Alternative Minimum Tax (AMT)

Question 1

AMT

Answer 1

• created to ensure that upper-income taxpayer with many deductions pay at least a certain level of tax.
• it is a separate way of computing taxable income, with different rates and exemptions
• it is always calculated after the regular tax liability, and the taxpayer pays the higher amount

Question 2

Computing the AMTI

Answer 2

• you being with AGI, as computed for the regular tax, and then recalculates and readjusts for the following preferences:
  1) subtract any casualty losses in excess of 10% of AGI and $100 per loss, gambling losses to the extent of winnings, charitable contributions, medical expenses in excess of 10% of AGI, investment interest to the extent of investment income, qualified residence interest, and the estate tax deduction for income in respect of a decedent. NOTE all taxes and misc deductions are not allowed for AMT
  2) add or subtract the difference in income that would be computed if the percentage-of-completion method were used to calculate income on long-term contracts
  3) Depreciation must be calculated using AMT rules. Depreciable lives are longer with the AMT calculation and thus limits the use of accelerate depreciation in the earlier years, but more beneficial in later years.
  4) add interest on certain private activity bonds issued after Aug 7th, 1986
  5) the bargain element (difference between the exercise price and the market price of the employer’s stock) with regard to incentive stock options is added to AMTI when the taxpayer exercises the options.

Question 3

Private Activity Bonds

Answer 3

-bonds issued by state and local governments to finance activities not associated with the issuing government (redevelopment bonds).

Question 4

AMT Exemption

Answer 4

-once AMTI is calculated, the AMT exemption is subtracted.
MFJ - $84,500
MFS - $42,250
Head of household - $54,300
Trusts and Estates - $24,100
These exemption amounts are reduced by 25% of the excess AMTI over the following amounts:
MFJ - $160,000
MFS - $80,450
Head of household - $120,700
Trusts and Estates - $80,450

Question 5

Exclusion Items vs. Deferral Items

Answer 5

• personal exemptions are not allowed to be deducted
• the standard deduction is not available for deduction
• deduction for property and state income taxes and all miscellaneous deductions are unavailable for AMT
• interest from Home Equity debt not used to purchase, rebuild or remodel the taxpayer’s home is not deductible
• itemized deductions are not reduced by 3% of AGI above the phaseout levels, as with regular income tax
• in addition to the lost or deferred deductions, tax preference items must be added that increase the AMT.

Question 6

AMT Rate of Tax

Answer 6

-after subtracting the exemption, AMT is calculated at 26% of the first $187,800 of AMTI ($93,900 for MFS) and 28% of all AMTI over that amount.

Question 7

AMT Credit

Answer 7

• any AMT paid in a given year due to the deferral (not the elimination) of deductions or the acceleration of income will create a credit that can be used to offset regular tax in future years, when regular tax is higher than AMT tax.
• used to reduce the regular tax down to the AMT for the year
• cannot reduce below the AMT amount.

Question 8

Nonrefundable Credits

Answer 8

• taxpayers who’s AMT is less than than their regular tax can be affected because nonpersonal, nonrefundable credit (business credits) can only reduce the regular tax liability down to the AMT amount and not below.
• any further credits must be carried forward to future years.

Question 9

Corporate AMT

Answer 9

• C corporations are also subject to AMT (pass through entities are not)
• small corporations (under $7.5 MM in average receipts for 3 years) are exempt from AMT, as are corporations in their first year of existence
• if less than 3 years of existence, as long as they have less than $5 MM of gross receipts they qualify for the small corporation exemption from AMT.

Question 10

Trust AMT

Answer 10

-trusts are subject to AMT

Question 11

AMT Planning

Answer 11

• if seeking to avoid AMT the taxpayer should avoid accelerated depreciation because these are added back to AMT
• the taxpayer should accelerate income and defer deductions.
• this will increase the regular income tax for the current year
• buy public purpose muni bonds
• postpone exercising incentive stock options

Question 12

Incentive Stock Options

Answer 12

• for AMT purposes the difference between the option price and the market price will be included in income when the option is exercised.
• the amount of AMT paid in the exercise year is available as a credit against regular tax liability in future years.
• selling the stock within a year of exercising an ISO will cause the whole gain to be taxable as ordinary income and avoid AMT treatment.
• if the price continues to appreciate, it will generally be better to hold onto the stock for the gain on sale to qualify as a capital gain (2 years and before) from the date of the grant and one year after the date of exercise.