Ch 15 Alternative Min Tax Flashcards
The AMT was designed to curb abuses by high-income taxpayers.
a. True b. False
a. True
The AMT is most likely to affect low-income taxpayers.
a. True b. False
b. False
The Foreign Tax Credit increases the tentative minimum tax.
a. True b. False
b. False
In some cases, the AMT merely changes the timing of a tax payment.
a. True b. False
a. True
The TCJA 2017 eliminated AMT for individuals.
a. True b. False
b. False
If a taxpayer’s medical expenses equal 5% of their AGI, this will not affect the calculation of AMTI.
a. True b. False
a. True
Charitable contributions must be added back to calculate AMTI.
a. True b. False
b. False
All itemized deduction changes are deferral items.
a. True b. False
b. False
Interest earned on private activity bonds is added back to taxable income to calculate AMTI.
a. True b. False
a. True
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
a. True
Depreciation is an exclusion item for AMT purposes.
a. True b. False
b. False
Depletion is a deferral item for AMT purposes.
a. True b. False
b. False
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.
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
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
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.
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.
The correct answer is c.
Because Adriana’s AMTI is not above the AMT Phaseout threshold amount, her AMT exemption is $81,300.
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.
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.
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.
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
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.
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.
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.
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.
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
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.
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.
$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.
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.
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.
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
$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
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.
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).