104-4 AMT and the Kiddie Tax

Question 1

2 Forms of AMT

Answer 1

A) Individual

B) Corporate

Question 2

Tax adjustments and

Tax preference items

Answer 2

Tax adjustments: can be negative or positive

Tax preference items: always positive

Question 3

Alternative Minimum Tax (AMT)

Answer 3

A separate, backup tax to the regular income tax to ensure that a taxpayer w/ significant income does not avoid the payment of tax by using certain deductions and exclusions

Taxable income is revised by adding back certain deductions in order to calculate the AMT.

The AMT places a minimum tax on taxpayers who have taken advantage of certain tax preference items.

Question 4

AMT Payable

Answer 4

If the regular income tax after credits equals or exceeds the individual AMT, then no individual AMT payment is required
However, if the regular income tax after credits is less than the individual AMT, then the AMT must be paid w/ this difference, referred to as the AMT payable

AMT payable = difference between AMT liability and the regular income tax liability

Question 5

Alternative Minimum Taxable Income (AMTI) calculation

Answer 5

Regular taxable income (from IRA Form 1040)
\+ positive AMT adjustments
- negative AMT adjustments
\+ AMT preference items
= AMTI

Question 6

Positive AMT Adjustment

Answer 6

Made when the deduction or exemption allowed for regular income tax purposes exceeds the deduction or exemption allowed for AMT purposes

Question 7

Negative AMT Adjustment

Answer 7

Made when the deduction allowed for AMT purposes exceeds that for regular income tax purposes

Question 8

AMT Preference Items

Answer 8

aka add-back items

tax preference items are always positive
these items are sometimes known as add-back items because they are always added to regular taxable income to calculate AMTI

Question 9

Exclusion Items

Answer 9

• Standard deduction
• Itemized deduction
• Exclusion of gain from Section 1202 qualified small business stock (QSBS)
• Tax-exempt interest treated as a tax preference for AMT
• % depletion treated as a tax preference for AMT

Any adjustment/preference item that is not an exclusion item is a deferral item. Deferral items include the bargain element of an incentive stock option (ISO)

Question 10

Deferral Item

Answer 10

Any adjustment/preference item that is not an exclusion item

Include the bargain element of an incentive stock option (ISO)

Question 11

Individual AMT Credit

Answer 11

The individual AMT paid in any one year may be used as a credit against regular income tax in a future year (indefinitely)
The individual AMT credit is available only to the extent the AMT was attributable to deferral items

Question 12

Kiddie Tax

Answer 12

Applies to unearned income (such as dividends and interest) of a child under age 19 (under age 24 if a dependent full-time student providing less than 50% of her own support

The kiddie tax provision limits income shifting by preventing families from transferring large amounts of unearned income to children and making the shift effective for income tax purposes.

If a child under the age of 19 has unearned income above a specified amount, the excess is taxed at estates and trusts tax rate for the year, rather than at the child’s marginal rate.

Question 13

Applicable tax rates for estates and trusts used by the child on unearned income

Answer 13

Either 0% (for the 10% tax bracket) or 15%/20% (depending on the estates and trusts income threshold)

Question 14

Standard deduction for a child w/ both unearned and earned income

Answer 14

A) $1,100; or
B) the amount of earned income plus $350 but limited to an amount no greater than the standard deduction for a single taxpayer ($12,200 in 2019)

Question 15

Planning strategies for individual AMT

Answer 15

1) Move income into an AMT year
2) Move deductions into a non-AMT year
3) Time the recognition of certain AMT adjustments and tax preference items