Year-end planning straddles the tax code's moving parts.

    No politician wants to face the electorate having just put 20 million folks into the alternative minimum tax, right? Yet when Congress reconvened from summer recess, that's how many new taxpayers were set to owe AMT for 2007. Unless Congress acts, the exemption from alt min falls to $45,000 and $33,750 for married couples and single filers, respectively, down from 2006's $62,550 and $42,500.

But 20 million is a mighty big number that Washington probably can't resist, say the experts at CCH, the Riverwoods, Ill.-based business-information provider (owned by Wolters Kluwer). "The best guess right now (early September) is that last year's higher exemption will be extended for 2007. It may even be indexed for inflation," says Mark Luscombe, a principal federal tax analyst at CCH.

Exactly when change might come seems less certain. Remember last year? Several expiring tax breaks were resuscitated by a bill signed on December 20. So much for avoiding the Christmas rush. Unfortunately, the waiting game is the planner's script again this year, with provisions beyond AMT up in the air. (See sidebar.)

With alt min, the issue is that the year-end moves a client should make are sometimes different if she will owe the nefarious tax than if she won't, says advisor Michael Kitces, of Pinnacle Advisory Group in Columbia, Md. "It may be necessary to delay tax planning until Washington either acts or doesn't act, no matter how late in the year that is."

In the meantime, clients ought to maintain a flexible posture that can play to whatever unfolds. "And advisors should brush up on their AMT planning," Kitces says.

A new wrinkle is that old minimum tax credits are now refundable credits. Thanks to last year's eleventh-hour legislation, the Tax Relief and Healthcare Act, clients with unused AMT credits that are at least four years old may be able to get refunds of all or part of them now, says Gina L. Gwozdz, a Bullard, Texas CPA who blogs She says the change primarily aids individuals who paid AMT when exercising incentive stock options (ISOs) during the tech boom.

Refundable Minimum Tax Credits

To step back, typically when ISOs are exercised or depreciation is accelerated, these and a few other so-called "timing difference" items lead to the alternative tax, the client receives a credit to utilize in the future. But normally such minimum tax credits can be used only in years the client is not subject to AMT (which can be rare), and even then only to the extent of the difference between his regular and alternative tax bills for the year, Gwozdz explains. These restrictions mean it can take forever to work off the six-figure minimum tax credits that many ISO clients have.

The new provision hastens considerably the ability to cash in unused credits. Effective for 2007 (think estimated taxes) through 2012, clients with $25,000 or more of these old minimum tax credits can generally get 20% refunded to them annually, even if they are currently subject to AMT. Full refunds of old credits as high as $5,000 may be obtainable this year, Gwozdz says. IRS Publication 553 provides additional information.

But there is a catch (as always). The amount the client can get back phases out over the same income range as personal exemptions do. For 2007, that starts at $234,600 for marrieds, $156,400 for singles. "We've only seen two clients benefit from the new rule, and they are both retirees with incomes that have dropped," reports CPA/planner Bob DiQuollo, president of Eaton Wealth Advisors in Morristown, N.J.

Still, to the extent possible, advisors should try to manage clients' incomes-did someone say Roth conversion?-to make sure refundable credits aren't inadvertently phased out, Gwozdz says.

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