R2-3 Flashcards
Don Mills, a single taxpayer, had $70,000 in taxable income before personal exemptions in the current year. 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?
a.
$77,000
b.
$83,000
c.
$72,000
d.
$75,000
Choice “a” is correct. Mills’ alternative minimum taxable income starts with his taxable income ($70,000). This is increased by state and local taxes paid ($5,000) and miscellaneous deductions that exceed 2% of adjusted gross income ($2,000) for a total of $77,000. The home mortgage interest on a loan to acquire the residence ($6,000) does not increase alternative minimum taxable income.
Choice “c” is incorrect. State and local income taxes must be added back to Mills’ taxable income in calculating alternative minimum taxable income.
Choice “d” is incorrect. Miscellaneous deductions that exceed 2% of AGI must be added back to Mills’ taxable income in calculating alternative minimum taxable income.
Choice “b” is incorrect. Home mortgage interest is not added back to Mills’ taxable income to calculate alternative minimum taxable income.
Alternative minimum tax preferences include:
~~Tax exempt interest from private activity bonds
~~Charitable contributions of appreciated capital gain property
a.
Yes
No
b.
No
No
c.
No
Yes
d.
Yes
Yes
Choice “a” is correct. Tax exempt interest from private activity bonds (generally) and accelerated depletion, depreciation, or amortization are alternative minimum tax preference items. Charitable contributions of appreciated capital gain property are not alternative minimum tax preferences.
The credit for prior year alternative minimum tax liability may be carried:
a.
Forward for a maximum of 5 years.
b.
Forward indefinitely.
c.
Back to the 3 preceding years or carried forward for a maximum of 5 years.
d.
Back to the 3 preceding years.
Choice “b” is correct. Alternative minimum tax (AMT) paid can be claimed as a credit against other years if the tax was paid on items that increased AMT that year but will reverse in later years. The concept is the same as deferred taxes for financial accounting purposes. The credit is carried forward indefinitely.
The alternative minimum tax (AMT) is computed as the:
a.
Excess of the tentative AMT over the regular tax.
b.
The tentative AMT plus the regular tax.
c.
Excess of the regular tax over the tentative AMT.
d.
Lesser of the tentative AMT or the regular tax.
Choice “a” is correct. The alternative minimum tax (AMT) is computed as the excess of tentative AMT over the regular tax.
Choice “c” is incorrect. The alternative minimum tax (AMT) is the excess of the tentative AMT over the regular tax, not the other way around.
Choice “b” is incorrect. The alternative minimum tax (AMT) is the excess of the tentative AMT over the regular tax, not the sum of the tentative AMT plus the regular tax.
Choice “d” is incorrect. The alternative minimum tax (AMT) is the excess of the tentative AMT over the regular tax, not the lesser of AMT or regular tax.
Robert had current-year adjusted gross income of $100,000 and potential itemized deductions as follows:
Medical expenses (before percentage limitations)
$ 12,000
State income taxes
4,000
Real estate taxes
3,500
Qualified housing and residence mortgage interest
10,000
Home equity mortgage interest (used to consolidate personal debts)
4,500
Charitable contributions (cash)
5,000
What are Robert’s itemized deductions for alternative minimum tax?
a.
$17,000
b.
$25,500
c.
$21,500
d.
$19,500
Choice “a” is correct. Robert’s itemized deductions for alternative minimum tax purposes are calculated as follows:
Medical expenses (exceeding 10% of AGI) $ 2,000
State income taxes (not allowed) −
Real estate taxes (not allowed) −
Qualified housing and residence interest 10,000
Home equity mortgage interest (not used to buy, build, or improve the home-not allowed) −
Charitable contributions (no difference) 5,000
Alternative Minimum Itemized deductions $ 17,000
Choices “d”, “c”, and “b” are incorrect, per the above calculation.
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?
a.
$11,000
b.
$2,000
c.
$13,000
d.
$0
Choice “a” is correct. Both mortgage interest and miscellaneous itemized deductions are deductible for regular (schedule A) tax purposes. However, miscellaneous itemized deductions are “adjustments” and, therefore, are not allowed as deductions for alternative minimum tax (AMT) purposes.
Choice “d” is incorrect. Mortgage interest is allowed as a deduction for AMT purposes.
Choice “b” is incorrect. Miscellaneous itemized deductions are not allowed for AMT purposes
Choice “c” is incorrect. The $2,000 miscellaneous itemized deductions are an add back for AMT purposes.
Which of the following is not an adjustment or preference to arrive at alternative minimum taxable income?
a.
Deductible medical expenses.
b.
Individual taxpayer net operating losses.
c.
Passive activity losses.
d.
Deductible contributions to individual retirement accounts.
Choice “d” is correct. Deductible contributions to individual retirement accounts are not an adjustment or preference in calculating a taxpayer’s alternative minimum taxable income. They are an adjustment in calculating adjusted gross income for regular (not alternative minimum) tax purposes.
Choices “b”, “c”, and “a” are incorrect. Adjustments to arrive at AMTI include individual net operating losses, passive activity losses, and medical expenses (to the extent they do not exceed 10% of AGI).
On their joint tax return, Sam and Joann, who are both over age 65, 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)
Based on these deductions, what would be the amount of AMT add-back adjustment in computing alternative minimum taxable income?
a.
$38,750
b.
$23,750
c.
$35,000
d.
$21,750
Choice “a” is correct. Per the mnemonic “PANIC TIMME,” for purposes of calculating alterative minimum taxable income, the taxpayer must add back, among other things, the following itemized deductions:
Taxes reduced by taxable refunds,
Home mortgage interest when the mortgage loan proceeds were not used to buy, build, or improve the taxpayer’s qualified dwelling (house, condominium, apartment, or mobile home not used on a transient basis),
Medical expenses not exceeding 10% of AGI, and
Miscellaneous deductions subject to the 2% of AGI floor.
The “PANIC TIMME” add-back is as follows:
Taxes $ 18,000
Home mortgage interest not used to buy, build, or improve a qualified dwelling (the motor home is not a qualified dwelling) 15,000
Medical expenses in excess of 7.5% AGI but not in excess of 10% of AGI (7.5% AGI is still used for taxpayers age 65 and over) 3,750
Deductible miscellaneous expenses in excess of 2% of AGI 2,000
Total “PANIC TIMME” add-back $ 38,750
Choices “d”, “b”, and “c” are incorrect per the above rule and per the above
Which of the following may not be deducted in the computation of alternative minimum taxable income of an individual?
a.
Personal exemptions.
b.
Charitable contributions.
c.
One-half of the self-employment tax deduction.
d.
Traditional IRA account contribution.
Choice “a” is correct. Alternative minimum tax will add back various deductions to arrive at alternative minimum taxable income. If an item is not added back, then it is allowed to be deducted. Personal exemptions are added back. Therefore, they are not deducted to arrive at alternative minimum taxable income.
Choice “d” is incorrect. Alternative minimum tax will add back various deductions to arrive at alternative minimum taxable income. If an item is not added back, then it is allowed to be deducted. Traditional IRA contributions are not added back. Therefore, they are deducted to arrive at Alternative minimum taxable income.
Choice “c” is incorrect. Alternative minimum tax will add back various deductions to arrive at alternative minimum taxable income. If an item is not added back, then it is allowed to be deducted. One half of the self-employment tax deduction is not added back. Therefore, it is deducted to arrive at alternative minimum taxable income.
Choice “b” is incorrect. Alternative minimum tax will add back various deductions to arrive at alternative minimum taxable income. If an item is not added back, then it is allowed to be deducted. Charitable contributions are not added back. Therefore, they are deducted to arrive at alternative minimum taxable income.
When computing alternative minimum tax, the individual taxpayer may take a deduction for which of the following items?
a.
Personal and dependency exemptions.
b.
Miscellaneous itemized deductions in excess of 2% of adjusted gross income floor.
c.
Casualty losses.
d.
State income taxes.
Choice “c” is correct. Casualty losses are not added back in the alternative minimum tax (AMT) calculation. Therefore, they are allowed as a deduction.
Choice “d” is incorrect. State income taxes are added back in the AMT calculation. Therefore, they are not allowed as a deduction.
Choice “a” is incorrect. Personal and dependency exemptions are added back in the AMT calculation. Therefore, they are not allowed as a deduction.
Choice “b” is incorrect. Miscellaneous itemized deductions in excess of 2% of AGI are added back in the AMT calculation. Therefore, they are not allowed as a deduction.
