Unit 4 Flashcards
AMT
- AMT, or Alternative Minimum Tax, started in 1969 as an “add-on tax.”
- It became a parallel system to the regular tax system in 1978.
- Calculating AMT can range from simple to complex based on the details of the tax return.
Calculating AMT
- Adjust regular taxable income with specific items to get AMTI (Alternative Minimum Taxable Income).
- Subtract the AMT exemption from AMTI to get the initial AMT base.
- Reduce this base by 15% or 20% of certain income (like dividends and long-term capital gains).
- Apply special AMT rates (26% or 28%) to compute the AMT liability before the special income tax.
- Multiply the 15% or 20% income by their respective rates and add to the previous step for the final AMT liability.
- Pay whichever is higher: the regular income tax or the AMT liability.
AMT Exemption Decrease
If AMTI exceeds specific thresholds ($1,156,300 for MFJ, $578,150 for Single), the AMT exemption decreases by 25% of the AMTI excess over the threshold.
Preference Items
- Accelerated Depreciation: If real or leased property placed in service before 1987 has accelerated depreciation exceeding hypothetical straight-line depreciation.
- Pollution Control: If amortization allowance for pollution control facilities exceeds depreciation.
- Intangible Drilling Costs: Excess IDCs reduced by 65% of net income from oil, gas, and geothermal properties.
- Interest on Private Activity Bonds: Except for bonds issued in 2009 and 2010.
- Percentage Depletion: If percentage depletion exceeds the property’s adjusted basis (applies to mining properties).
Adjustments
- ISO Bargain Element: Adjustment in the first taxable year when ISO stock rights become freely transferable or no longer subject to risk of forfeiture.
- Completed Contract Method: Adjust long-term contract income to reflect percentage of completion method.
- Real Property: Adjust MACRS depreciation for property placed in service after 1986 and before 1999 to hypothetical straight-line depreciation using a 40-year life.
- Personal Property: Adjust MACRS deduction for property placed in service after 1998 to 150% declining balance method.
If a taxpayer does not itemize what do you add back
The standard deduction
AMT Adjustments for itemized deductions
- Add back all itemized deductions to taxable income.
- Subtract only allowable itemized deductions, including:
- Gambling losses (limited to gambling winnings)
- Investment interest expense (limited to net investment income)
- Interest on qualifying mortgage debt
- Medical expenses (in excess of 7.5% of AGI)
- Casualty losses (in excess of 10% of AGI)
- Charitable contributions (subject to AGI limits)
- Estate tax deduction on IRD
To Reduce Final AMT Liability
- Subtract the 15%/20% income items from the AMT base before applying the 26% and/or 28% rates.
- Apply the AMT rates (26%/28%) on the remaining AMT base.
- Add the (15%/20% income x 15%/20% tax) to the calculated AMT liability for the final AMT liability.
Exclusion Items
cause a permanent change in tax, such as:
Nondeductible itemized deductions (e.g., property taxes, sales or income taxes, excise taxes)
Interest from private activity bonds
Certain home mortgage interest, like home equity loans
Deferral Items
are timing differences, not permanently altering taxable income, including:
Differences in depreciation methods
Exercise of ISOs
Long-term contract accounting
AMT Credit: Creation, Usage, and Limitations
- The AMT credit is created when the taxpayer pays AMT generated from deferral items in the prior year; exclusion items do not generate this credit.
- It is utilized when the regular tax liability exceeds the AMT liability, reducing the final tax liability to the AMT amount.
- If the AMT liability exceeds the regular tax liability in a year, the credit cannot be used, and the taxpayer must pay the higher AMT liability.
- Any unused credit is carried forward indefinitely for future use.
Business AMT
- Sole proprietors, S-Corporation owners, partners of partnerships, and members of LLCs, known as pass-through entities, are subject to individual AMT.
- Pass-through entities are taxed on the individual level for AMT.
- C-Corporations are no longer subject to AMT
Trusts and AMT
- Trusts are subject to AMT, with similar preference items and adjustments as individuals.
- The AMT exemption for trusts is $28,400.
- The AMTI threshold for the phase-out of the AMT exemption is $94,600.
- Like individuals, trusts face a 25% reduction of the AMT exemption for any excess AMTI over the threshold.
Optimizing AMT Strategy
- If subject to AMT, accelerate income into AMT years and delay deductions to regular tax years.
- Income taxed at lower 26% or 28% rate in AMT years.
- Deferred deductions may allow higher deductions in future regular tax years.
- Be cautious not to accelerate too much income or defer too many deductions.
- Aim to balance tax liability under AMT with regular tax liability.
Forecasting Minimum Tax Liability AMT
Forecasting Minimum Tax Liability:
- Estimate AGI and add preference items (excluding state or local tax refunds).
- Subtract allowable itemized deductions.
- Calculate forecasted AMTI.
- If AMTI exceeds threshold, subtract 25% of excess from AMT exemption.
- Subtract modified AMT exemption from AMTI to get forecasted AMT base.
- Tax first threshold at 26%, and remaining amount at 28%.
- Determine minimum tax liability for planning withholding and estimated quarterly payments.
Planning for Incentive Stock Options ISOs
- Understand the AMT adjustment associated with ISOs.
- Recognize that paying AMT for exercising ISOs is temporary.
- The AMT liability from exercising ISOs will reverse upon eventual sale of the underlying securities.
- Since this is a deferral, the AMT paid will create an AMT credit.
- Use the AMT credit whenever the regular tax liability exceeds the AMT liability.
Accelerated Depreciation (preference item)
If real or leased property placed in service before 1987 has accelerated depreciation exceeding hypothetical straight-line depreciation.
Pollution control (preference item)
If amortization allowance for pollution control facilities exceeds depreciation.
Intangible Drilling Costs (preference item)
Excess IDCs reduced by 65% of net income from oil, gas, and geothermal properties.
Interest on Private Activity Bonds (preference item)
Except for bonds issued in 2009 and 2010.
Percentage depletion (preference item)
Percentage Depletion: If percentage depletion exceeds the property’s adjusted basis (applies to mining properties).
If AMTI exceeds the threshold what do you do?
subtract 25% of excess from AMT exemption.
Pass through entities are taxed at what level for AMT?
Individual level
AMT credit is created when?
when the taxpayer pays AMT generated from deferral items in the prior year; exclusion items do not generate this credit.
Are trusts subject to AMT?
Trusts are subject to AMT, with similar preference items and adjustments as individuals.
If subject to AMT, what would you do regarding income and deductions?
-accelerate income into AMT years
-delay deductions to regular tax years.
DD DELAY DEDUCTIONS
Sole proprietors, S-Corporation owners, partners of partnerships, and members of LLCs, known as pass-through entities, are subject to what AMT?
individual AMT.
Income taxed at what in AMT years
Income taxed at lower 26% or 28% rate in AMT years.
Paying AMT for exercising ISOs is what
paying AMT for exercising ISOs is temporary.
What happens to AMT liability upon the eventual sale of the underlying securities?
The AMT liability from exercising ISOs will reverse upon eventual sale of the underlying securities.
What happens when you defer AMT deductions?
Deferred deductions may allow higher deductions in future regular tax years.
When would you utilize AMT credit?
It is utilized when the regular tax liability exceeds the AMT liability, reducing the final tax liability to the AMT amount.
If the AMT liability exceeds the regular tax liability in a year, what happens with the credit?
If the AMT liability exceeds the regular tax liability in a year, the credit cannot be used, and the taxpayer must pay the higher AMT liability.
ISO bargain element (adjustment)
ISO Bargain Element: Adjustment in the first taxable year when ISO stock rights become freely transferable or no longer subject to risk of forfeiture.
Completed contract method (adjustment)
Completed Contract Method: Adjust long-term contract income to reflect percentage of completion method.
Real property (adjustment)
Real Property: Adjust MACRS depreciation for property placed in service after 1986 and before 1999 to hypothetical straight-line depreciation using a 40-year life.
AMT requires taxpayers adjust their regular taxable income by
a number of adjustments and preferences
AMT exemption is
an amount that is subtracted to arrive at the AMT base
What do you multiply the AMT base by?
special AMT rates to compute the AMT
Why are most individual taxpayers not subject to AMT?
because their regular income tax is greater than AMT. Because they don’t have substantial adjustments and/or preference items
What do AMT adjustments take into consideration?
itemized deductions and timing differences
What do you use to minimize or eliminate AMT liability?
AMT credit
What is the first thing you do to determine AMT liability?
adjust regular taxable income with adjustments and preferences
After you’ve adjusted taxable income with adjustments and preferences, what do you do to calculate AMT liability?
Subtract exemption amount to arrive at AMT base
Once you have your AMT base what do you do
Multiply the base by the special AMT rates to compute the AMT
What is the final step in determining AMT liability?
Pay the greater of the AMT or the regular income tax
Couple is MFJ with regular taxable income of $90k and preferences and adjustments of $88k. What is their regular and AMT liability?
Regular taxable income based on 90k = $10,336
90,000 + 88,000 = $178,000 - $133,300 exemption = $44,700 * .26 = $11,622
You’d pay the AMT rate
“AMT Payable” = 11,622 - 10,336 = $1,286
AMT liability can also be called
tentative minimum tax
AMT Exemption Amounts
MFJ/Surviving Spouse = $133,300
Single/HoH = $85,700
MFS = $66,650
If you’re making over a certain amount of income, the exemption that you get for AMT is reduced by 25%
If you’re MFJ/Surviving spouse making over $1,218,700
Individ/HoH making over $609,350
MFS making over $609,350
AMT tax rates of 26% and 28% applied how
26% of the first $232,600
28% any amount over $232,600
Preference Items are
provisions built into the tax code granting favorable treatment to taxpayers
What are the 2 most common tax preference items
-Excess of Accelerated Depreciation (ACRS Cost Recovery)
-Tax Exempt interest from certain private activity bonds issued before 2009 or after 2010
Is everything that gets preferential tax treatment a preference item?
No - for example muni bond interest is typically exempt from federal interest but is not a preference item
Tax Exempt Interest on Private Activity Bond Preference Item
State/Local bonds issued to fund private businesses
Aug 7 1986 - Jan 1 2009/After 2010
These are bonds that are regularly tax exempt but taxable under AMT
Which is the primary AMT generator, preference items or adjustments?
Adjustments - most taxpayers won’t have preference items
Richard, single taxpayer, has $15k ACRS cost-recovery deduction on real property placed in service before 1987 and held for investment. The straight-line ACRS deduction would have been 10k. He also has $10k of tax exempt interest on private activity bonds. What are his total preferences?
$5,000 excess cost recovery deduction (15k - 10k)
$10,000 tax exempt interest on private activity bonds
$15k total tax preferences
AMTI =
taxable income
+ positive adjustment
-negative adjustments
+ preference items
= AMTI
AMT adjustments have 2 categories
- itemized deductions that are not allowed in computing AMTI
- timing differences relating to the deferral of income or acceleration of deductions
Itemized deductions not deductible under AMT
all state local and foreign income tax
all real and personal property tax
all sales tax
These must be added back to calculate AMTI
Deductible for AMT purposes
Casualty losses greater than 10% AGI
Charitable contributions
Medical expenses greater than 7.5% AGI
Qualified housing interest/investment interest
Estate tax deduction on income in respect to decedent
Gambling losses
Single taxpayer has following itemized DDs
Mortgage Int (first mort) $17,200
Charitable Cont $4000
State income tax $8,155
Gambling losses $1,900
Margin interest $4,100
AGI $245,400. Under reg. tax method she is allowed itemized deductions of $37,200, what amount of itemized is she allowed under AMT?
Mort int $17,200
Charity $4000
Gambling loss $1,900
Margin $4,100
$27,200
CANT deduct taxes under AMT
Rob has residential rental property that cost $100k. Depreciation is $3,636 calculated w/straight line method, 27.5 recovery period, based on MACRS rules. What is the depreciation for ATM purposes?
$2,500 - based on the straight line method and 40 year recovery period, under alternative depreciation system.
Positive AMT adjustment is $1,136 ($3,636 - 2500 = 1,136)
Office furniture used in business cost $20k. Placed in service many years ago based on MACRS rules. Reg depreciation = $2,498. AMT depreciation = $2,450 based on alt depreciation system (150% DB method, half yr convention, 7 year recovery period) What is positive AMT adjustment?
$2498 - 2450 = $48
If bonus depreciation been taken at beg. of assets life, or if asset placed in service before 2015 and was eligible for bonus depreciation, then no AMT depreciation adjustment.
R&E expenditures of $50k expensed in current yr. DD for AMT purposes is $5k ($50k, 10 yrs) This is bc expenditures are capitalized and amortized over 10 yr period. What is positive AMT adjustment?
$50,000 - $5000 = $45000
Tom has ISO option for 3k shares of ABC corp.
Option price $20
Shares have FMV of $50
On exercise of option tom has no ordinary liability but generates $90k of AMT income. What should he do to avoid creating that much AMT?
He could exercise half this year and half next - keeping him under AMT limits, save creating the AMT
Year 1: Your regular tax liability is $10,000, but your AMT liability is $15,000. You pay $15,000 in AMT. This creates a $5,000 potential AMT credit ($15,000 - $10,000).
Year 2: Your regular tax liability is $12,000. You can use your $5,000 AMT credit from Year 1 to reduce your Year 2 tax liability to $7,000 ($12,000 - $5,000).
Common reasons for AMT credit creation
-Exercise of incentive stock options (ISOs): The difference between the exercise price and market value is often taxed under AMT rules, even if not recognized for regular tax purposes.
-State and local tax (SALT) deductions: The deduction for state and local taxes is limited under the AMT, potentially creating a difference in liability.
AMT credit carryforward
The AMT credit is not refundable in the current year. Instead, it can be carried forward indefinitely to offset future regular tax liabilities.
What capital gains rates do you pay under AMT? Same or different?
Same as regular
Calculate AMTI
Reg taxable income
+positive AMT adjustments
-negative AMT adjustments
+Amt preference items
= AMTI
You would pay AMT rate of 26% on the first what $
232,600
You would pay AMT of 28% on what?
Anything over $232,600
Finding AMTI
Regular taxable income
+positive adjustments
-negative adjustments
+preference items
= AMTI
Finding AMT base
AMTI
- exemption
=AMT BASE
Once you have AMT base what do you do
Multiply by AMT rate.
First 232,600 * .26
anything over that * .28
that gives you tentative AMT then you - regular income tax on taxable income
What part of AMT are you calculating when you subtract the exemption?
Amt base
When would a positive AMT adjustment happen?
Reg tax adjustment or DD > AMT adjustment or DD
When would a negative adjustment happen?
When AMT adjustment or DD > reg tax adjustment or DD
Tax preference items are always what: negative or positive
Positive
All of these are positive adjustments for AMT except:
- Personal Casualty Loss
- Standard Deduction
- Addtl Standard Deduction amount
- Property Tax deduction
personal casualty loss is not a miscellaneous itemized deduction and can be used for regular tax and AMT calculations.
Standard deduction, addtl standard deduction, and property tax deduction are disallowed for AMT purposes and are, accordingly, positive adjustments
Couple married w/4 kids all under 17. 35k of preference items.
Salary: 227k
Interest Income: 20k
Biz Income: 30k
AGI: 277k
Minus Itemized DDs
SALT: -10k
Mortg. int on Personal Res: -13k
Charity: -3k
QBI (30,000 * .2) = -6k
Taxable income 245k
Now what do you do?
Add back preference items
+ 35k
Add back adjustments:
Excess depreciation (they had told you this) 75k - 50k = + 25K
SALT: + 10k
35K + 25K + 10k = 70K + 245K taxable income = 315k AMTI
MINUS EXEMPTION
315K -133k = $181,500 AMT TAX BASE
MULTIPLY BY 26%
$181,500 * .26 = $47,190
SUBTRACT CREDITS
$2000 * 4 = -8000 child tax credit
= $39,190 tentative minum tax
DO THE SAME WITH REG TAX
Reg tax = $45,600 - 8000 child tax cred. = 37,600
AMT 39,190 - reg 37,600 = $1,590 AMT MIN TAX
TOTAL TAX LIABILITY = $37,600 + $1,590 = 39,190
Couple MFJ w/1 kid. Reg tax = $15,434
ABBREVIATED RETURN:
AGI = $158,000
Itemized DDs = $48,500
Taxable Income = $110,000
OTHER ISSUES:
ISO Bargain Element: $30,000
Income from reclass of completed contract method to percent completion method: $14,000
ITEMIZED DDs Detail:
Mort Interest: $24,000
Prop Tax: $6,700
Charity: $14,500
State Income Tax: $3,300
What is their AMTI?
AMTI
Reg Taxable income
+positive adjust
- negative adjust
+ preference items
= AMTI
AGI = $158,000
SALT: -$10,000
Mort Int : -$24,000
Charity: -$14,500
Taxable income = $109,500
ADD BACK PREFERENCE ITEMS = 0
ADJUSTMENTS =
+ $30,000 ISO
+ $14,000 CONTRACT
+ $10,000 SALT
= 163,500
