Alternative Minimum Tax and Other Taxes

Question 1

What kind of tax must a TP pay in general?

Answer 1

Greater of regular tax or the tentative minimum tax. (an AMT exemption prevents many TPs to be imacted in general).

Question 2

What is the formula for computing AMT?

Answer 2

Regular taxable income
\+/- Adjustments
\+ Preferences
= AMT income
- Exemption
= AMT Base
x Rate (26 0r 28%)
= Tentative Minimum Tax before Credit 
- Certain credits
= Tentative Minimum Tax
- Regular tax liability
= AMT (if positive)

Question 3

What are AMT credits?

Answer 3

Child and dependent care credit.
Adoption credit.
Credit for the elderly and disabled.
Child tax credit.
Education credit.
IRA credit.
Non-business energy property credit.
Residential energy efficient property credit.
Foreign tax credit.

Question 4

What is one of the most common adjustment items for AMT computation?

Answer 4

Depreciation for personalty.
MACARS 2, 5, 7, and 10 yr property are depreciated using the 200% declining-balance method.
For AMT, the 150% declining-balance method is used.

Question 5

AMT adjustment: Required for realty or property used for bonus depreciation?

Answer 5

No.

Question 6

What is AMT adjustment for medical deduction?

Answer 6

Allowed only to extent it exceeds 10% of AGI.

It doesn’t impact most TP, but older TP is allowed 7.5% and needs to be adjusted.

Question 7

AMT adjustment: what must be added back?

Answer 7

Deductions. No deduction allowed for taxes.
2% misc deductions.
Personal exemptions.
Standard deductions (if used).

Question 8

AMT adjustment: re: home equity interest?

Answer 8

Interest not used for the residence must be added back.

Question 9

AMT adjustment: re: stock option?

Answer 9

The compensation element (difference between option price and FMV) on the exercise date for an incentive stock option must be added back.

Question 10

What are 2 tax preference items?

Answer 10

1. For real property and leased personalty purchased before 1987, excess of accelerated over straight-line depreciation.
2. Tax exempt interest on private activity bonds (less related expenses).

Question 11

What is AMT credit? Limit?

Answer 11

The AMT amount TP must pay becomes AMT credit that can be carried forward indefinitely to offset regular tax liability when TP is not subject to AMT.

AMT credit is limited to the amount of AMT generated from timing differences.

Question 12

Self-employment tax: what is self-employment income? Is this all subject to self-employment tax?

Answer 12

• Gross income from self-employment less deductions associated with the activity.
• Allocations of income to general partners (but not limited partners).
• Guaranteed pmts paid to both general and limited partners.

No, only 92.35% of the total self-employment income.

Question 13

Self-employment tax: What is the tax rate? For regular employed people?

Answer 13

15. 3% (double because TP has to pay both employer and employee share).
16. 65% (social security: 6.2%. Medicare: 1.45%)

Question 14

Self-employment tax: What is the threshold to be subject to self-employment tax?

Answer 14

Self-employment income x 92.35% must exceed $400.

Question 15

Self-employment tax: does this apply to allocations (income) to S corporation shareholders?

Answer 15

No.

Question 16

Self-employment tax: does this have cap for FICA taxes like for regular employed TPs?

Answer 16

Yes. Social security is 12.4% of earned income up to an annual limit (127,200 - 2017).
Medicare is 2.9% on all earned income (no cap).

Question 17

What is Medicare Surtax?

Answer 17

An additional 0.9% hospital insurance tax applies;
*Joint filer with wages > $250,000.
*Single and HofH filers with wages > $200,000.
Applies to self-employment income in the same way.

Question 18

How is tax on net investment income determined?

Answer 18

1. Lower of;
   Net investment income or Modified AGI (=AGI+foreign earned income exclusion) in excess of thresholds: $200,000/$250,000 (single/married jointly).
2. Taxed at 3.8%

Question 19

Who does tax on next investment income apply to?

Answer 19

Individuals, trust, estates.

Question 20

What does net investment income include, 3 categories?

Answer 20

• Interests, dividends, annuities, rents, royalties; net of allowed expenses.
• Net income derived from a passive activity or a business of trading in financial instruments or commodities.
• Net gain from the disposition of property NOT held in a trade or business.

Question 21

What does net investment income NOT include, 5 categories?

Answer 21

• Earned compensation/wages.
• Excluded capital gains from the sale of a residence.
• Gains from the sale of a business where TP actively participates.
• Qualified retirement plan distributions and IRA distributions.
• Tax exempt income.

Question 22

Example: what tax liability do TPs have?

Married filing jointly. Earned income: $275,000. Net investment income: $75,000. Modified AGI: $300,000.

Answer 22

Lower of net investment income: 75,000 or excess of 250,000 over modified AGI = 300,000-250,000=50,000. Therefore, 50,000.

50,000x3.8%=1,900 - tax on net investment income.

Also, Earned income exceeds 250,000 threshold by 25,000. Then 25,000x0.9 additional MC tax apply = $225.

Question 23

Tax on NII: Is sale profit from selling passive income item subject to this?

Answer 23

Yes.

Question 24

On which form AMT is reported?

Answer 24

Form 6251.

Question 25

AMT adjustments: are gambling losses deductible still or need to add back? Charitable contributions?

Answer 25

Deductible.

Question 26

What consists self-employment income?

Answer 26

Self-employment income represents the net earnings of an individual from a trade or business carried on as a proprietor or partner, or from rendering services as an independent contractor.

Question 27

Is self-employment tax deductible? From what?

Answer 27

Generally, one-half of an individual’s self-employment tax is deductible from gross income in arriving at adjusted gross income.

Question 28

AMT: what deductions are allowed?

Answer 28

Gambling loss.
Traditional IRA account contribution.
One-half of the self-employment tax.
Charitable contributions.
Etc.

Question 29

An employee who has Social Security tax withheld in an amount greater than the maximum for a particular year, may claim what?

Answer 29

may claim the excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers. An employee who had excess Social Security tax withheld from one employer should be reimbursed by the employer.