Individual Tax Issues Flashcards
Farr, an unmarried taxpayer, had $70,000 of adjusted gross income and the following deductions for regular income tax purposes:
Home mortgage interest on a loan to acquire a principal residence $11,000
Miscellaneous itemized deductions above the threshold limitation $ 2,000
What are Farr’s total allowable itemized deductions for computing alternative minimum taxable income?
$11,000 - 2% miscellaneous itemized deductions are not allowed for AMT purposes. Home mortgage interest is allowed as long as the loan proceeds were used to acquire or make capital improvements to a principal residence. Thus, the correct answer is $11,000
Which of the following may not be deducted in the computation of alternative minimum taxable income of an individual?
A. Traditional IRA account contribution.
B. One-half of the self-employment tax deduction.
C. Personal exemptions.
D. Charitable contributions.
C - Personal exemptions cannot decrease AMT income.
In 2015, Don Mills, a single taxpayer, had $70,000 in taxable income before personal exemptions. Mills had no tax preferences. His itemized deductions were as follows:
State and local income taxes
$5,000
Home mortgage interest on loan to acquire residence
6,000
Miscellaneous deductions that exceed 2% of adjusted gross income
2,000
What amount did Mills report as alternative minimum taxable income before the AMT exemption?
$77,000 - The alternative minimum tax ensures that all taxpayers share the tax burden fairly by preventing taxpayers with substantial income from avoiding significant tax liability. The alternative minimum tax equals the excess (if any) of the tentative minimum tax over the regular tax. In computing a taxpayer’s alternative minimum taxable income, several adjustments and preferences are made to a taxpayer’s taxable income before personal exemptions. Adjustments are a substitution of an amount used in computing alternative minimum tax for an amount used computing regular tax. Preferences involve the addition of the difference between alternative minimum tax and regular tax treatments. Included in the preferences are those stipulating that state and local income taxes and miscellaneous itemized deductions are not deductible for alternative minimum tax purposes. Home mortgage interest on loan to acquire residence is deductible under both the regular tax and the alternative minimum tax.
Thus, Mills must add back his state and local income taxes of $5,000 and miscellaneous deductions that exceed 2% of adjusted gross income of $2,000 to his $70,000 of taxable income before personal exemptions, putting his alternative minimum taxable income at $77,000
Alternative minimum tax preferences include
- Tax exempt interest from private activity bonds issued After August 7, 1986
- Charitable contributions of appreciated capital gain property
1 only
On their joint tax return, Sam and Joann had adjusted gross income (AGI) of $150,000 and claimed the following itemized deductions:
Interest of $15,000 on a $100,000 home equity loan to purchase a motor home
Real estate tax and state income taxes of $18,000
Unreimbursed medical expenses of $15,000 (prior to AGI limitation)
Miscellaneous itemized deductions of $5,000 (prior to AGI limitation).
Both Sam and Joann are less than 65 years old. Based on these deductions, what would be the amount of AMT add-back adjustment in computing alternative minimum taxable income?
$35,000 - The following amounts are added back to taxable income to compute AMT income:
Interest because proceeds were not used for principal residence $15,000
Taxes 18,000
Medical expenses (no adjustment since 10% of AGI threshold applies for regular tax also) -0-
2% miscellaneous itemized deductions (deducted $5,000 - (2% x $150,000) for regular tax) 2,000
Total add-back $35,000
An employee who has social security tax withheld in an amount greater than the maximum for a particular year, may claim
A. Such expenses as either a credit or an itemized deduction, at the election of the employee, if that excess resulted from correct withholding by two or more employers.
B. Reimbursement of such excess from his employers, if that excess resulted from correct withholding by two or more employers.
C. The excess as a credit against income tax, if that excess resulted from correct withholding by two or more employers.
D. The excess as a credit against income tax, if that excess was withheld by one employer.
C - An employee who has social security tax withheld in an amount greater than the maximum for a particular year, 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
