Alternative Minimum Tax (AMT)

Question 1

AMT mechanics

Answer 1

• separate method of calculating income tax liability
• used when AMT results in higher tax liability than regular income tax
• purpose is to prevent taxpayer from reducing tax liability below reasonable levels
• certain tax benefits are limited or lost under AMT

Question 2

AMT rate

Answer 2

• 28%
• regular tax max is 37%

Question 3

Exemptions increase

Answer 3

• amount of income automatically exempt from AMT is 126,500 (J) and 81,300 (S)
• phased out at 1,156,300 (J) and 578,150 (S)
• AMT generally applied for those claiming substantial exemptions, credits and deductions not allowed under AMT

Question 4

AMT calculation

Answer 4

1. start with regular post deduction 1040 income (if itemizing) or AGI (if st. ded.)
2. add back any item that was deductible for the 1040 but not for AMT
3. add preference items
4. result equals AMT base
5. subtract exemptions
6. result equals AMTI (alternative minimum taxable income)
7. calculate AMT (26% and 28% rates)

Question 5

Preference items

Answer 5

IPOD
- excess Intangible drilling costs (IDC)
- Private activity municipal bond
- Oil and gas percentage depletion
- Depreciation (ACRS/MACRS) not straight line

Depletion
- deduction allowed in determining taxable income from business activities in natural resources
- percentage depletion (excess depletion over property’s adjusted basis) typically triggers AMT because it is acceleration
- cost depletion is not an AMT preference item

Question 6

Exclusion items vs. deferral items

Answer 6

Add back items
- some itemized deductions are not allowable deductions for AMT
- property, state, city income and sales tax (10k/ yr limit)
- incentive stock option “bargain element”

Deductions allowed to keep
- medical expenses
- qualified residence interest
- investment income
- charitable deductions
- casualty and gambling loss

Question 7

Credit, operation, usage, and limitations

Answer 7

• instead of standard deduction, individual return has AMT exemption
• amount is determined by filing status and phased out
• minimum tax is compared to regular 1040
• if regular tax after credits equals or exceeds AMT minimum, then no AMT is required
• AMT payable is difference between AMT tax and regular tax

Question 8

Planning strategies

Answer 8

• AMT can be postponed or avoided by reviewing income and expenses
• may entail increasing regular income tax liability
  1. accelerate receipt of taxable income or deferring payment of itemized expenses (more taxable income)
  2. defer exercise of incentive stock option (add back) to later date or disqualifying ISO (taxable)
  3. purchasing public muni bonds instead of private activity bonds