US persons are taxed on their worldwide income, but are allowed a foreign tax credit (FTC) for foreign taxes paid. In most cases, the FTC gives taxpayers a dollar-for-dollar credit against their US tax liability.
However, the FTC may be limited for Alternative Minimum Tax (AMT) purposes in order to ensure that a taxpayer’s US liability is only reduced on foreign-source income. This article will briefly examine some of the basic elements of the Alternative Minimum Tax Foreign Tax Credit (AMTFTC).
Alternative Minimum Tax Foreign Tax Credit Calculation
The AMT for individuals in calculated on Form 6251. Taxpayers who need to determine whether they will have an AMTFTC, will first need to calculate their foreign tax credit for their regular tax. Once this is done, line 34 of the form should be filled in, and if the amount on this line is greater than or equal to the amount on line 31 (see IRS instructions for specifics), then a zero would be entered on line 35 (the AMT line), and the instructions should be reviewed to determine whether the form will need to be attached to the tax return. If the AMT is not owed, line 32 of the form will still need to be filled in, in order to determine whether a taxpayer has an AMTFTC carryback or carryforward.
If the AMT is owed, the FTC may be limited by IRS rules. In general, for purposes of calculating the AMTFTC limitation, foreign-source AMT income (AMTI) is divided by total AMTI. This amount is then multiplied by the tentative minimum tax (and not the regular tax). This calculation must be determined for each separate basket type of income (i.e. general and passive income). FTCs that are not used because of the AMTFTC may be carried forward.
Taxpayers may elect to use regular foreign-source income in the numerator of this equation, provided that it does not exceed total AMTI.
Contact Sherayzen Law Office For Tax Help With Determining AMT, FTC and AMTFTC
Determing your Foreign Tax Credit and Alternative Minumum Tax can involve complex issues and this article only attempts to provide a very general background information that should not be relied upon in making the determination of your specific situation. Rather, you should contact Sherayzen Law Office for legal help with this issue. Our tax firm will help you determine your AMT, FTC and AMTFTC for the relevant tax years as well as provide sound tax planning for the future.