When Tax Carry forwards exist in the marital estate
How do you handle an alternative minimum tax (AMT) carry forward for purposes of your divorce process?
Brief definition of AMT tax
Years ago the government instituted an alternative minimum tax for people who were taking large deductions and not paying their fair share of taxes. Once the government caught wind of this and recognized these loopholes they limited how much a taxpayer could take as a deduction on their personal return.
The difference between AMT and AMT tax credit
This article relates to an AMT tax credit. What is the difference between AMT and AMT tax credit? The AMT imposes a tax on the taxpayer. The AMT credit provides a tax credit for certain items when an AMT exists on a taxpayer’s tax return.
In context to a divorce what happens when an AMT credit carry forward exists?
At the present time there is no formal guidance how to address the AMT credit carry forward for purposes of a divorce. Given this situation, ask yourself the following questions:
- How much is the AMT credit carry forward?
- Is the AMT credit carry forward material to talk about? If not, you may want to ignore it and let one person take it on their return.
- If there is money behind the AMT credit carry forward then break down how the AMT credit was generated and allocate it between the spouses accordingly
- If the spouses find the AMT credit carry forward a contentious issue then consider it a tradable component where other negotiable items of similar value can be used to offset the benefits that can be gained from the AMT tax credit carry forward.
Worthy to note: When determining who should receive the AMT tax credit, be sensitive to each of your effective marginal tax brackets. Also, be sensitive to the issue whether you will generate an AMT going forward. Now that your incomes are going to be reported separately, potentially neither of you will be able to benefit from the AMT tax credit carry forward on your tax returns. Why? You may not incur an AMT in the near term. If you do not choose who will get the AMT tax credit carry forward, then the software used to create your return may default it to the first person listed on the return as “the taxpayer”.
About the Author
Larry Smith is a Founding Partner of Divorce Outcomes, a specialized professional services firm that manages all of the financial aspects in a divorce process. Since 2003 he has worked as a trusted financial advisor, financial advocate, divorce architect and technical financial expert; he is not an attorney. He is an alumni of KPMG and Andersen with expertise in technical accounting, forensics, sophisticated taxation, management consulting, risk management, advanced process engineering, business combinations, divorce management, multi-party negotiations, advanced quality analytics and cognitive performance technologies. Since 1986 Larry has been advising individuals and organizations about innovative financial solutions to resolve complex financial challenges that arise in life and in business.
For both personal and business divorces, Larry is considered an expert in divorce strategies, divorce process management, financial divorce architecture, financial risk management, taxation for divorces, financial divorce forensics, advanced divorce analytics, financial divorce negotiations and mediation, business valuations and sophisticated equity structures. He helps clients shape complex financial decisions, manage communication risks and ever-changing negotiating positions to strategically preserve or grow wealth from these types of transactions.
If You Have a Question
If you have a question, feel free to contact me at [email protected] or 617-680-5222. The call is free. I will spend 30–60 minutes with you. I will provide you an honest assessment as to where I think you are positioned in your divorce process or answer any questions you have. I may provide you some guidance, insight or advice that you can take with you as you wish. There is no obligation to move forward. The phone call is designed to ease your fears, provide you some options to pursue and a potential road to run on that can lead you down a path to achieve a successful outcome.
About Divorce Outcomes
Divorce Outcomes is a specialty services firm that helps people both domestically and internationally manage all of the financial decisions that arise in their divorce process. We are not attorneys. We are financial experts who partner with our clients as their personal financial advocates. We help our clients manage their divorce process, uncover hidden financial risks, architect divorce solutions, manage ever-changing negotiating positions, communicate complex financial matters and close the divorce process as soon as possible with a goal to arrive at the best outcomes possible. Throughout the process we evaluate the current state of our clients’ financial lives with an objective to best reposition their future. We do not sell any products. We simply raise issues that are in our clients best interest. Our clients share with us we:
- unfold, analyze and repackage their financial life so they are well positioned after their divorce
- preserve the value of their business or marital estate
- continuously strive to provide a return on our services
- build balanced financial solutions grounded in evidence
- find ways to make our client, and at times both parties, money through the process
- design their divorce to work for them and their family’s life
- provide mental clarity to make decisions
- reduce the total process time from start to close
- minimize the stress and unpleasant memories that can last a lifetime
As we reach an agreed upon settlement structure, we help our clients identify a fitting attorney who can leverage the financial solution to draft and record the requisite legal documents. Where outcomes are at risk from a traditional process, we function as expert financial negotiators or financial mediators to turn around the situation and achieve our client’s desired outcomes.
This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute formal advice or a recommended course of action as every person’s situation is unique and different. The information here is not intended to be, and should not be, relied upon by the recipient to make a decision without professional guidance.