The alternative minimum tax only applies in a tax year to the extent it exceeds your regular tax liability. If your situation reverses in the future, so that your regular tax liability exceeds the alternative minimum tax amount, you may get a credit for some or all of that extra alternative minimum tax. As explained below, this “minimum tax credit” is available to the extent the alternative minimum tax you paid this year was caused by “deferral preferences.” (Remember, the alternative minimum tax is imposed on your regular taxable income as adjusted to take away certain deductions and tax benefits known as adjustments or “preferences.” Please let me know if you'd like more information on how the alternative minimum tax is determined.) There are two types of adjustments made to regular taxable income for alternative minimum tax purposes:

“Deferral ” preferences. These are preference items and other adjustments relating to the timing of the applicable tax treatment. For example, the adjustment requiring you to depreciate certain property more slowly for alternative minimum tax purposes is a deferral preference. That is, you will eventually be allowed the same total of depreciation deductions under the alternative minimum tax rules, but the deductions will just be spread out more slowly.

“Exclusion” preferences. These, on the other hand, are deductions or other tax benefits that are simply taken away entirely—not just deferred—for alternative minimum tax purposes. These include personal and dependency exemptions, certain itemized deductions (like your deduction for state taxes), and tax-exempt income from certain types of investments.

To arrive at the minimum tax credit available to you, you must determine how much of the alternative minimum tax liability was caused by deferral preferences. To do this, determine what your alternative minimum tax liability would have been if the only adjustments you had to make were for the exclusion items. To the extent your actual alternative minimum tax liability was higher with the deferral preferences, the minimum credit is established. You can then use the credit in later years to the extent your regular tax liability is greater than the alternative minimum tax liability.

Example. In Year 1, the taxpayer's regular tax liability was $10,000 but his alternative minimum tax liability was $18,000, so he had to pay an extra $8,000 for alternative minimum tax. Say that without his deferral preferences, the alternative minimum tax liability would have been just $13,000, so that only an extra $3,000 would have been owed. Thus, the deferral preferences resulted in $5,000 of additional alternative minimum tax liability and this $5,000 is the amount of the minimum credit.

In year 2, the taxpayer's regular tax liability is $15,000 and his liability under the alternative minimum tax would be just $12,000, i.e., the alternative minimum tax amount is $3,000 less. Accordingly, in Year 2, the taxpayer can use $3,000 of his minimum credit from Year 1 to reduce his regular tax liability. The remaining $2,000 of credit continues to be carried forward until it can be similarly used.

As a general rule, the minimum tax credit can't give you a tax refund. However, credits that haven't been used after three tax years are partially refundable, subject to a phase-out based on the taxpayer's adjusted gross income.