Confused about AMT

So this year I think I need to file AMT. (UK/US dual citizen, fully resident and work in UK full time, no time in US).

I have filled out a normal 1116, and tried to follow the instructions for the AMT 1116. However, the normal 1116 reduces the standard taxes down to 0, but the AMT 1116 gives me AMTFTC that mostly reduces the AMT, but not to 0.

So figuring this, I end up owing tax. But I have a huge amount of UK tax paid that following the calculations is left over and I cannot apply (because for the AMTFTC you are adding back the standard deduction to be taxed on).

Is this right? Is there a way to get around owing any tax to the US, as I have a tonne of tax paid to the UK that I cannot use now to offset my US tax to 0, but this seems wrong to me.

Any help appreciated.

So figuring this, I end up owing tax. But I have a huge amount of UK tax paid that following the calculations is left over and I cannot apply (because for the AMTFTC you are adding back the standard deduction to be taxed on).

Is this right? Is there a way to get around owing any tax to the US, as I have a tonne of tax paid to the UK that I cannot use now to offset my US tax to 0, but this seems wrong to me.

One often hears the phrase "FEIE and FTC prevents double taxation". This is false. It should say "Generally, but not always, FEIE and FTC prevents double taxation". You may have a 'not always' situation. Double taxation can occur.

You are correct; AMT does not allow the standard deduction.

Are you are using tax software (TurboTax, etc.)? If so, I can't offer any advice. If not, have you used an FTC basket for all foreign sourced income for both regular and AMT? Do you have additional US sourced assets?

AMT is far too complicated for me to comment further concerning your circumstances, or the need to file AMT, but you may suffering from the 'limitation' imposed by 1116AMT (combination of lines 17, 18, 19, and 20). It is not uncommon given the right circumstances.

Thanks for the reply, theOAP.

All my income is foreign source. My wife has a small amount as a sole trader. So the income is split between her Schedule C income and my gross PAYE UK income (with employer's pension contributions added). I also have some interest from a bank, about $90 for the year (UK bank), of which no foreign tax is paid. I have no other income, no US income, no capital gains etc.

For the $90 interest, I pay no UK tax. So this means it is passive income and I do not file a 1116 for it as have no credit to claim. I file a 1116 on the gross total income that is general category income. Taking my UK taxes for the year (US tax year not UK tax year), I file this on the 1116 and end up with a surplus as UK tax is higher. I have carry over I could use as well from previous year. However, I cannot reduce my tax obligation by 100%, as I have no credit to apply to the $90 interest, so the credit I can take is something like 0.9995 x total income, meaning I end up owing about $10 tax.

Now however I file AMT and I have an amount, say for a made-up example, $10,000 that is my tentative minimum tax. I work through another 1116 labelled "AMT 1116" to work out the AMTFTC. FOllowing the instructions, I have to make the line 18 be my total income + the standard deduction of around $22k, unlike the normal 1116. Therefore, when I figure the ratio of what I can apply with my FTC, it is something like 0.8. So if I multiple the $10k TMT by 0.8 to get the credit I can use, in this example that is $8000. So I end up with $10,000 (TMT) - $8000 (AMTFTC) = $2000.

So I have offset my general income by all the tax owed, I owe $10 for interest, and then I have offset 85% of my AMT meaning I have $2000 I cannot seem to apply any credit to. Therefore, I would owe in this example, $2010.

Yes I have >$10,000 tax paid to the UK that I have not used at all.  This seems silly.

It also makes me wonder if is possible to elect NOT to take the "standard deduction". If I did this, I would actually be able to cover all of this tax with my foreign tax credits, as in my standard 1116 I would not be taking any deduction into account and likewise in the AMT1116 the total I would be using to determine the ratio I can apply of FTC against the TMT would be closer to 1.

Can you elect to NOT take the standard deduction? There is no downside to me - I would just take less UK tax credit over to the following years. Or do you HAVE to apply a deduction?

Many thanks in advance.

With MFJ and Sch. C, you've gone way beyond my knowledge level for AMT.

For the $90 interest, I pay no UK tax. So this means it is passive income and I do not file a 1116 for it as have no credit to claim. I file a 1116 on the gross total income that is general category income. Taking my UK taxes for the year (US tax year not UK tax year), I file this on the 1116 and end up with a surplus as UK tax is higher. I have carry over I could use as well from previous year. However, I cannot reduce my tax obligation by 100%, as I have no credit to apply to the $90 interest, so the credit I can take is something like 0.9995 x total income, meaning I end up owing about $10 tax.

This all sounds correct and would be what one would expect.

FOllowing the instructions, I have to make the line 18 be my total income + the standard deduction of around $22k, unlike the normal 1116.  Therefore, when I figure the ratio of what I can apply with my FTC, it is something like 0.8.

The std. deduct is added (line 2?) to form 6251AMT, but it is not allowed in the 1116 Part 1 calculations (line 3a), increasing the amount on line 17; so in terms of the ratio for lines 17 and 18 of 1116, it should balance out.

If you have correctly not included the std. deduct in Part 1, 1116AMT, and have used the proper figure for line 18, 1116AMT, and still end up with the 0.8 on line 19, 1116AMT, then I have no further thoughts other than that's why AMT is so unpopular.

Can you elect to NOT take the standard deduction?

You can always take itemized deductions but you must use the result on all forms throughout the return. For both 6251 and 1116AMT, the itemized deductions are treated much the same as the std. deduct; tax for Itemized deducts are added on line 2 on 6251 and various amounts for Itemized deducts are disallowed on line 3a, Part 1, 1116AMT.

Sorry not to be of more help but with the recent election of the 'simplified limitation' method vs. the standard way to calculate AMTFTC, I'm not the best source for answers.

Aha, I think you have discovered where I am going wrong. I read this:

Step 2. Complete Part I of each AMT
Form 1116 using only income and
deductions that are allowed for the AMT
and attributable to sources outside the
United States.

...in the 6251 instructions and did not twig that I should not include the standard deduction on line 3a of 1116.

So if I don't include the standard deduction in Part I of the AMT1116 as you say, this should balance out...?

Many thanks for your help, will give this a go.

One more question on the AMT1116 (sorry) - where do I deduct my FTC already used on my normal 1116? Would this be on line 12 of the AMT1116 ("reduction in foreign taxes")? I must have to account for the FTC already taken on standard tax, right?

Many thanks

So if I don't include the standard deduction in Part I of the AMT1116 as you say, this should balance out...?

It will certainly improve your results for lines 19, 20, and 21.

The instructions were much more informative in the past, specifically saying it's '0' for 3a for std. deduct on 1116AMT. I suppose for the 90% of taxpayers who now use TurboTax, knowledge is not needed.

One more question on the AMT1116 (sorry) - where do I deduct my FTC already used on my normal 1116?

No where, if you are using the normal method for figuring AMTFTC.

For most expats, line 12 relates to the tax excluded by the use of 2555 FEIE.

I believe, but I could be wrong, If opting for the 'simplified limitation election', you use the 1116 FTC amount from the 'normal' 1116 on form 6251 only, and avoid the need to complete a 1116AMT. Warning: using the simplified limitation (as usual) comes with restrictive rules for all future returns. I've never used it and know very little about it.

No where, if you are using the normal method for figuring AMTFTC.

For most expats, line 12 relates to the tax excluded by the use of 2555 FEIE.

I believe, but I could be wrong, If opting for the 'simplified limitation election', you use the 1116 FTC amount from the 'normal' 1116 on form 6251 only, and avoid the need to complete a 1116AMT. Warning: using the simplified limitation (as usual) comes with restrictive rules for all future returns. I've never used it and know very little about it.

Thanks again - I agree about caution with simplified methods and associated warnings on the instructions about being limited to these unless IRS give permission to change!

I don't understand why you would not somewhere exclude FTCs already used. To me this risks double use of FTC. However, it is not obvious where to use it. I suppose you attach a calculation and explanation with your worksheet that sums the 1116 FTCs and the AMT1116 FTCs and shows carry over of the difference in foreign tax and the sum of these 2 figures?

For example, if I had $30,000 foreign tax paid, and my normal US tax was $15,000, this would be offset against the $30,000 tax paid. So my normal 1116 would use $15,000 of the $30,000 I paid as a credit. I would then fill out the AMT1116 but write in $30,000 as my foreign tax paid. Then if my AMT was $7,000, I would apply this against my foreign tax paid ($30,000) and use the AMTFTC. Then in an attached statement, I would write that I have $30,000 - $15,000 - $7,000 = $8,000 surplus credit to carry forward?

This seems to be as you say, how the form suggests you would fill it, but seems a bit strange to me. It doesn't see m obvious how you would easily figure if your 1116 + AMT1116 would exceed your actual foreign tax paid and you could end up using double credits.

Cheers

First, thank you for your examples. They have helped greatly to clarify your questions.

I don't understand why you would not somewhere exclude FTCs already used. To me this risks double use of FTC.

You are making the assumption that normal taxation and AMT taxation are one continuous, cumulative system of taxation. That is not the case. They are two completely different systems, and if you include NIIT, there could be at least three systems.

Normal taxation starts with a 1040, identifies income, allows a series of deductions and exemptions that reduces that income, and comes up with an amount of tax due. That's the first system of taxation. AMT starts by utilising the same 1040, up to a point. It doesn't require a second 1040 since, up to that point, the two would be duplications. (How kind of the IRS.) Beyond that point, AMT disallows some normal deductions, exemptions, and special allowances like the intangible drilling costs for all your oil wells. It then computes the tax due, at different AMT rates. That's the second different, totally unique system, independent from the first, normal system. IF the AMT amount of tax due is higher than the normal tax due, the AMT tax amount is entered, via 6251 and 1116AMT, on Schedule 2, line1, and onwards to the 1040, line 12b, and the figure on 12b is used for further calculations.

So, 2 different systems using FTC, but it's 2 different computations of FTC. Therefore the FTC is not continuous or cumulative. Each set of FTC is unique to each system. (Hope I've not made that too incomprehensible.)

First, thank you for your examples. They have helped greatly to clarify your questions.

You are making the assumption that normal taxation and AMT taxation are one continuous, cumulative system of taxation. That is not the case. They are two completely different systems, and if you include NIIT, there could be at least three systems.

Normal taxation starts with a 1040, identifies income, allows a series of deductions and exemptions that reduces that income, and comes up with an amount of tax due. That's the first system of taxation. AMT starts by utilising the same 1040, up to a point. It doesn't require a second 1040 since, up to that point, the two would be duplications. (How kind of the IRS.) Beyond that point, AMT disallows some normal deductions, exemptions, and special allowances like the intangible drilling costs for all your oil wells. It then computes the tax due, at different AMT rates. That's the second different, totally unique system, independent from the first, normal system. IF the AMT amount of tax due is higher than the normal tax due, the AMT tax amount is entered, via 6251 and 1116AMT, on Schedule 2, line1, and onwards to the 1040, line 12b, and the figure on 12b is used for further calculations.

So, 2 different systems using FTC, but it's 2 different computations of FTC. Therefore the FTC is not continuous or cumulative. Each set of FTC is unique to each system. (Hope I've not made that too incomprehensible.)

Thanks theOAP, very helpful. This is how I understood AMT to be - an alternative to the normal tax, where you pay the higher amount. However the way it was making me figure this by having foreign source income meant it appeared to me to be an additional tax amount. This is because on the Line 10 of 6251 you subtract your FTCs; if you had US source income you would not do this and if your normal tax was higher, this would cancel out the AMT if it was lower.

So this makes much more sense now why I use the full foreign taxes paid for AMT1116, not that with the normal FTC removed.

Thanks again, very helpful and learning a lot about this complex system!!