Module 3: AMT and Other Taxes Flashcards
What is the alternative minimum tax?
A tax designed to ensure that taxpayers who take a large number of tax-preference deductions pay a minimum amount of tax on their income
The excess of the tentative AMT over regular tax
What is the AMT calculation?
Regular taxable income \+/- Adjustments \+ Preferences = AMTI - Exemption = AMT base x AMT rate = Tentative AMT tax - AMT foreign tax credit = Tentative minimum tax - Regular income tax = Alternative minimum tax
For all taxpayers except MFS, what is the rate appled to taxable AMTI?
26% applied to the firs $187,800 of taxable excess AMTI and 28% of all taxable excess AMTI exceeding $187,800
Concerning individual AMT, what are the four areas the CPA exam focuses on?
- Exception formula
- Distinguishing “adjustments” from “preferences”
- AMT credit carryforward period (against regular tax)
- Credits: available to reduce ATM (not regular tax)
EXEMPTIONS (1 OF 4)
For exemptions, what is the exemption amount?
Single taxpayers:
54,300 - [25% x (AMTI - 120,700)]
MFJ:
84,500 - [25% x (AMTI - 160,900)]
MFS:
42,250 - [25% x (AMTI - 80,450)]
ADJUSTMENTS vs PREFERENCES (2 OF 4)
What are adjustments to AMT?
Specific items that may increase or decrease AMT because the treatment of the item for AMT purposes is different from that for regular tax purposes
ADJUSTMENTS vs PREFERENCES (2 OF 4)
What are the common adjustments to AMT?
(PANIC TIME)
- Passive activity losses
- Accelerated deprecation
- Net operating loss of the individual taxpayer
- Installment income of a dealer
- Contracts - percentage completion versus completed contract
- Tax “deductions
- Interest deductions on some home equity loans
- Miscellaneous deductions not allowed
- Exemptions (personal) and standard deduction
ADJUSTMENTS vs PREFERENCES (2 OF 4)
How do the different adjustments affect AMT?
PANIC increases or decreases AMT
TIME only increases AMT (itemized deduction)
ADJUSTMENTS vs PREFERENCES (2 OF 4)
What are tax preference items?
Items that are always add-back
Results in more income or fewer deductions being recognized for AMT versus regular tax
ADJUSTMENTS vs PREFERENCES (2 OF 4)
What are common tax preference items?
(PPP)
- Private activity bond interest income (on certain bonds)
- “Percentage depletion” deduction (excess over adjusted basis of property)
- Pre-1987 accelerated depreciation
CREDIT CARRYFORWARD (3 OF 4) How long is the carry over period for AMT paid in a taxable year?
Carry forward indefinitely (forever)
CREDIT CARRYFORWARD (3 OF 4) What can the carried over AMT be applied to?
Regular tax, not future AMT
CREDIT CARRYFORWARD (3 OF 4) Which adjustments and preferences cannot be carried forward as part of the "credit"?
- Tax deductions
- Interest deduction on some home equity loans
- Miscellaneous deductions not allowed
- Exemptions (personal) and standard deduction
- Private activity bond interest income (on certain bonds)
- “Percentage depletion” deduction (excess of adjusted basis of property)
How to the PANIC adjustments affect regular taxable income when calculating AMTI?
- Passive activity losses - added back/recalculated
- Accelerated depreciation adjustment
- Real property - difference b/w regular tax depreciation and SL w/40 year life
- Personal property - difference b/w regular tax depreciation and 150% DB
- No adjustment for Section 179 expensed property - Net operating loss - must be recomputed
- Installment method - may not be used by dealer for property sales
- Contracts (LT) - differece b/w POC method and completed-contract method or any other method of acct = adjustment
How do the TIME adjustments affect regular taxable income when calculating AMTI?
- Taxes reduced by taxable refunds - added back
- Interest
- Mortgage interest not used to buy/build/improve dwelling is added back
- Investment interest expense must be recalculated - Miscellaneous deductions subject to 2% floor - added back (not allowed)
- Exemptions (personal) and standard deductions - added back
How the tax preference items (PPP) affect regular taxable income when calculating AMTI?
Always adds to regular taxable income
CREDITS (4 OF 4)
What tax credits are permitted as a credit to reduce the AMT?
(FACCE)
- Foreign
- Adoption
- Child
- Contribution to IRA
- Earned income
What are “other taxes”?
- Self-employment tax
- Tax penalty imposed by individual mandate section of the Affordable Care Act
- Kiddie Tax
What is the self-employment tax?
It represents the employer portion and the employee portion of FICA taxes (SS and Medicare) imposed on self-employment income
What is the additional medicare tax?
Imposed by the Affordable Care act
0.9% of wages in excess of $250,000 for MFJ; $125,000 for MFS; and $200,000 for all other taxpayers
What is the net investment income tax?
Applies a rate of 3.8% to certain net investment income of individuals who have income above the statutory threshold amounts ($250K for MFJ, $200K for S/HH)
What does net investment income include?
Interest, dividends, capital gains, rental and royalty income, nonqualified annuities, and income from businesses involved in trading of financial instruments/commodities
What is the tax penalty imposed by the Individual Mandate Section of the Affordable Care Act?
Tax penalty imposed on certain individuals who are not covered by health insurance
The lesser of $695 per person or 2.5% of family income, w/ max of $2,085
What is the kiddie tax?
Tax on interest and dividend income
Net unearned income of a dependent child under 18 years of age (or, age 18 to under 24 who does not provide over half of his/her own support and is a full-time student) is taxed at the parent’s higher tax rate
