Bitten by AMT if you take the Foreign tax Credit

Hi all,

Has anyone else found that you can get bitten by AMT if you take the Foreign Tax Credit (form 1116)? I was planning on taking the FTC instead of the 80k exclusion until I hit the AMT section, and found I'd have to fill in the AMT form 6251, and then found I'd have to pay 10% of the AMT tax - even though all of my income was already taxed in the UK (whatever happened to avoiding double tax?). Has anyone else come across this, or have I made a right royal mess of the AMT form?

It might seem mad to want to take the FTC instead of the exclusion, but there was reason in my madness. In a few years I expect (hope?) to have a big income dump ($500k) of capital gains (stock) taxed at a low 10% rate in the UK. Since the US tax rate for that is likely to be higher (up to 28% as I understand it, tapering down to 25,15,5 over time), I wanted to accumulate as much FTC carryover as possible - whilst still not getting double-taxed, though. The FTC seemed the right way to go about this. It worked really well in 2003 as I had enough US income & tax paid to avoid having to file the AMT, but this year its all UK income & UK tax. And this year the AMT has reared its ugly head...

I scanned the postings already but couldn't find any address of AMT on FTC - except a brief blurb by Helen in April last year on AMT in general. This forum (and the whole site) is fantastic - I wish I'd stumbled onto it a year ago!

Any help or comments or information, or even a funny joke, is appreciated.

Thanks
/Shannon

dumb question, what is AMT?

from someone whose family income, much less indiv. income, is unlikely to ever exceed $80k.

Alternative Minimum Tax

bvamin

AMT (alternative minimum tax) is, according to the IRS blurb, intended to ensure that those with a high economic income (me, I guess) who receive special benefits (they consider the Foreign Tax Credit one of them) are limited in the amount that these benefits can apply. I've never had to file one before so it was a bit of a surprise to see that the FTC was limited. It meant that there was some US tax due even though all my foreign income had already been taxed at a much higher UK rate. I actually don;t think I've made any mistake on the form, but I was hoping that maybe, on the off chance, someone else had been through this & could say otherwise.

FYI - if you take the FTC instead of the foreign earned income exclusion, you'd have to fill in the AMT (and probably pay some amount of tax) if your income is over about 40k (if single) and its all foreign income & foreign tax. Well, it doesn't take a Sherlock Holmes to realize that that's probably why practically everyone who can takes the income exclusion instead. As will I now, I think, unless I hear otherwise from folks on this board...

I'm not sure of the answer as for tax year 2004 I had earned US income and moved to the UK last August and my accountant has filed an extension for me so that I can submit my forms after my one year in the UK so I fall under the foreign earned income exclusion.

However, for tax year 2005, I most likely will have mostly UK income, besides from interest and dividend income in the US, so are you saying that I would have to fill in AMT if I took FTC as I am single and my income is over the IRS limit?

bvamin

Hi bvamin,

If you take the FTC *instead* of the foreign earned income exclusion, and you earnt more than $40,250 (being single) - then you'd have to fill in AMT. But if you take the exclusion of $80k (which I believe you are based on your extension to meet the Phys Presence test), then you wouldn't have to fill in AMT unless you're income was over $120,250 (of course, I've ignored whatever deductions etc. you might have just to illustrate the main principle). If you have to fill in AMT, you will have to pay some minimum amount of US tax, even if you've paid it in the UK - as I just discovered.

For quite specific reasons, I was initially intending to take the FTC instead of the exclusion (see initial posting), but most likely won't be now (still need to review a few things & get some info from my company first to weigh the pros/cons of about 1% of AMT vs. much less FTC carryover).

Cheers
/Shannon

I am sorry if this comes across as rude. If you don't know what you are doing. Get a professional to do it for you and advise you. Spend the extra not to get your self in trouble.
If you are a student and you need to file an ez form i understand not getting a pro to do it. But a big deal like this get HELP!
The company my hubby moved us to the UK hooked us up with a professional. price water house. They will file both the UK and US for US taxes for us. I would not want a big mess hanging over my head like taxes.
No matter these governments they are gonna get their money and if they can get more and you stand there and take it they are gonna.
Just advise and a comment.
Sorry if i affended.

AMT (alternative minimum tax) is, according to the IRS blurb, intended to ensure that those with a high economic income (me, I guess) who receive special benefits (they consider the Foreign Tax Credit one of them) are limited in the amount that these benefits can apply. I've never had to file one before so it was a bit of a surprise to see that the FTC was limited. It meant that there was some US tax due even though all my foreign income had already been taxed at a much higher UK rate. I actually don;t think I've made any mistake on the form, but I was hoping that maybe, on the off chance, someone else had been through this & could say otherwise.

Silly question: Does the $80K include income from investments, or just employment?