Chapter 8 Flashcards
In 2019 Helen paid $3,000 in property taxes $6,000 in state income taxes. Her AGI is $84,000 and she chooses to itemize deductions. What difference will her property and state income taxes cause between her regular taxable income and his AMT taxable income?
Group of answer choices
Her AMT taxable income will be identical to her regular taxable income.
Her AMT taxable income will be $9,000 higher than her regular taxable income.
Her AMT taxable income will be $6,000 higher than her regular taxable income.
Her AMT taxable income will be $3,000 lower than her regular taxable income.
Taxable income will be $9,000 higher because in the AMT computation property and state income taxes are not deductible. Therefore, they are added back.
In 2019 George’s AMT taxable income is $609,000. His filing status is single. How much AMT exemption is George allowed to use against his AMT taxable income?
Group of answer choices
$0
$71,700
$47,025
$24,675
$47,025
The AMT system adopts two flat tax rates. Which ones?
Group of answer choices
26% and 28%.
10% and 15%.
28% and 30%.
30% and 35%.
26% and 28%
If a taxpayer materially participates in an activity, any loss from that activity is considered a:
Group of answer choices
Passive activity loss
Hobby loss
Net operating loss
Capital loss
A passive activity loss is a lot like an NOL. It stems from expenses exceeding revenue. Both NOLs and PALs come from a trade or business. The only difference is the amount of time a taxpayer dedicates to the trade or business. If the taxpayer “materially participates,” the loss is considered an NOL. If a taxpayer does not materially participate, the activity is considered passive and the loss is a Passive Activity Loss.
Valeria purchased a home for $320,000 six years ago. A recent hurricane partially damaged the home. The fair market value of the house before the damage was $475,000. After the damage by the hurricane, the value of the house fell to $300,000. How much and what type of loss does Valeria recognize?
Group of answer choices
a $320,000 1231 loss
a $175,000 personal casualty loss
a $155,000 passive activity loss
a $175,000 at risk loss
(B)
Which of the following is true for hobby losses?
Group of answer choices
They are not at all deductible
They stem from the conduct of an activity in which the taxpayer engages with the intent to earn a profit
They are measured based on the excess of the adjusted basis over the amount realized
They are triggered by the disposition of an asset
For this question I answered with “they are not all deductible” and was correct.
Our slides tell us that, “A hobby activity is any activity whose primary purpose is not to make a profit.” While you can make profit from a hobby, the activity that the taxpayer is engaging in is a hobby and is for personal pleasure – they do not have the intent to earn a profit. While profit can happen, that is not the intention.
The slides say that, “Hobby expenses are deductible only to the extent of hobby income.” I did a bit more reading on the IRS website (Links to an external site.), and found the following: “Limits on Hobby Expenses. Generally, taxpayers can only deduct hobby expenses up to the amount of hobby income. If hobby expenses are more than its income, taxpayers have a loss from the activity. However, a hobby loss can’t be deducted from other income.”
So not all hobby losses are deductible, as they cannot be deducted from other income if they sum up to more than the hobby income.
Which of the following is true for passive activity losses?
Group of answer choices
They are not at all deductible
They stem from the conduct of an activity in which the taxpayer engages with the intent to earn a profit
They stem from the conduct of an activity in which the taxpayer engages without the intent to earn a profit
They are triggered by the disposition of an asset
I chose the second choice and got 1 point. “They stem from the conduct of an activity in which the taxpayer engages with the intent to earn a profit.”
Choice 1 “They are not at all deductible.”
It is wrong. See Slide 15: “Generally, losses from passive activities (PAL) can only offset income from passive activities. Any disallowed losses are carried forward indefinitely until used. Unused PAL can be deducted against passive and nonpassive income upon the fully taxable disposition of the entire interest in the activity.”
Choice 3 “They stem from the conduct of an activity in which the taxpayer engages without the intent to earn a profit.”
It is wrong. See Slide 15: “…The only difference is the amount of time a taxpayer dedicates to the trade or business. A passive activity is an activity in which income flows primarily through the investment of capital and requires little labor.” The taxpayer engages with the intent to earn a profit through the investment on trade or business.
Choice 4 “They are triggered by the disposition of an asset.”
It is wrong. See Slide 15: “A passive activity loss is a lot like an NOL. It stems from expenses exceeding revenue. ”
A married couple reported the following items for the current year:
Salaries $95,000 Dividends $1,000 Interest income on savings account $500 Loss from rental real estate ($2,000) Both spouses actively participate in the rental real estate activities. What is the taxpayers’ adjusted gross income on a joint return for the year?
Group of answer choices
$95,000
$96,500
$98,500
$94,500
$94,500,If there is active participation in the rental real estate activity, up to $25,000 of any resulting
loss is deductible against ordinary income, subject to a $100,000 - $150,000 adjusted gross income (AGI)
phaseout. This married couple has AGI of $96,500 before considering the rental loss, so the loss fully
offsets against ordinary income, resulting in AGI of $96,500 - $2,000, or $94,500.
Bartlet owns a manufacturing business and participates in the business. Which of the following conditions would cause the business to be considered a nonpassive activity for Bartlet?
Group of answer choices
Bartlet participates in the business for more than 500 hours during a year.
The business made a profit in any three of the last five years that preceded the current year.
The business has at least 10 employees who, individually or collectively, work for the business more than 1,000 hours in a year.
Bartlet files an election with the IRS postponing nonpassive activity classification.
Bartlet participates in the business for more than 500 hours during a year.
To be classified as a nonpassive activity for Bartlet, he must materially participate in the manufacturing business. This determination is made on a yearly basis according to the seven tests for material participation outlined in Regulation §1.469-5T. One of the seven tests is that the individual participates in the activity for more than 500 hours during the year.
Alternative minimum taxable income is
Group of answer choices
The sum of all tax preferences.
Taxable income adjusted by tax preferences and reduced by an exemption amount.
Taxable income increased by tax preferences and increased or decreased by adjustments and other statutory modifications.
AGI plus tax credits
The AMT exemption for a single filer in 2019 is $71,700 (slide 26). This exemption is phased out by 25% of the amount of AMTI over $510,300 for single filers (slide 27).
We need to calculate AMTI to see if any of the AMT exemption is phased out. AMTI is the sum of taxable income plus adjustments ($374,400 + $155,500=$529,900).
The taxpayer’s AMTI ($529,900) is a bit above the phase-out range ($510,300), which means that she will lose a bit of her AMT exemption. This exemption is phased out by 25% of the amount of AMTI over $510,300. Therefore, the phased-out amount is $4,900 [($529,900 – $510,300) × 25%].
Once you subtract $4,900 from her AMT exemption, the AMT exemption she can still take is $66,800 ($71,700 – $4,900), which means the amount subject to AMT tax is the difference between AMTI and her exemption ($529,900-$66,800=$463,100).
The AMT tax she will owe is the difference between her “tentative minimum tax” (slide 28) and her regular tax liability (which the problem tells you is $74,760).
Her “tentative minimum tax” (slide 28) is 26% of the first 194,800 and 28% of everything above $194,800 {($194,800 × 26%) + [($463,100 – $194,800) × 28%]=$125,772}.
Therefore, the AMT tax she will owe is the difference between $125,772 and $74,760 ($125,772 - $74,760 = $51,012).
In 2019 Rachael, a single filer, has taxable income of $374,400. She has tax preferences and adjustments totaling $155,500. Assume her regular income tax liability is $74,760. What is the amount of Rachael’s alternative minimum tax liability?
Group of answer choices
$51,012
$49,242
$69,654
$0
The AMT exemption for a single filer in 2019 is $71,700 (slide 26). This exemption is phased out by 25% of the amount of AMTI over $510,300 for single filers (slide 27).
We need to calculate AMTI to see if any of the AMT exemption is phased out. AMTI is the sum of taxable income plus adjustments ($374,400 + $155,500=$529,900).
The taxpayer’s AMTI ($529,900) is a bit above the phase-out range ($510,300), which means that she will lose a bit of her AMT exemption. This exemption is phased out by 25% of the amount of AMTI over $510,300. Therefore, the phased-out amount is $4,900 [($529,900 – $510,300) × 25%].
Once you subtract $4,900 from her AMT exemption, the AMT exemption she can still take is $66,800 ($71,700 – $4,900), which means the amount subject to AMT tax is the difference between AMTI and her exemption ($529,900-$66,800=$463,100).
The AMT tax she will owe is the difference between her “tentative minimum tax” (slide 28) and her regular tax liability (which the problem tells you is $74,760).
Her “tentative minimum tax” (slide 28) is 26% of the first 194,800 and 28% of everything above $194,800 {($194,800 × 26%) + [($463,100 – $194,800) × 28%]=$125,772}.
Therefore, the AMT tax she will owe is the difference between $125,772 and $74,760 ($125,772 - $74,760 = $51,012).
