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How Do You Qualify For A Form 8801?

If you’re like many Americans, tax time can have you feeling anxious. You want to make sure all your forms are filed properly, and you definitely want to receive any refunds that are due. You also want to avoid paying more than your fair share of taxes!

Form 8801, Credit for Prior-Year Minimum Tax, is a form you fill out yourself. This form could help you reduce your taxable income and even increase your refund if you’ve been subject to the Alternative Minimum Tax in previous years.

What is Form 8801?

Form 8801 is a tax form for individuals, estates, and trusts. It determines the credit for Alternative Minimum Tax you incurred previously and can carry tax credits forward to the 2021 tax year. This form is four pages long, and the instructions for this form alone are six pages long. Even as IRS tax forms go, this one is complicated!

What is the Alternative Minimum Tax?

The Alternative Minimum Tax was instituted by Congress in 1969. This is a tax that ensures that those with a high income pay their fair share of taxes. Some high-income earners could dodge paying taxes by using deductions. This tax exists to ensure that, no matter how many deductions they have, they are still paying income taxes.

Not sure if you’re subject to the Alternative Minimum Tax? You can complete Form 6251, Alternative Minimum Tax – Individuals if you’re an individual. Completing this form will tell you if you will owe taxes because of the Alternative Minimum Tax. If you’re using tax software, it should complete this form as a part of filing your taxes. If not, the IRS website has the form and instructions available.

How do I qualify for Form 8801?

You qualify to complete a Form 8801 if you had Alternative Minimum Tax adjustments or liability in the previous tax year, a credit on line 26 on the previous tax year’s Form 8801, or an allowed qualified electric vehicle.

This isn’t a form that you get from your bank or employer; it’s a form that you (or your tax preparer) will fill out as a part of your tax return if necessary. It could help you lower your tax liability, so if you had to pay the Alternative Minimum Tax last year, be sure to fill out the Form 8801, or ask your accountant about it.

What information do I need to complete Form 8801?

Form 8801 asks for a variety of information. To complete the form, you will need:

  • Your previous year Form 6251 and tax forms
  • Information regarding deductions, deferrals, stocks, bonds, capital gains and losses, and excluded items (see the instructions for Form 8801)
  • Completed Foreign Earned Income Tax Sheet
  • Information about your qualified electric vehicle if you plan to use it as a deduction
  • A calculator
  • And several hours to read the instructions and fill out the forms

Seriously, this form is complicated and long. In the Instructions, the IRS estimates that it can take around seven hours to learn about this form and complete it. If you’re not up to the challenge, there’s always the option of using an accountant or tax preparer to do it for you!

What can I do to avoid the Alternative Minimum Tax?

Qualifying for a Form 8801 can be advantageous when it comes to tax prep.

The Alternative Minimum Tax works because it is difficult to avoid. Deductions that many of us take for granted, such as mortgage interest deductions and real estate taxes, aren’t useable in most cases. 

But the news isn’t all bad. According to the Tax Policy Center, the Alternative Minimum Tax only affected about 0.1% of households in 2019. The hardest hit households were those earning over $1,000,000 per year; 12.5% of these households ended up paying the Alternative Minimum tax in 2019.

And, if you were subject to the tax last year, Form 8801 can at least give you some credit that could help you lower your taxes this year.

The best way to lower your tax liability is to speak with a tax professional who can give you advice based on your unique situation. Your family size, marriage status, business income, investments, and various other financial information are all important pieces of your tax liability puzzle, and there is no one size fits all solution. 

Even if you’re hit with the Alternative Minimum Tax this year, you may be able to take steps over the coming year so that tax season next year will be a little more kind to your wallet.