Bryant - Course 4. Tax Planning. 15. Alternative Minimum Tax

Question 1

Module Introduction

In the past, many taxpayers carefully planned their financial affairs using these special tax provisions. They were able to thereby substantially reduce, or even eliminate, their entire income tax liability. As a result, new rules were implemented in 1969 to ensure that all taxpayers would pay at least a minimum amount of income tax. Thus, the Alternative Minimum Tax (AMT) was created.

The Alternative Minimum Tax (AMT) module will present to you the methods for calculating the alternative minimum tax for individuals and corporations.

Answer 1

Upon completion of this module you should be able to:
* Sequence the steps in the computation of AMT for individuals,
* List the adjustments affecting the AMT calculation,
* Specify tax filing procedures for AMT,
* Describe the process of computation of corporate Alternative Minimum Taxable Income (AMTI), and
* List the exemptions available to small businesses.

Question 2

Previously, the alternative minimum tax (AMT) was referred to as an add-on minimum tax because it was added to the taxpayer’s regular income tax. The present AMT system was originally created in 1978. It is no longer an add-on tax and now functions as a separate and parallel tax system. Taxpayers are first required to compute their regular income tax liability, and then compute their tax under the AMT system.

Answer 2

The AMT system requires that taxpayers adjust their regular taxable income by a number of adjustments and preferences. An exemption amount is then subtracted to arrive at the AMT base. The AMT base is multiplied by the special AMT rates to compute the AMT. Taxpayers are required to pay the greater of either the regular income tax or the AMT.

The present AMT applies to individuals, corporations, estates, and trusts.

To ensure that you have an understanding of alternative minimum tax, the following lessons will be covered in this module:
* Individual Alternative Minimum Tax
* Trust Alternative Minimum Tax

Question 3

The present Alternative Minimum Tax (AMT) system uses special methods of tax computation. Due to changes in the AMT calculations, a lack of any inflation adjustments for the AMT exemption, and the generally higher income of taxpayers, more and more taxpayers are either subject to AMT now or will be subject to AMT in the near future. Understanding this area of the tax system and being able to assist your clients in planning for AMT issues is vitally important for a financial planner.

At this point in time, however, most individual taxpayers are not subject to alternative minimum tax (AMT) because their regular income tax is greater than the AMT. This is because many taxpayers do not have substantial adjustments and/or preference items. Changes in the tax code, such as reductions of the regular marginal tax brackets, are making more taxpayers subject to AMT than before. Therefore, financial planners must be sensitive to AMT issues since a planning decision, which may be advantageous, could be disastrous if that decision places the taxpayer into an AMT situation.

Answer 3

AMT adjustments take into consideration itemized deductions and timing differences. Tax planning using AMT credit can help individuals to minimize or even avoid AMT liability. An individual whose tax computation results in AMT tax liability must follow the AMT tax filing procedures specified by the IRS.

To ensure that you have an understanding of individual alternative minimum tax, the following topics will be covered in this lesson:
* Computational Aspects
* Tax Preference Items
* AMT Adjustments
* Summary of AMT Computation
* Planning for the Alternative Minimum Tax
* AMT Tax Filing Procedures

Upon completion of this lesson, you should be able to:
* Determine whether an individual taxpayer is subject to AMT,
* Compute AMT for individuals,
* Calculate AMT with tax preferences,
* List the adjustments affecting AMT calculation,
* Specify the effect of itemized deductions and credit on AMT,
* Describe strategies for ATM planning, and
* Outline the procedures for AMT tax filing.

Question 4

What are the Steps to Compute AMT?

Answer 4

• Step 1. Make Adjustments
  Adjust regular taxable income by adjustments and preference items.
• Step 2. Subtract Exemption
  Subtract an exemption amount to arrive at the AMT base.
• Step 3. Apply AMT Rate
  Multiply the AMT base by the special AMT rates to compute the AMT.
• Step 4. Determine Amount to Pay
  Pay the greater of the regular income tax, or, the AMT.

Question 5

Determining AMT Liability Example:

Ricardo and Sue are married and file a joint return for 2023 with a regular taxable income of $30,000 and tax preferences and adjustments of $12,000. Their Alternative Minimum Taxable Income (AMTI) totals $42,000 ($30,000 + $12,000). Their alternative minimum tax base is zero because the AMT exemption amount is $126,500 (2023) for married individuals filing a joint return. Thus, their tax liability is based on the regular tax computation and no AMT liability is owed.

Answer 5

Assume the same facts as above for Ricardo and Sue except that they have tax preferences and adjustments of $131,000. Their AMTI totals to $161,000 ($30,000 + $131,000). Their tax liability using the regular computation would be based on taxable income of $30,000, or $3,160. However, deducting the AMT exemption amount of $126,500 (2022) from AMTI leaves Ricardo and Sue with an AMT base of $34,500. Thus, their AMT tax is the 26% AMT tax rate times their AMT base of $34,500, or $8,970. Thus, Ricardo and Sue must pay $8,970 in tax because it is greater than their regular tax of $3,160.

The terminology associated with this example is:
Regular tax liability = $3,160
AMT liability = $8,970
AMT payable = $5,810 ($8,970 - $3,160)

Question 6

What is the formula for computing the alternative minimum tax (AMT) for individuals?

Answer 6

TAXABLE INCOME

Plus: Tax preference items (per IRC Section 57)

Plus: The standard deduction if the taxpayer does not itemize

Plus or minus: Adjustments are required because different rules are used for calculating the alternative minimum taxable income as compared with taxable income, such as special AMT limitations on certain itemized deductions.

Equals: Alternative minimum taxable income (AMTI)

Minus: Exemption amount (2023):
* $126,500 for a married couple filing a joint return and surviving spouses
* $81,300 for single individuals and Head of Household status
* $63,250 for a married individual filing separately
* $28,400 for trusts and estates

The exemption amount is reduced by 25% of AMTI in excess of:
* $1,156,300 for a married couple filing a joint return and surviving spouses
* $578,150 for single individuals, head of households, and for a married individual filing separately
* $94,600 for trusts and estates

Equals: Alternative Minimum Tax Base

Times: Tax rate:
26% of first $220,700 [MFJ, HoH, or Single]
28% of amounts in excess of $220,700 [MFJ, HoH, or Single]

Minus: Nonrefundable personal credits

Equals: Tentative Minimum Tax

Minus: Regular Tax (after nonrefundable personal credits)

Equals: Alternative Minimum Tax

Question 7

Example of an AMT calculation:

The following are the details of Rita, an unmarried taxpayer filing single:

Taxable income = $185,000
Regular tax liability (after credits) = $45,497
Positive AMT adjustment due to limitations on itemized deductions = $25,300
Tax preferences in 2019 = $10,000
Rita has a nonrefundable adoption credit of $1,000 and a nonrefundable child and dependent care credit of $600

Rita’s alternative minimum tax for 2019 is calculated as follows:

Answer 7

Taxable income = $185,000
Plus: Tax preferences Items $10,000
Plus: Adjustments related to itemized deductions $25,300
Equals: Alternative minimum taxable income (AMTI) $220,300
Minus: Exemption $71,700
Equals: Alternative minimum tax base (AMT Base) $148,600
AMT 26% on first $194,800 of AMT Base $38,636
Plus: 28% on AMT Base over $194,800 $0
Equals: Tentative minimum tax $38,636
Minus: Regular tax ($45,497)

Alternative minimum tax (AMT payable) $0

Question 8

What are Tax preferences items?

Answer 8

Tax preferences are provisions in the Internal Revenue Code (IRC) granting favorable treatment to taxpayers. For example, accelerated depreciation allowed for real property placed in service before 1987 is a tax preference item. To compute the tax base for the alternative minimum tax (AMT), the tax preferences designated in IRC Section 57 must be added to taxable income.

Some of the most common tax preference items include the following:
* Excess of accelerated depreciation (ACRS cost recovery) claimed over a hypothetical straight-line depreciation amount for real property placed in service before 1987, computed on an item-by-item basis.
* Tax-exempt interest on certain private activity bonds issued before 2009 or after 2010. In general, private activity bonds are state or local bonds that are issued to help finance private businesses.
* Exclusion of gain on the sale of certain small business stock. The exclusion is 7% of the gain on the disposition of qualified small business stock under Section 1202.

All items receiving preferential treatment are not all tax preference items. For example, most municipal bond interest income is exempt from the federal income tax but is not a tax preference item. Only tax-exempt interest on private activity bonds issued after August 7, 1986 but before January 1, 2009 is subject to the AMT. Also, bonds issued by a municipality to fund certain nongovernmental activities such as industrial parks are subject to AMT. The interest on such bonds is tax-exempt for ordinary tax calculations but is taxable under AMT. This is one area where planning for AMT is important because liability for AMT will transform a tax-exempt investment into a taxable one.

Over the years, tax preference items have played a diminishing role in creating AMT, while tax adjustments, which we will see next, have become the primary AMT generator. Therefore, most taxpayers will not have tax preference items.

Question 9

Tax Preference Items Example:

Richard, a single taxpayer, has the following tax preference items for the current year:
* $15,000 ACRS cost-recovery deduction on real property placed in service before 1987 and held for investment. The straight-line ACRS deduction would have been $10,000.
* $10,000 of tax-exempt interest on private activity bonds.

What is Richard’s total tax preference?

Answer 9

Richard’s total tax preferences are $15,000, consisting of:
* $5,000 excess cost recovery deductions, and
* $10,000 tax-exempt interest on the private activity bonds.

Question 10

To compute the tax base for AMT, tax preference items must be __ ____??____ __ taxable income.
* added to
* subtracted from

Answer 10

added to

To compute the tax base for AMT, tax preference items designated in Section 57 must be added to taxable income.

Question 11

List items that are deductible for alternative minimum tax (AMT) purposes

Answer 11

Only certain itemized deductions are allowed in computing alternative minimum taxable income (AMTI). Additionally, the standard deduction is not allowed if an individual does not itemize deductions.

The following items are deductible for alternative minimum tax (AMT) purposes:
* Casualty and theft losses in excess of 10% of Adjusted Gross Income (AGI) (ONLY VALID FOR FEDERAL DECLARED DISASTER AREAS)
* Charitable contributions (but not in excess of the 20%, 30%, 50%, and 60% of AGI limitation amounts)
* Medical expenses in excess of 7.5% of AGI
* Qualified housing interest
* Certain other interest up to the amount of qualified net investment income included in the AMT base
* Estate tax deduction on income in respect of a decedent
* Gambling losses (to the extent of gambling winnings)

Question 12

List items that are NOT deductible for alternative minimum tax (AMT) purposes

Answer 12

Some of the more significant itemized deductions that are not deductible for the AMT include:
* State, local and foreign income taxes ($10,000 maximum), and
* Real and personal property taxes.

Some tax advisors recommend that cash-basis taxpayers prepay their local property taxes or state income taxes before the end of the year. This would reduce the current year’s tax liability. However, if the taxpayer is subject to the AMT, this may not be a valid strategy.

Question 13

Jane, a single taxpayer, has the following itemized deductions:
Home mortgage interest (first mortgage): $17,200
Charitable contributions: $4,000
State income taxes: $8,100
Deductible gambling losses: $1,900
Property taxes: $13,900
Deductible margin interest: $4,100
Jane’s AGI for the current year is $245,400. What amount of itemized deductions would be allowed for purposes of the AMT?
* $27,200
* $49,200
* $35,300
* $31,200

Answer 13

$27,200

All of the listed items are deductible under AMT except for the taxes (state & property).

Home mortgage interest (first mortgage): $17,200
Charitable contributions: $4,000
Deductible gambling losses: $1,900
Deductible margin interest: $4,100
$17,200 + $4,000 + $1,900 + $4,100 = $27,200

Question 14

List 4 of the most common alternative minimum tax (AMT) adjustments for individuals due to timing differences.

Answer 14

• For real property placed in service after 1986 and before January 1, 1999, the difference between the modified accelerated cost recovery system (MACRS) depreciation claimed using the property’s actual recovery period and a hypothetical straight-line depreciation amount calculated using a 40-year life.
• For personal property placed in service after 1998, the difference between the MACRS deduction and the amount determined by using the 150% declining balance method under the alternative depreciation system with a switch to the straight-line method.
• For research and experimental (R&E) expenditures, the difference between the amount expensed and the deduction that would have been allowed if the expenditures were capitalized and amortized over a ten-year period.
• For the deferral of taxability on the exercise of options received under an Incentive Stock Option plan. This is an area of particular importance to financial planners because the timing of the exercise of ISO options is usually discretionary. A choice to exercise ISO options when the taxpayer is subject to AMT or will become subject to AMT because of the exercise could create a large and unexpected tax liability, which can usually be avoided or diminished with careful tax planning.

Question 15

AMT Adjustments Example:

Rob has the following AMT adjustments caused by timing differences in 2023:

Rob has a residential rental property costing $100,000. This property was placed in service in January 1999. The depreciation in 2022 on this property is $3,636. This depreciation has been calculated using the straight-line method, a 27½ recovery period, and based on MACRS rules. The depreciation in 2023 for AMT purposes is $2,500. This is based on the straight-line method and a 40-year recovery period, under the alternative depreciation system. Thus, the positive AMT adjustment is $1,136 ($3,636 - $2,500). The Taxpayer Relief Act of 1997 eliminates this adjustment for real property that is placed in service after 1998. Such property is depreciated under the straight-line method.
A computer used in business costs $10,000. It was placed in service in 2023. The depreciation on this computer is $2,000. The depreciation is based on MACRS rules, which require a 200% declining balance method, a half-year convention, and a five-year recovery period. The depreciation for AMT purposes is $1,500. It is based on the alternative depreciation system, that is, 150% DB method, half-year convention, and a five-year recovery period. Thus, the positive AMT adjustment is $500 ($2,000-$1,500).
R&E expenditures amounting to $50,000 are expensed in the current year. For AMT purposes, the R&E deduction would be $5,000 ($50,000, 10 years). This is because the expenditures are capitalized and amortized over a 10-year period. Thus, the positive AMT adjustment is $45,000 ($50,000 - $5,000).

Answer 15

Rob’s total positive AMT adjustment to his taxable income in 2023, to arrive at AMTI, is $46,636 ($1,136 + $500 + $45,000).

Question 16

What personal credits are allowed to reduce the tentative minimum tax?

Answer 16

A number of credits are allowed to reduce a taxpayer’s regular tax liability. However, for purposes of the alternative minimum tax (AMT), only the foreign tax credit and nonrefundable personal credits are allowed to reduce the tentative minimum tax:
* Foreign tax credit
* Child and dependent care credit
* Credit for the elderly and totally disabled
* Adoption expense credit
* Child tax credit
* AOTC and Lifetime Learning credits

Question 17

Describe the alternative minimum tax foreign tax credit

Answer 17

The foreign tax credit that may be deducted from the AMT is a specially computed credit, called the “alternative minimum tax foreign tax credit.” It is calculated using the various amounts used in computing AMTI rather than taxable income. Thus, the AMT is likely to apply to a taxpayer who uses credits (other than foreign tax credits and nonrefundable personal credits) to reduce his regular tax liability.

Question 18

For the purposes of AMT, certain credits are allowed which reduce the tentative minimum tax. Identify each of the allowable credits (Select all that apply)
* Adoption Credit
* Child Tax Credit
* Business Energy Credit
* Earned Income Credit
* Elderly and Disabled Credit
* American Opportunity Tax Credit
* Foreign Tax Credit
* Work Opportunity Tax Credit

Answer 18

• Adoption Credit
• Child Tax Credit
• Elderly and Disabled Credit
• American Opportunity Tax Credit
• Foreign Tax Credit

Question 19

Explaind the AMT Credit

Answer 19

Taxpayers are allowed an alternative minimum tax (AMT) credit that can be used against their regular tax liability, under IRC Section 53. If a taxpayer pays AMT in a taxable year, that amount of AMT is eligible to be used as a credit, against the taxpayer’s regular tax liability, in a future year.

Though this may seem unusual, there is underlying reasoning for the AMT credit. The AMT is caused primarily by adjustments that will reverse in the future. The taxpayer will actually pay a higher regular tax in those future years. Therefore, the imposition of a prior year AMT, and the current year regular tax, would constitute double taxation. A taxpayer may have paid AMT in prior years, but is not subject to the AMT in the current year. Such a taxpayer may be entitled to an AMT credit against his regular tax liability in the current year.

Question 20

When can AMT credit that becomes available in future years be used?

Answer 20

It is extremely important to note that an AMT credit may be available in future years to offset any regular tax that is owed. Any AMT credit that becomes available in future years can only be used when the regular tax exceeds the AMT tax. If the AMT tax exceeds the regular tax in future years, the credit would not be used and would carry over to the following year.

Question 21

Exam Tip:

Understand the Alternative Minimum Tax (AMT) basics. The AMT system requires taxpayers to follow what steps:

Answer 21

• Adjust regular taxable income by adjustments and preferences.
• Subtract an exemption amount to arrive at the AMT base.
• Multiply the AMT base by the special AMT rates to compute the AMT.
• Pay the greater of the regular income tax or the AMT.

Question 22

What are things to consider for Alternative Minimum Tax Planning?

Answer 22

Taxpayers with substantial amounts of tax preference items, and a corresponding low regular tax liability may be subject to the alternative minimum tax (AMT). These taxpayers need to engage in tax planning to minimize or avoid the AMT. A liberal exemption is provided for most individuals, that is, $126,500 (2023) for married individuals filing a joint return and $75,900 (2023) for single taxpayers and heads-of-households. The timing of certain income and deduction items may result in the full use of the exemption each year.

Planning to avoid the AMT may be accomplished by delaying the payment of certain itemized deductions.
* For example, state and local taxes are itemized deductions that reduce the regular income tax but do not reduce the AMT. A taxpayer using the cash method of accounting, who defers the payment of state income taxes into the following year, triggers an increase in the regular tax for the current year. This increase can eliminate AMT liability. However, it is necessary to consider the tax effects for both the current and following years. The reason is that state income taxes are deductible for purposes of the regular tax calculation when the payment is made in the following year. This reduction may affect the AMT calculation in such a year and increase the amount of tax that is owed. Similarly, as noted above, the time of the exercise of ISO options may be used to reduce or eliminate the AMT.

Certain tax-exempt investments generate additional tax preferences for the investor, such as interest on private activity bonds. An investor must determine the impact of such investments on his or her AMT before acquiring them.

If a taxpayer was already subject to AMT, then the optimal strategy would be to accelerate income into the AMT year and delay allowable itemized deductions until a regular tax year. Any income would be taxed at 26% or 28% rather than at a higher rate, while any deferred deductions (such as charitable contributions) might allow a deduction at a rate greater than 28%. However, care must be taken when utilizing this strategy. A taxpayer should not accelerate too much income into the AMT year or defer too many deductions into a regular tax year. A taxpayer should only accelerate income and defer expenses up to the point where tax liability under AMT equals the regular tax.

Question 23

What are the important AMT Tax Filing Procedures?

Answer 23

Individuals must use Form 6251 to compute the alternative minimum tax (AMT).

Form 6251 must be completed and attached to an individual’s tax return in any of the following situations:
* An AMT tax liability actually exists.
* The taxpayer has tax credits that are limited by the tentative minimum tax.
* The AMT base exceeds the exemption amounts and an individual has AMT adjustment or tax preference items.

Question 24

Section One Summary

Tax laws give preferential treatment to certain types of income and allow special deductions on some kinds of expenses. Many individuals benefit from these tax advantages. The alternative minimum tax (AMT) regulation attempts to ensure that all individuals will pay at least a minimum amount of tax.

In this lesson, we have covered:
* AMT computation: The basic steps in AMT computation are:
- Adjust regular taxable income with preferences and adjustments.
- Subtract an exemption amount to arrive at the AMT base.
- Multiply the AMT base by AMT rates to compute the AMT (but using the lower rates of 0%, 15%, or 20% for certain capital gains and dividends).
- Pay the greater of two: the regular income tax, or the AMT.
* Tax preferences are certain items where special considerations are given to taxpayers according to the tax law. They include:
- Excess depreciation over straight-line depreciation,
- Tax-exempt interest on certain private activity bonds, and
- Exclusion of gain on the sale of Section 1202 small business stock.
* AMT adjustments represent:
- Itemized deductions that are not allowed in computing AMTI, and
- Timing differences relating to the deferral of income or acceleration of deductions.

Answer 24

• Itemized deductions allowed for AMT adjustment are:
  Charitable contributions,
  Medical expenses in excess of 7.5% of AGI,
  Qualified housing interest,
  Estate tax deduction on income in respect of a decedent, and
  Gambling losses, to the extent of gambling winnings.
• Timing differences caused by deferring income or accelerating deductions include the following:
• Real property placed in service after 1986
• Personal property placed in service after 1998
• Research and Experimental expenditures
• Value of stock options under an ISO plan when exercised
• Credits that reduce the AMT: Foreign tax credit and nonrefundable tax credits. The nonrefundable credits are Child and dependent care credit, Elderly and totally disabled credit, Adoption expense credit, Child tax credit, and the American Opportunity and lifetime learning credits.
• AMT credit can reduce regular taxes paid on future tax returns. An AMT credit can only be used when the regular tax liability exceeds the AMT liability.
• Tax planning for avoiding AMT or minimizing it requires that taxpayers correctly time certain income and deduction items. They can thus make full use of the exemption each year.
• AMT tax filing procedures stipulate that individuals must use Form 6251 and attach it to his or her tax return, if:
  The taxpayer is subject to AMT tax liability.
  The taxpayer has tax credits limited by the tentative minimum tax.
  The taxpayer has AMT adjustments or tax preference items and the AMT base exceeds the exemption amounts.

Question 25

The alternative minimum tax applies to individuals, estates and trusts only if it exceeds the taxpayer’s regular income tax liability.
* False
* True

Answer 25

True

The alternative minimum tax only applies to individuals, estates and trusts if it exceeds the taxpayer’s regular income tax liability.

Question 26

Priscilla has calculated various components of her tax for the year. Her regular income tax is $17,000, her tentative minimum tax (TMT) for the year is $21,000, her alternative minimum tax (AMT) is $4,000 and her AMT tax credit earned this year is $2,500. What is Priscilla’s tax liability for the year?
* $4,000
* $18,500
* $17,000
* $21,000

Answer 26

$21,000

Priscilla’s TMT exceeds her regular tax, so she will pay the $4,000 AMT plus the regular tax of $17,000. Therefore, her total tax liability is $21,000. The AMT tax credit will be used in future years when regular tax exceeds TMT.

Question 27

What deduction is not allowed when computing the alternative minimum tax?
* Standard deduction
* Moving expenses
* Individual retirement accounts
* Alimony

Answer 27

Standard deduction

For purposes of the alternative minimum tax, no deductions are allowed for the standard deduction.

Question 28

Which of the following statements is false?
* The alternative minimum tax applies to individuals and estates and trusts only if the Tentative Minimum Tax exceeds the taxpayer’s regular tax liability.
* The alternative minimum tax rate is equal to the taxpayer’s top marginal tax rate.
* Most middle-income taxpayers are not subject to the alternative minimum tax.
* The alternative minimum taxable income is the taxpayer’s regular taxable income adjusted for preference items, nondeductible items and other adjustments.

Answer 28

The alternative minimum tax rate is equal to the taxpayer’s top marginal tax rate.

Only the statement regarding the tax rates is incorrect. The AMT rates are 26% of the 1st $191,500 of AMT base and 28% of the balance, not the regular income tax rates.

Question 29

Sam and Cindy are married and file a joint return in 2023. Their taxable income is $138,200, therefore their regular tax liability is $21,019. Their tax preference items are $24,800. AMT adjustments are excess depreciation of $18,000 and state and local property taxes of $10,000. What is their total tax liability?
* $28,400
* $21,019
* $26,940
* $18,954

Answer 29

$21,019

The total tax liability for Sam and Cindy is $21,019 ($21,019 regular tax + $0 AMT). $191,000 is their AMTI and $64,500 is their AMT tax base.

Sam and Cindy’s AMT is computed as follows:
Taxable income = $138,200
Plus: Tax preferences = $24,800
AMT adjustments:
Excess depreciation = $18,000
State and local property taxes = $10,000
Plus $28,000
AMTI = $191,000
Minus: AMT exemption = ($126,500)
Tax base = $ 64,500
Times: Tentative minimum tax (26% Tax rate) = $16,770
Minus: Regular tax (based on taxable income $138,200) = ($21,019)
Alternative minimum tax = $0

Question 30

Section 2 - Trust Alternative Minimum Tax

Trusts are also subject to Alternative Minimum Tax. Similar preference items and adjustments of individuals apply, and the calculation is the same. The 2023 AMT exemption for trusts is $28,400, and the 2023 AMTI threshold for the phaseout of the AMT exemption for trusts is $94,600. The complete phaseout amount is $208,200 (2023).

Answer 30

Exam Tip: Knowing that AMT applies to trusts, as well as the appropriate AMT exemption and AMTI threshold amount is, more than likely, enough knowledge for the exam. It is highly unlikely you will be tested on an AMT calculation as it relates to trusts on the CFP® Certification Examination.

Question 31

Module Summary

The alternative minimum tax (AMT) provides a separate set of rules for calculating income tax. It ensures that individuals and corporations, using special tax benefits, will pay at least a minimum amount of tax. It reduces the benefit of special deductions and preferences, thereby creating a tax liability for an individual or corporation who would otherwise pay little or no tax.

The AMT is calculated separately from regular tax computation and then compared with it. The greater amount of the two must be paid.

The key concepts to remember are:
The individual AMT computation involves calculating the following:
* The Alternative Minimum Taxable Income (AMTI)– is calculated by starting with the taxable income and adding the following to it:
Tax preferences are special benefits given to taxpayers.
AMT adjustments include itemized deductions and timing differences in deferral of income or acceleration of deductions.
Standard deductions do not apply to AMT.

Answer 31

• The Alternative Minimum Tax Base is arrived at by deducting:
  Exemption amount (varies based on the AMTI).
• The Alternative Minimum Tax is the result of applying:
  AMT rates are 26% of the first $220,700 (2023), and 28% of amounts exceeding that amount. The lower regular tax rates (20%, 15%, and 0%) applicable to certain capital gains and dividends also apply to calculating the AMT. For these income items, the 26% and 28% rates do not apply.
• Compare AMT with regular tax – the individual pays the greater of the two.
• Tax filing procedures - Individuals must complete Form 6251 and attach it to the tax return if they are subject to AMT, have tax credits, and have AMT adjustments or tax preferences with the AMT base exceeding exemption amounts.

The trust AMT gives similar preference items and adjustments to individuals who apply, and the calculation for trust AMT is the same as that of individual AMT.

Question 32

Each of the following are AMT adjustments due to timing differences EXCEPT:
* Exercise of incentive stock options (ISOs)
* Research and experimental (R&E) expenditures
* Estate tax deduction on income in respect of a decedent
* The difference between the MACRS depreciation claimed using real property’s actual recovery period and a hypothetical straight-line depreciation

Answer 32

Estate tax deduction on income in respect of a decedent

Estate tax deduction on income in respect of a decedent is deductible for AMT purposes but is not categorized as an AMT adjustment due to timing differences.

Question 33

Place the steps to compute Alternative Minimum Tax (AMT) in the correct order.
* Apply AMT Rate
* Make Adjustments
* Subtract Exemption
* Determine Amount to Pay

Answer 33

• Step 1. Make Adjustments
  Adjust regular taxable income by adjustments and preference items.
• Step 2. Subtract Exemption
  Subtract an exemption amount to arrive at the AMT base.
• Step 3. Apply AMT Rate
  Multiply the AMT base by the special AMT rates to compute the AMT.
• Step 4. Determine Amount to Pay

Question 34

If a taxpayer was already subject to AMT, then the optimal strategy would be to:
I. delay income until an AMT year
II. accelerate allowable itemized deductions in a regular tax year
* II only
* Both I and II
* I only
* Neither I nor II

Answer 34

Neither I nor II

If a taxpayer was already subject to AMT, then the optimal strategy would be to accelerate income into the AMT year and delay allowable itemized deductions until a regular tax year.

Question 35

Individuals must use Form 6251 to compute the alternative minimum tax (AMT) in which of the following situations?
* The taxpayer has tax credits that are limited by the alternative minimum taxable income.
* An AMT tax liability exists.
* The taxpayer purchases several municipal bonds.
* The exemption amount exceeds the AMT base.

Answer 35

An AMT tax liability exists.

Form 6251 must be completed and attached to an individual’s tax return in any of the following situations:
* An AMT tax liability exists.
* The taxpayer has tax credits that are limited by the tentative minimum tax.
* The AMT base exceeds the exemption amounts and an individual has AMT adjustment or tax preference items.

Question 36

Amounts of alternative minimum tax base exceeding $220,700 are taxed at a rate of __ ____??____ __ in 2023.
* 28%
* 21%
* 26%
* 25%

Answer 36

28%

2023 Tax rate:
* 26% of first $220,700
* 28% of amounts in excess of $220,700

Question 37

The calculation to solve for the AMT begins with __ ____??____ __.
* tentative minimum tax
* alternative minimum tax base
* alternative minimum taxable income
* taxable income

Answer 37

taxable income

Question 38

Alternative minimum tax (AMT) adjustments represent the following:
I. Standard deduction
II. Timing differences relating to the deferral of income or acceleration of deductions.
II only
Both I and II
I only
Neither I nor II

Answer 38

II only

Alternative minimum taxable income (AMTI) equals taxable income as modified by certain adjustments and increased by tax preference items. Alternative minimum tax (AMT) adjustments represent the following:
* Itemized deductions that are not allowed in computing AMTI, and
* Timing differences relating to the deferral of income or acceleration of deductions.

Question 39

Identify items that are deductible for AMT purposes. (Select all that apply)
* Real and personal property taxes
* Qualified housing interest
* State, local, and foreign income taxes ($10,000 maximum)
* Medical expenses in excess of 7.5% of AGI
* Charitable contributions

Answer 39

Qualified housing interest
Medical expenses in excess of 7.5% of AGI
Charitable contributions

The following items are deductible for alternative minimum tax (AMT) purposes:
* Casualty and theft losses in excess of 10% of Adjusted Gross Income (AGI)
* Charitable contributions (but not in excess of the 20%, 30%, 50%, and 60% of AGI limitation amounts)
* Medical expenses in excess of 7.5% of AGI
* Qualified housing interest
* Certain other interest up to the amount of qualified net investment income included in the AMT base
* Estate tax deduction on income in respect of a decedent
* Gambling losses (to the extent of gambling winnings)

Question 40

Taxpayers are allowed an alternative minimum tax (AMT) credit that can be used against their __ ____??____ __.
* AMT
* long-term capital gains
* passive income
* regular tax liability

Answer 40

regular tax liability

Taxpayers are allowed an alternative minimum tax (AMT) credit that can be used against their regular tax liability.

Question 41

Each of the following is an AMT tax preference EXCEPT:
* Excess of accelerated depreciation claimed over straight-line depreciation amount for real property (pre-1987)
* Exclusion of gain on the sale of certain small business stock
* Municipal bond interest income
* Tax-exempt interest on private activity bonds

Answer 41

Municipal bond interest income

Most municipal bond interest income is exempt from the federal income tax but is not a tax preference item. Only tax-exempt interest on private activity bonds issued after August 7, 1986 but before January 1, 2009 is subject to the AMT.