000 for Federal
Available Credit for Prior Year AMT of $20,000 for California
Bargain element of $300,000
Federal AMT liability is $31,715
Federal Credit Applied: $0
Total Federal Tax is $367,078
California AMT liability is $0
California Credit Applied: $13,891
Total California Tax is $91,000

Scenario 10
Salary of $1,500,000
Available Credit for Prior Year AMT of $100,000 for Federal
Available Credit for Prior Year AMT of $20,000 for California
Bargain element of $300,000
Federal AMT liability is $0
Federal Credit Applied: $13,285
Total Federal Tax is $511,578
California AMT liability is $0
California Credit Applied: $20,000
Total California Tax is $151,339

What did we learn from scenario 8, scenario 9, and scenario 10?
● For us to use the AMT credit when we have a bargain element, our regular tax liability has to be higher than our AMT liability.
● We cannot use any AMT credits in scenario 8 because our AMT liability is higher than our regular tax liability. The Total Federal Tax of $219,533 is higher than the Federal AMT liability of $72,613. The Total California Tax of $56,000 is higher than the California AMT liability of $10,784.
● We were able to use the AMT credits in Scenario 10 because our regular tax liability is higher than our AMT liability even though we had a bargain element of $300,000.

Please note that this material is for educational use only and it’s subject to change. Tax laws are complex, there are exceptions to the rules, and it’s constantly changing. Be sure to talk to a qualified professional before making an informed decision. Thank you for watching. Until next time. This is Tan, your Trusted Advisor.