M4: AMT and other Taxes

Question 1

AMT

Answer 1

Regular taxable income +- adjustments + preferences = Alternative minimum taxable income - Exemptions = Alternative minimum tax base x AMT rate = Tentative AMT tax - AMT foreign tax credit = Tentative minimum tax - Regular income tax = Alternative minimum tax (pay in addition to regular tax)

General rule: Pay greater of regular tax or Tentative minimum tax

Question 2

Pass Key

Answer 2

CPA examination focuses majority of questions concerning Individual alternative minimum tax on the following four areas:

1 exemption formula
2 distinguishing “adjustments” from “preferences”
3 AMT credit carry forward period (against regular tax)
4 Credits: available to reduce AMT (not regular tax)

Question 3

Exemption formula

Answer 3

Single: 54,300 less [25% x (AMTI - 120,000)]
MFJ: 84,5000 less [25% x (AMTI - $160,900)]
MFS: 42,500 less [25% x (AMTI - 80,450)}

Question 4

Adjustments

Answer 4

PANIC TIME (Itemized deductions always “Adds” to Regular Taxable Income)

Passive activity losses are added back or recalculated

Accelerated depreciation (post 1986):

• on real property, this is difference between regular tax depreciation & straight line using a 40 year life for property placed in service after 1986
• personal property, difference between regular tax depreciation and 150 percent declining balance depreciation for regular tax purposes, there will be no AMT depreciation adjustment of 200 percent declining-balance eligible property

Net operating loss of individual taxpayer; loss must be recomputed

Installment income of a dealer; installment method may not be used for property sales

Contracts - percentage completion vs completed contract

Taxes reduced by taxable refunds

Interest; home mortgage interests when the mortgage loan proceeds were not used to buy, build, or improve taxpayer’s qualified dwelling

Miscellaneous deductions not allowed; subject to the 2% floor

Exemptions (personal) & standard deduction

Question 5

Tax Preference Items

Answer 5

PPP

Private activity bond interest income (on certain bonds)
Percentage depletion deduction (excess over adj. basis of property)
Pre-1987 accelerated depreciation