The limitations on the hybrid credit are written into the law. The law is Internal Revenue Code Section 30B, found very near the end of the section at paragraph (g)(1). The law reads,
The credit allowed ... shall not exceed the excess (if any) of--
(A) the regular tax reduced by the sum of the credits allowable under subpart A and sections 27 and 30, over
(B) the tentative minimum tax for the taxable year.
Now, that is as clear as mud, right? The credits that the law refers to are the various credits I have listed in my article -- such as the child tax credit and the education credits. The maximum dollar limit for the hybrid credit is the regular tax liability (on the 2005 tax form is found on Form 1040 Line 44) minus all these credits, and only if the regular tax left over is still higher than your AMT. Confusing? Yep.
Some tax credits apply only against the regular tax liability. Other credits can be used against both the regular tax and the alternative minimum tax. And still other credits can be used against a wide range of extra taxes, such as the self-employment tax. All of this is written into the tax laws and is very hard to un-ravel unless you have a really good scorecard. The IRS publishes worksheets and schedules so that taxpayers can calculate the allowable amount of a credit. A good example is the child tax credit worksheet. I expect the IRS will create a similar worksheet or schedule for the hybrid credit.
So, no, I do not have any secret instructions from the IRS. In fact, the IRS has not released any details about the hybrid credit. I expect they are still trying to figure out all the details before they issue guidance to the public. But I am following this issue very closely, and I will let all of you know the minute I hear more information.
- Hybrid Tax Credit
- Limitations on the Hybrid Tax Credit
- Tax Planning Scenarios for the Hybrid Tax Credit
- Understanding the Alternative Minimum Tax