Ch 15 Alternative Min Tax

Question 1

The AMT was designed to curb abuses by high-income taxpayers.

a. True b. False

Answer 1

a. True

Question 2

The AMT is most likely to affect low-income taxpayers.

a. True b. False

Answer 2

b. False

Question 3

The Foreign Tax Credit increases the tentative minimum tax.

a. True b. False

Answer 3

b. False

Question 4

In some cases, the AMT merely changes the timing of a tax payment.

a. True b. False

Answer 4

a. True

Question 5

The TCJA 2017 eliminated AMT for individuals.

a. True b. False

Answer 5

b. False

Question 6

If a taxpayer’s medical expenses equal 5% of their AGI, this will not affect the calculation of AMTI.

a. True b. False

Answer 6

a. True

Question 7

Charitable contributions must be added back to calculate AMTI.

a. True b. False

Answer 7

b. False

Question 8

All itemized deduction changes are deferral items.

a. True b. False

Answer 8

b. False

Question 9

Interest earned on private activity bonds is added back to taxable income to calculate AMTI.

a. True b. False

Answer 9

a. True

Question 10

Exercising a large number of ISOs and not selling the stock in the same tax year may result in the imposition of AMT.

a. True b. False

Answer 10

a. True

Question 11

Depreciation is an exclusion item for AMT purposes.

a. True b. False

Answer 11

b. False

Question 12

Depletion is a deferral item for AMT purposes.

a. True b. False

Answer 12

b. False

Question 13

HHH Company grants Willow one incentive stock option (ISO) on January 10, 2021. The exercise price is $10. The market price on the exercise date (June 12, 2023) is $33. What is the AMT consequence when Willow exercises the ISO?

a. $0 AMT gain.
b. $10 AMT gain.
c. $23 AMT gain
. d. $33 AMT gain.

Answer 13

The correct answer is c.

The AMT gain is the difference between the market price and the exercise price at the date of exercise.
$33 - $10 = $23

Question 14

Your client, A.J., who has a taxable income of $200,000, is concerned about being subject to the alternative minimum tax (AMT). The following income and deductions were included in computing taxable income. Select the one item that may be added to (or subtracted from) regular taxable income in calculating the AMT.

a. A long-term capital gain of $90,000.
b. A cash contribution to A.J.’s church of $18,000
c. Dividend income of $80,000.
d. A state income tax deduction of $8,000

Answer 14

The correct answer is d.

Answer d is correct because no taxes are deductible for AMT purposes.

Answers a, b, and c are included
for both regular and AMT purposes.

Question 15

In 2023, Adriana (a single taxpayer) has an AMTI of $175,000. What is Adriana’s AMT exemption this year?

a. $0.
b. $43,750.
c. $81,300.
d. $175,000.

Answer 15

The correct answer is c.

Because Adriana’s AMTI is not above the AMT Phaseout threshold amount, her AMT exemption is $81,300.

Question 16

In 2023, Livia (a surviving spouse) has an AMTI of $1,445,800.
What is Livia’s AMT exemption this year?

a. $0.
b. $54,125.
c. $126,500.
d. $1,156,300.

Answer 16

The correct answer is b.

Because Livia’s AMTI is above the AMT phaseout threshold amount, her AMT exemption must be reduced. Livia’s exemption is reduced by 25% of the amount that her AMTI exceeds $1,156,300 (the
threshold).

Therefore, Livia’s exemption must be reduced by $72,375 [(1,445,800 - $1,156,300) x 0.25].

However, the amount of the exemption is only $126,500.

Therefore, Livia is entitled to an AMT exemption this year of $54,125.

Question 17

Vito, age 50, has deductible medical expenses of $12,000 under the regular tax system and an AGI of $100,000.
What are the tax consequences for computing Vito’s AMTI?

a. Vito’s AMTI is not affected by his medical expenses.

b. $300 of Vito’s medical expenses must be added back to compute his AMTI.

c. $2,500 of Vito’s medical expenses must be added back to compute his AMTI.

d. All of Vito’s medical expenses must be deducted to compute his AMTI.

Answer 17

The correct answer is a.

Medical and dental expenses are deductible for regular tax and AMT purposes to the extent that they exceed 7.5% of the taxpayer’s adjusted gross income for 2023

Question 18

Which of the following would be added to a taxpayer’s regular taxable income to arrive at alternative minimum taxable income?

Receipt of interest on public purpose municipal bonds.

Receipt of interest on private activity municipal bonds.

Exercise of nonqualified stock options.

Sale of the shares purchased through the exercise of incentive stock options.

Answer 18

Receipt of interest on private activity municipal bonds.

Rationale

While private activity municipal bonds generate interest that is exempt for regular income tax purposes, once a taxpayer is subject to the AMT, the interest generated by these bonds is taxable, and must be added to alternative minimum taxable income.

The interest earned on public purpose municipal bonds is always exempt from tax under the regular or AMT system. T
he exercise of a non-qualified stock option will generate ordinary income which is taxed for regular income tax purposes, but would not have to be added back to calculate AMTI.
The sale of shares purchased through the exercise of incentive stock options generates a negative adjustment to AMTI.

Question 19

All of the following adjustments or preferences will result in a permanent increase in tax when a taxpayer becomes an AMT taxpayer except:

Private activity municipal bond interest.

State income taxes.

The gain on stock underlying ISOs from the date of grant to the date of exercise.

All of the above.

Answer 19

The gain on stock underlying ISOs from the date of grant to the date of exercise.
Rationale

The inclusion of the gain on ISOs from date of grant to date of exercise creates a credit that can be used against future regular income tax liability. The adjustments to state and local taxes and private activity municipal bond interest result in a permanent increase in tax liability when a taxpayer falls into the AMT system.

Question 20

In 2024, Livia (a surviving spouse) has an AMTI of $1,445,800. What is Livia’s AMT exemption this year?

$0.
$76,525.
$133,300.
$1,218,700

Answer 20

76,525.
Rationale

Because Livia’s AMTI is above the AMT phaseout threshold amount, her AMT exemption must be reduced.

Livia’s exemption is reduced by 25% of the amount that her AMTI exceeds $1,218,700 (the threshold).

Therefore, Livia’s exemption must be reduced by $56,775 [(1,445,800 - $1,218,700) x 0.25].

However, the amount of the exemption is only $133,300. Therefore, Livia is entitled to an AMT exemption this year of $76,525.

Question 21

Wesley became an AMT taxpayer last year. As a result, he had to add several items to his taxable income in arriving at alternative minimum taxable income.
Which of the following items will result in an AMT credit that can be used to offset future regular tax liability?

$7,000 in property taxes paid on his principal residence.

$80,000 difference between the fair market value of stock and the strike price in the incentive stock option used to purchase the stock.

$3,000 in interest on private activity municipal bonds.

$2,000 above the AGI threshold for medical expenses.

Answer 21

$80,000 difference between the fair market value of stock and the strike price in the incentive stock option used to purchase the stock.

Rationale

The inclusion of the difference between the fair market value and exercise price of the stock options will result in a credit that Wesley can use against future regular income tax liability.

Options a and c are adjustments, which result in permanent differences in tax liability as a result of the imposition of the AMT.
The medical expense deduction is the same for both regular tax and AMT.

Question 22

which of the following is true regarding AMT?

Interest for home acquisition indebtedness deducted for regular tax purposes must be added back.

A taxpayer who has deductible medical expenses for regular tax purposes of $10,000 will not have an add-back for AMT purposes.

Municipal bond interest must be added back for AMT purposes.

Charitable contributions deducted for regular income tax purposes are limited to 30% under AMT.

Answer 22

A taxpayer who has deductible medical expenses for regular tax purposes of $10,000 will not have an add-back for AMT purposes.

Rationale

Charitable contributions are not added back for AMT purposes. Municipal bonds in general are not added back for AMT purposes, however, private activity bonds are.
There is no add back for home acquisition indebtedness.

Question 23

HHH Company grants Willow one incentive stock option (ISO) on January 10, 2023. The exercise price is $10. The market price on the exercise date (June 12, 2024) is $33.

What is the AMT consequence when Willow exercises the ISO?

$0 AMT gain.
$10 AMT gain.
$23 AMT gain.
$33 AMT gain

Answer 23

$23 AMT gain.
Rationale

The AMT gain is the difference between the market price and the exercise price at the date of exercise.
$33 - $10 = $23

Question 24

n 2024, Alan (a single taxpayer) has an AMTI of $739,650. What is Alan’s AMT exemption this year?

$0.
$53,125.
$85,700.
$609,350.

Answer 24

53,125.
Rationale

Because Alan’s AMTI is above the AMT phaseout threshold amount, his AMT exemption must be reduced. Alan’s exemption is reduced by 25% of the amount that his AMTI exceeds $609,350 (the threshold).

Therefore, Alan’s exemption must be reduced by $32,575 [($739,650 - $609,350) x 0.25].

As a result, Alan is entitled to an exemption of $53,125 ($85,700 - $32,757).

Question 25

Your client, A.J., who has a taxable income of $200,000, is concerned about being subject to the alternative minimum tax (AMT). The following income and deductions were included in computing taxable income.
Select the one item that may be added to (or subtracted from) regular taxable income in calculating the AMT.

A long-term capital gain of $90,000.

A cash contribution to A.J.s church of $18,000.

Dividend income of $80,000.

A state income tax deduction of $8,000.

Answer 25

state income tax deduction of $8,000.

Rationale

Option d is correct because no taxes are deductible for AMT purposes.

Options a, b, and c are included for both regular and AMT purposes

Question 26

which of the following deductions would be fully allowed in calculating a 40-year old single taxpayer’s AMT for 2024?

The entire amount of interest on a mortgage with a principal balance of $500,000. The mortgage was originally taken out for $400,000, and was almost immediately refinanced to acquire $100,000 in home equity.

Interest on private activity bonds.

Real estate taxes paid on the taxpayer’s principal residence.

Casualty losses in excess of 10% of AGI for a declared disaster.

Answer 26

Casualty losses in excess of 10% of AGI for a declared disaster.

Rationale

The interest on the $500,000 mortgage must be reduced by the percentage that represents financing above the original mortgage, which in this case is $100,000. This is the same rule that applies to deductibility of mortgage interest for regular tax purposes.

Interest on private activity bonds must be added back in calculating AMTI.

State and local taxes are not deductible once a taxpayer becomes an AMT taxpayer,
but casualty losses may be claimed following the same rules that apply for regular tax purposes.

Question 27

Vito, age 50, has deductible medical expenses of $12,000 under the regular tax system and an AGI of $100,000. What are the tax consequences for computing Vito’s AMTI?

Vito’s AMTI is not affected by his medical expenses.

$300 of Vito’s medical expenses must be added back to compute his AMTI.

$2,500 of Vito’s medical expenses must be added back to compute his AMTI.

All of Vito’s medical expenses must be deducted to compute his AMTI.

Answer 27

Vito’s AMTI is not affected by his medical expenses.

Rationale

Medical and dental expenses are deductible for regular tax and AMT purposes to the extent that they exceed 7.5% of the taxpayer’s adjusted gross income for 2024.

Question 28

All of the following statements about the alternative minimum tax (AMT) are correct, except:

The AMT is designed primarily to change the timing of tax payments to more current.

Some adjustments made for AMT purposes result in a permanent increase in tax.

As an alternative to the regular income tax system, a taxpayer may elect to pay tax based on the AMT calculation.

The AMT frustrates efforts by taxpayers to participate in activities that reduce or eliminate their current tax liability.

Answer 28

As an alternative to the regular income tax system, a taxpayer may elect to pay tax based on the AMT calculation.
Rationale

If the calculated tax due is greater under the AMT, the taxpayer must pay the higher amount. The AMT is not a voluntary alternative to the regular tax system. It is a mandatory alternative, and applies only when the AMT tax exceeds the regular tax imposed on the taxpayer.

Question 29

UPDATED FOR 2024:

In 2024, Adriana (a single taxpayer) has an AMTI of $175,000. What is Adriana’s AMT exemption this year?

$0.
$45,500.
$85,700.
$175,000.

Answer 29

$85,700.

Rationale

Because Adriana’s AMTI is not above the AMT Phaseout threshold amount, her AMT exemption is $85,700.

Question 30

In 2024, Martina (a surviving spouse) has an AMTI of $650,000. What is Martina’s AMT exemption this year?

$0.
$85,700.
$133,300.
$1,218,700.

Answer 30

$133,300.
Rationale

Because Martina’s AMTI is not above the AMT phaseout threshold amount of $1,218,700, she has no adjustment.

Question 31

he alternative minimum tax (AMT) was originally designed to:

Create a more user-friendly tax system.
Curb abuses by high-income taxpayers.
Provide additional credits to certain low-income taxpayers.
Give taxpayers a choice of which tax to pay.

Answer 31

Curb abuses by high-income taxpayers.
Rationale

The AMT was enacted in 1986 to curb perceived abuses by high-income taxpayers trying to minimize their current income tax liability.

Question 32

Which of the following statements concerning the taxation of incentive stock options (ISOs) is correct?

On the date of exercise, the difference between the fair market value of the stock and the exercise price is included in regular taxable income.

If the taxpayer sells the stock acquired by exercising an ISO more than one year after the date the option was granted, the gain will be taxed at capital gains tax rates.

The sale of stock acquired by exercising an ISO will trigger a potential AMT tax for the taxpayer.

The grant of ISOs to a taxpayer does not result in a taxable event for regular or AMT tax purposes.

Answer 32

The grant of ISOs to a taxpayer does not result in a taxable event for regular or AMT tax purposes.

Rationale

When an ISO is exercised, there is no regular tax consequence, but the difference between the fair market value on the date of exercise and the strike price becomes an AMT preference. In order to achieve capital gains treatment on the exercise of an ISO, the taxpayer must hold the stock 2 years from the date of the grant and one year from the date of exercise, making option B incorrect. Option C is incorrect since it is the exercise of the option, not the sale of the stock, that triggers a potential AMT tax. Since ISOs must be issued with a strike price equal to fair market value on the date of the grant, they will never create a taxable event on issuance.

Question 33

Gavin, a single individual, who is an executive at IT Consulting, Inc., was granted 1,500 ISOs on IT’s stock two years ago when the price per share was $25. The last few years have resulted in tremendous growth for IT Consulting and the stock is now trading at $55 per share. Gavin exercised the ISOs, but did not sell the stock – he plans on holding the shares for at least a year so he can pay the lower capital gains tax rate on the growth. How much will Gavin have to add to his taxable income when computing AMTI as a result of this transaction?

$0.
$37,500.
$45,000.
$82,500.

Answer 33

$45,000.
Rationale

Even though exercise of the options results in no taxable event for regular tax purposes this year,

Gavin will have to add $45,000 [($55 - $25) x 1,500] to his taxable income when computing AMTI.

Question 34

Miriam, who is single and age 36, provides you with the following information from her financial records.

Regular income tax liability - $44,342

AMT positive adjustments - $30,000

AMT preferences - $20,000

Taxable income - $175,000

Calculate her AMTI.

A. $80,251
B. $168,126
C. $212,875
D. $225,000
E. None of the choices

Answer 34

Solution: The correct answer is D.

Miriam’s AMTI is calculated as follows:

Taxable income $175,000
+ AMT positive adjustments $30,000
+ AMT preferences $20,000
= AMTI $225,000.

Miriam’s AMT exemption is not deducted in calculating AMTI.
Rather, it is deducted from AMTI to calculate the AMT base.
Likewise, the regular income tax liability does not affect the calculation of AMTI.

Question 35

In 20x1, Dan exercised an incentive stock option, acquiring 150 shares of stock at an option price of $75 per share (fair market value at the date of exercise was $130 per share).
Which of the following statements is incorrect?

A. Dan has a positive AMT adjustment from the ISO in 20x1.
B. Dan has no taxable income from the ISO in 20x1.
C. Dan has an AMT basis of $19,500 in the stock.
D. Dan has an income tax basis of $19,500 in the stock.

Answer 35

Solution: The correct answer is D.

The question is looking for the false statement.

The transaction has no effect on taxable income but there is a positive alternative minimum tax adjustment in 20x1. Dan’s AMT basis is equal to FMV at the date of exercise (19,500), and his regular income tax basis is equal to his cost (11,250).

Grant price was $75 per share (Dan’s tax basis - what he purchased the shares for)

Price on the date of exercise was $130 per share (Dan’s AMT basis)

To ensure the best tax consequences for ISOs, the sale must be 1 year from exercise and 2 years from grant.

Question 36

Mitch, who is single and has no dependents, had AGI of $150,000. His potential itemized deductions were as follows:

Medical expenses (before percentage limitation) - $20,000

State income taxes - $3,000

Real estate taxes - $7,000

Mortgage (qualified housing and residence) interest - $9,000

Cash contributions to various charities - $4,000

Unreimbursed employee expenses (before percentage limitation) - $4,300

What is the amount of Mitch’s AMT adjustment for itemized deductions?

A. $10,000
B. $13,750
C. $16,800
D. $19,300
E. $25,800

Answer 36

Solution: The correct answer is A.

Mitch’s adjustment for itemized deductions for AMT purposes are as follows:

State income taxes 3,000

Real estate taxes 7,000

Total 10,000

Notes

Unreimbursed employee expenses: no longer deductible