Alternative Minimum Tax Flashcards
How to determine AMT liability
- Adjust regular taxable income w/ adjustments and preferences (+)
- Subtract exemption to reach AMT base
-Multiply AMT base by special AMT rates to compute AMT - Pay the greater of regular income tax or AMT
Tax preference items
-Excess of accelerated depreciation (ACRS cost recovery) for reap property place in service before 1987
- tax-exempt interest on certain private activity bonds issued before 2009/after 2010 (state/local bonds to help finance private business)
- exclusion of gain of sale of certain small business stock (7% of gain on disposition of qualified small business stock)
AMT adjustments
-Itemized deductions that are not allowed in computing AMTI
-Timing differences relating to the deferral of income/acceleration of deductions
Itemized deductions
Casualty and theft losses in excess of 10% of Adjusted Gross Income (AGI) (ONLY VALID FOR FEDERAL DECLARED DISASTER AREAS)
Charitable contributions (but not in excess of the 20%, 30%, 50%, and 60% of AGI limitation amounts)
Medical expenses in excess of 7.5% of AGI
Qualified housing interest
Certain other interest up to the amount of qualified net investment income included in the AMT base
Estate tax deduction on income in respect of a decedent
Gambling losses (to the extent of gambling winnings)
AMT adjustments due to timing
- For real property between 1986-1/1/1999, the difference between MACRS depreciation claimed using actual recovery period and hypothetical straight line dep using 40 yr life
- For personal property after 1998, difference between MACRS deduction and amount determined by 150% declining balance method under alternative dep sys with a switch to the straight-line
- Research and experimental (R&E) expenditures: difference between amount expensed and deduction that would have been allowed if the expenditures were capitalized and amortized over a 10 yr period
- deferral of taxability on the exercise of options received under Incentive stock plan*
Credits that reduce AMT
-Foreign tax credit and nonrefundable personal credits
Child and dependent care credit
Credit for the elderly and totally disabled
Adoption expense credit
Child tax credit
AOTC and Lifetime Learning credits
Priscilla has calculated various components of her tax for the year. Her regular income tax is $17,000, her tentative minimum tax (TMT) for the year is $21,000, her alternative minimum tax (AMT) is $4,000 and her AMT tax credit earned this year is $2,500. What is Priscilla’s tax liability for the year?
Priscilla’s TMT exceeds her regular tax, so she will pay the $4,000 AMT plus the regular tax of $17,000. Therefore, her total tax liability is $21,000. The AMT tax credit will be used in future years when regular tax exceeds TMT.
Sam and Cindy are married and file a joint return in 2023. Their taxable income is $138,200, therefore their regular tax liability is $21,019. Their tax preference items are $24,800. AMT adjustments are excess depreciation of $18,000 and state and local property taxes of $10,000. What is their total tax liability?
The total tax liability for Sam and Cindy is $21,019 ($21,019 regular tax + $0 AMT). $191,000 is their AMTI and $64,500 is their AMT tax base.
Sam and Cindy’s AMT is computed as follows:
Taxable income = $138,200
Plus: Tax preferences = $24,800
=
AMT adjustments:
Excess depreciation = $18,000
State and local property taxes = $10,000 $28,000
AMTI = $191,000
Minus: AMT exemption ** = ($126,500)
Tax base = $ 64,500
Times: Tentative minimum tax (26% Tax rate) = $ 16,770
Minus: Regular tax (based on taxable income $138,200) = ($21,019)
Alternative minimum tax = $0
Taxpayers are allowed an alternative minimum tax (AMT) credit that can be used against their _____________.
regular tax liability
Amounts of alternative minimum tax base exceeding $220,700 are taxed at a rate of ____ in 2023.
2023 Tax rate:
26% of first $220,700
28% of amounts in excess of $220,700
Each of the following is an AMT tax preference :
Tax-exempt interest on private activity bonds
Exclusion of gain on the sale of certain small business stock
Excess of accelerated depreciation claimed over straight-line depreciation amount for real property (pre-1987)
Municipal bond interest income is not a tac preference item
If a taxpayer was already subject to AMT, then the optimal strategy would be to:
accelerate income into the AMT year and delay allowable itemized deductions until a regular tax year.
Identify items that are deductible for AMT purposes.
Casualty and theft losses in excess of 10% of Adjusted Gross Income (AGI)
Charitable contributions (but not in excess of the 20%, 30%, 50%, and 60% of AGI limitation amounts)
Medical expenses in excess of 7.5% of AGI
Qualified housing interest
Certain other interest up to the amount of qualified net investment income included in the AMT base
Estate tax deduction on income in respect of a decedent
Gambling losses (to the extent of gambling winnings)
Each of the following statements about AMT Credit creation, usage, and limitations are correct :
AMT credit can be carried over until final tax return.
AMT credit is created when a taxpayer has AMT exposure that resulted from a deferral item (timing difference)
Credit can be used to the extent that regular tax liability is greater than the AMT liability
Credit is limited and cannot be used in years when the AMT liability exceeds the regular liability
