Significant Change for Alternative Minimum Tax Calculations -
Effective 2005 and Subsequent Years:
The American Jobs Creation Act, passed on October 22, 2004 includes a major change to the way in which the Alternative Minimum Tax liability is calculated.
Under present law, taxpayers are subject to an alternative minimum tax (''AMT''), which is payable,
in addition to all other tax liabilities, to the extent that it exceeds the taxpayer's regular income tax liability.
A foreign tax credit (FTC) may be claimed by individuals or corporations
against the alternative minimum tax (AMT). The AMT foreign tax credit (AMT-FTC) is limited to the foreign tax paid on foreign source alternative minimum taxable income (AMTI). Foreign source AMTI is gross
income from foreign sources minus deductions used in computing the AMTI of the foreign source income. Therefore, the AMT-FTC limit is determined by multiplying the pre-credit tentative minimum tax by the following
fraction:
Tentative minimum tax before FTC ´ Foreign source AMT income
_____________________________
In tax years beginning before January 1, 2005, the AMT foreign tax credit is limited to 90 percent of AMT before the foreign tax credit,
without regard to the alternative tax net operating loss deduction and the intangible drilling cost exception for independent producers. The
90-percent limitation applies regardless of the provisions of a tax treaty.
Because of this limitation, a taxpayer must pay some U.S. tax even if all AMT income is from
foreign sources, such as is the case with U.S. citizens living and working in Canada. In the typical situation, a U.S. citizen living and working in Canada claims a foreign earned income exclusion, and then a
foreign tax credit for income in excess of the excluded amount. AMT typically begins to appear at income levels over approximately $CDN 120,000.
Effective for the 2005 and future tax years, the 90-percent limitation is repealed, allowing
for a complete elimination of AMT for many taxpayers.
This new provision should significantly benefit individuals who are US
citizens or green-card holders with little or no US source income and who have accumulated excess AMT foreign tax credits because of the 90% limitation.
The planned changes to the foreign tax credit system, effective for 2006 tax years, should also assist in reducing or eliminating U.S. tax liability for expatriates.
Related Links:
U.S. Citizens Still Must File - Even If you have no tax liability.
Tax Treatment of Americans in Canada.
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