AMT Credit Carryforward: How To Use It for Tax Savings

At Brighton Jones, we frequently work with clients facing Alternative Minimum Tax (AMT) complexities — often due to stock compensation, business income, or real estate holdings. Many are surprised to learn that AMT payments made in previous years could provide valuable tax credits in the future, reducing what they owe in higher-tax years. However, without proper planning, these credits can go unused. 

Understanding how AMT credits work and how to use them strategically can improve long-term tax efficiency. As financial advisors, we help clients structure income, deductions, and investment decisions to apply AMT credits effectively. 

What is the AMT credit, and how does it work?

The AMT credit allows taxpayers to offset future regular tax liability if AMT was paid in previous years due to certain tax adjustments. 

Why does the AMT credit exist?

The AMT system often forces taxpayers to “prepay” taxes on income they haven’t technically realized yet. We see this frequently with executives and early employees at companies offering incentive stock options (ISOs). When an ISO is exercised but not sold, the strike price and fair market value spread are considered taxable under AMT, even though the stockholder has not seen any cash proceeds. 

Another common scenario is that of real estate investors who benefit from depreciation deductions. Under AMT rules, some depreciation benefits are disallowed, increasing taxable income. This results in higher AMT payments and creates a future AMT credit opportunity. 

State and local tax (SALT) deductions are another frequent AMT trigger, as high-income taxpayers in states with elevated income taxes often see these deductions eliminated under AMT. The result is a higher tax bill in the short term — but potentially an opportunity to use an AMT credit later. 

Since AMT forces an early tax payment, the AMT credit allows taxpayers to recover that overpaid tax in future years — but only when the regular tax liability exceeds AMT. 

How to use the AMT credit

To use the AMT credit, you’ll need to wait until your regular tax liability exceeds the Alternative Minimum Tax (AMT) in a future year — this often happens when you sell stock and realize capital gains. At that point, you can apply your AMT credit carryforward to offset the difference, effectively reducing your overall tax bill. You maximize your after-tax returns by strategically timing your credit usage and keeping more wealth working for you.

How long does the AMT credit last?

AMT credits carry forward indefinitely, meaning they do not expire. However, they cannot be carried backward to offset prior-year taxes. A taxpayer’s regular tax liability must exceed their AMT liability in a future year to use an AMT credit. 

AMT credit accumulation can be frustrating. I work with many new clients who knew of credit accumulation but didn’t have a strategic plan to use credit accumulation.  

If you remain in the AMT system year after year, you may never be able to use the AMT credit. This typically happens when you consistently exercise incentive stock options (ISOs) without selling enough shares to increase your regular tax liability, keeping you stuck with AMT. Additionally, you won’t be able to use the credit if your income structure is high enough that your AMT liability consistently exceeds your regular tax. Certain deductions — such as state and local taxes — can lower your regular tax liability, making it even harder to offset AMT in future years.  

How to use the AMT credit for maximum tax savings

Time stock sales strategically

For many Brighton Jones clients, stock compensation is the primary AMT trigger. We help clients plan their stock sales strategically so they can utilize their AMT credits. Selling appreciated stock in a year when regular tax exceeds AMT allows for efficient application of the AMT credit. Spreading ISO exercises over multiple years can also help balance AMT exposure while preventing excessive AMT carryforward accumulation.

Use charitable giving to adjust regular tax

Many clients with AMT credits are also committed philanthropists. However, making large charitable contributions at the wrong time can push regular tax liability below AMT, preventing credit usage. We help structure charitable donations over multiple years or through donor-advised funds (DAFs) to assist with tax efficiency while supporting philanthropic goals.

Plan real estate and investment transactions carefully

Capital gains and depreciation recapture for real estate investors can impact AMT exposure. Selling property in a year where AMT credits can be applied is key. We advise on 1031 exchanges and tax-loss harvesting to strategically manage AMT liabilities and credit utilization.

Optimize deductions

Many clients unintentionally lower their regular tax liability too much with deductions, making it harder to use AMT credits. By carefully structuring deductions — such as state taxes, mortgage interest, and investment expenses — we help clients avoid reducing regular tax liability below AMT. 

Common mistakes and how we help clients avoid them

Some individuals seek out Brighton Jones when they recognize opportunities to optimize their AMT credit strategy. Some have accumulated large AMT credits but are unsure how to structure their finances to use them efficiently. Others have experienced challenges — such as timing stock sales or managing deductions — that may have limited their ability to fully utilize these credits in the past. In contrast, others have made decisions — like selling stock at the wrong time or taking too many deductions — that inadvertently prevented them from utilizing these credits. 

 We help clients take control of their tax planning to avoid issues such as: 

• Losing track of AMT credits due to poor record-keeping. 
• Selling stock in low-tax years, missing opportunities to use credits. 
• Triggering AMT year after year, never creating a window for regular tax to exceed AMT. 
• Over-reducing regular tax liability, making AMT credits inaccessible. 

AMT credits are a valuable tax-planning tool, but they require a proactive strategy to be utilized effectively. At Brighton Jones, we work closely with clients to assess their financial situation, identify any available AMT credits, and create a plan for applying them to maximize long-term tax savings. This includes reviewing past tax filings, optimizing the timing of stock sales, and structuring deductions to target regular tax liability exceeding AMT when necessary. 

If you’re looking to optimize your AMT credit strategy, our team at Brighton Jones is here to help you navigate the complexities and create a plan that aligns with your financial aspirations. 

This content is provided for informational purposes only and should not be construed as individualized advice. For individualized advice, please consult with your adviser.