AMT & Deferred Compensation Practice Questions
Frank Clarke, an employee, was covered under a noncontributory pension plan. Frank died on April 15, 2020, at age 64 and, pursuant to the plan, his widow received monthly pension payments of $500 beginning May 1, 2020. Mrs. Clarke also received an employee death payment of $10,000 in May 2020. How much should she include in her gross income for 2020? A. $14,000 B. $9,000 C. $5,000 D. $10,000
A. $14,000 All death benefits received by the beneficiaries or the estate of an employee from, or on behalf of, an employer are included in gross income. The pension payments must be included unless Frank made contributions to the pension plan.
Sarah owns and operates a retail sporting goods business as a sole proprietor. Her store is located on the ground floor of a two-story building that she owns. Based on the following information regarding 2020, compute her net self-employment income to be put onto Schedule C for that year. 1. Gross profit from sporting goods business: $100,000 2. Rental income from upper level (45%) of building: 20,000 3. Building depreciation expense: 10,000 4. Utilities for ground floor (Tenant pays own utilities.): 4,500 5. Depreciation on vehicles used in business: 3,000 6. Gain on sale of van used 100% in business: 2,000 7. Contributions to her Keogh retirement plan: 5,500 8. Sarah's health insurance premiums: 4,000 9. Mortgage interest on building: 10,000 10. Other expenses of running her sporting goods business: 11,500 A. $70,000 B. $64,500 C. $66,000 D. $73,500
A. $70,000 Net income from self-employment are gross income derived from a trade or business, less allowable deductions attributable to the trade or business. The rental income is not self-employment income since rental property is not Sarah's ordinary course of business and she is not a real estate broker. Therefore, any rental expenses do not offset the self-employment income from the sporting goods business. Also, 100% of the health insurance premiums are deductible on Form 1040 as an adjustment but are not deducted against self-employment income. Capital gains and losses and contributions to retirement plans are not considered income or expenses for self-employment purposes. Sarah's net self-employment income is computed as follows: 1. Gross profits from sporting goods business: $100,000 2. Building depreciation expense ($10,000 × 55%): (5,500) 3. Utilities (ground floor only):(4,500) 4. Listed property depreciation expense: (3,000) 5. Mortgage interest ($10,000 × 55%): (5,500) 6. Other expenses: (11,500) Net self-employment income: $70,000
When computing alternative minimum tax, the individual taxpayer may take a deduction for which of the following items? A. Gambling losses. B. Standard deduction. C. Property taxes. D. State income taxes.
A. Gambling losses. Gambling losses are allowed as deductions against alternative minimum taxable income (AMTI), subject to the same limitations as regular tax.
Alternative minimum taxable income is: A. Taxable income increased by tax preferences and increased or decreased by adjustments and other statutory modifications. B. Computed the same for individuals and corporations. C. Taxable income adjusted by tax preferences and reduced by an exemption amount. D. The sum of all tax preferences.
A. Taxable income increased by tax preferences and increased or decreased by adjustments and other statutory modifications. Taxable income is adjusted by positive and negative adjustments and various other statutory items to arrive at alternative minimum taxable income. There are numerous adjustments to items taken into account in determining taxable income as well as some additional adjustments. Tax preference items are also added to taxable income to arrive at alternative minimum taxable income.
Alternative minimum tax preferences include:
AMT preferences are items that are allowed relatively favorable treatment in determining regular taxable income. These preferences are added back to TI to find AMTI. Tax-exempt interest from private activity bonds is an AMT preference item. A charitable contribution of appreciated capital gain property is not an AMT preference item.
Rich is a cash-basis, self-employed air-conditioning repair technician with current-year gross business receipts of $20,000. Rich's cash disbursements were as follows: 1. Air-conditioning parts: $2,500 2. Social media advertising: 2,000 3. Estimated federal income taxes on self-employment income: 1,000 4. Business telecommunication fees: 400 5. Charitable contributions: 200 What amount should Rich report as net earnings from self-employment? A. $15,100 B. $13,945 C. $14,900 D. $14,100
B. $13,945 The $20,000 gross receipts would be reduced by the $2,500 for parts, the $2,000 in advertising expense, and the $400 in telecommunication expense. This $15,100 is net income from self-employment. Net earnings from self-employment is net income from self-employment reduced by the employer's portion of FICA taxes (0.0765) times the taxpayer's net income from self-employment. Thus, the $15,100 should be reduced by an additional $1,155 ($15,100 × 0.0765), resulting in net earnings from self-employment of $13,945.
Paul and Lois Lee, both age 50, are married and filed a joint return for 2020. Their 2020 adjusted gross income was $126,000, including Paul's $121,000 salary. Lois had no income of her own. Neither spouse was covered by an employer-sponsored pension plan. What amount could the Lees contribute to IRAs for 2020 to take advantage of their maximum allowable IRA deduction in their 2020 return? A. $6,000 B. $14,000 C. $0 D. $13,000
B. $14,000 The maximum amount that any taxpayer may deduct for a contribution to an IRA is limited to the lesser of $6,000 or the taxpayer's compensation gross income for the year. If the taxpayer is age 50 or older, a $1,000 catch-up contribution is allowed in addition to the $6,000 per year IRA contribution limit. If one spouse is eligible to make deductible IRA contributions, that spouse may contribute up to $14,000 if a joint return is filed and both taxpayers are age 50 or over. Furthermore, the Lees may deduct their IRA contribution for AGI.
Robert had current-year adjusted gross income of $100,000 and potential itemized deductions as follows: 1. Medical expenses (before percentage limitations): $12,000 2. State income taxes4,000Real estate taxes: 3,500 3. Qualified housing and residence mortgage interest: 10,000 4. Home equity mortgage interest(used to consolidate personal debts): 4,500 5. Charitable contributions (cash): 5,000 What are Robert's itemized deductions for alternative minimum tax? A. $24,000 B. $19,500 C. $23,500 D. $28,000
B. $19,500 Individuals are entitled to claim itemized deductions in calculating AMT with certain adjustments. The following itemized deductions are not allowed: 1. State, local, and foreign income taxes, and 2. Real and personal property taxes. Deductions claimed for medical expenses are allowed with the same floor of 7.5% of AGI as for regular tax. Qualified housing interest is deductible which is similar to the qualified residence interest deduction that is allowed against regular tax. The allowable itemized deductions for AMT are $4,500 of medical expenses, $10,000 of qualified housing interest, and $5,000 of charitable contributions.
Flowers, a married taxpayer, purchased an annuity for $64,400 that will pay $700 per month over the life of Flowers and Flowers's spouse. At the time of purchase, the couple's joint life expectancy was 23 years. Flowers received payment beginning April 1, Year 1, amounting to $6,300 in the first year of the annuity contract. How much is includible in Flowers's gross income in the first year? A. $6,300 B. $4,200 C. $0 D. $2,100
B. $4,200 An annuity is a taxable stream of payments to the extent that the payments exceed the basis of the annuity. The basis is recovered with each payment pro rata based on the length and price of the contract. In this case, Flowers paid $64,400 for an annuity that is expected to last 23 years. Thus, the annuity will have basis recovery of $233 per month ($64,400 ÷ 23 years ÷ 12 months). This means that every month, $467 will be considered taxable. Therefore, there is approximately $4,200 of taxable income.
Logan, an employee of Argon Industries, earned a salary of $60,000 in Year 2. In addition, the following two transactions between Logan and Argon occurred in Year 2: Logan received a bonus of 100 shares of publicly-traded stock worth $13,000 with a basis to Argon of $8,000, and Logan purchased 1,000 shares of unrestricted Argon stock pursuant to a nonqualifying stock option plan for $10 per share when stock was valued at $25 per share. What amount of compensation should Argon report in Logan's Form W-2 for Year 2? A. $60,000 B. $88,000 C. $73,000 D. $93,000
B. $88,000 Income reported should include all amounts provided as compensation. First, the $60,000 is included as the base salary. Next, the bonus of publicly-traded stock is taken at the fair market value of $13,000. Finally, the nonqualified stock option will result in compensation equal to the difference between the FMV of the stock and the exercise price, or $15,000 [($25 FMV - $10 exercise price) × 1,000 shares]. This is a total of $88,000 ($60,000 + $13,000 + $15,000).
Generally, in computing the alternative minimum tax for individuals, which one of the following is not an adjustment or tax preference for alternative minimum tax purposes? A. Tax-exempt interest on certain private activity bonds. B. Contributions to an Individual Retirement Arrangement (IRA). C. Excess depletion. D. Standard deduction.
B. Contributions to an Individual Retirement Arrangement (IRA). Taxable income must be adjusted to arrive at alternative minimum taxable income (AMTI). The adjustments are described in Secs. 56 and 58 with tax preferences in Sec. 57. The adjustments with respect to itemized deductions of an individual are contained in Sec. 56(b)(1). Contributions to an IRA have no effect on AMTI.
Davis, a sole proprietor with no employees, has a Keogh profit-sharing plan to which he may contribute 15% of his annual earned income. For this purpose, "earned income" is defined as net self-employment earnings reduced by the: A. Self-employment tax. B. Deductible Keogh contribution and the employer's portion of self-employment tax. C. Self-employment tax and the employer's portion of the deductible Keogh contribution. D. Deductible Keogh contribution.
B. Deductible Keogh contribution and the employer's portion of self-employment tax. The deduction for contributions on behalf of a self-employed individual is the same as for corporate contributions to an employee plan. The contribution limit is 25% of the earned income derived by the self-employed individual from the trade or business or $57,000, whichever is less. The earned income must be reduced by the amount of the contribution and the employer's portion of self-employment tax.
Which of the following is a tax preference item to be considered in computing the alternative minimum tax for individuals in the current year? A. Interest on savings accounts over $10,000. B. Excess depletion. C. Tax-exempt interest on any municipal bonds. D. Standard deduction.
B. Excess depletion. Tax preference items increase adjusted taxable income to arrive at alternative minimum taxable income [Sec. 55(b)]. Section 57(a)(1) lists excess depletion as a tax preference item.
The alternative minimum tax (AMT) is computed as the: A. Tentative AMT plus the regular tax. B. Excess of the tentative AMT over the regular tax. C. Excess of the regular tax over the tentative AMT. D. Lesser of the tentative AMT or the regular tax.
B. Excess of the tentative AMT over the regular tax. The alternative minimum tax is the excess of the minimum tax over the regular tax. The AMT is payable in addition to the regular tax.
Which of the following may not be deducted in the computation of alternative minimum taxable income (AMTI) of an individual? A. Traditional IRA account contribution. B. Standard deduction. C. Charitable contributions. D. One-half of the self-employment tax deduction.
B. Standard deduction. Standard deductions are added back to taxable income when calculating the Alternative Minimum Tax. Therefore, no deduction is allowed for standard deductions in the computation of AMTI.
In 2016, Ross was granted an incentive stock option (ISO) by his employer as part of an executive compensation package. Ross exercised the ISO in 2018 and sold the stock in 2020 at a gain. Ross's profit was subject to the income tax for the year in which the: A. ISO was granted. B. Stock was sold. C. ISO was exercised. D. Employer claimed a compensation deduction for the ISO.
B. Stock was sold. According to the Internal Revenue Code, an employee will have no income tax consequences on the grant date or the exercise date of an incentive stock option if that employee meets two requirements. First, the employee cannot dispose of the stock within 2 years after the grant date or within 1 year after the exercise date. Second, the employee must be employed by the company on the grant date until 3 months prior to the exercise date. Since Ross meets these requirements, he is not subject to any tax on the grant or exercise dates. Ross did, however, recognize a capital gain when he sold the stock in 2020.
Rachel Robinson, age 52, receives a $500 per month annuity from her pension plan. The annuity started January 1, 2020. Her contributions to the plan totaled $39,600. The number of anticipated monthly payments is 360. What is Rachel's nontaxable part of the annuity payment? A. The full amount received until the original cost of the annuity has been recovered. B. The investment in the contract divided by the number of anticipated monthly payments. C. Any amount received once the original cost of the annuity has been recovered. D. One-half of each payment.
B. The investment in the contract divided by the number of anticipated monthly payments. Taxpayers are permitted to recover the cost of the annuity (the price paid) tax free. A simplified method for qualified retirement plan (employee) annuities is available if the annuity start date is after November 18, 1996. The nontaxable portion of an annuity is calculated by dividing the investment in the contract, as of the annuity starting date, by the number of anticipated monthly payments.
Which type of income is not subject to self-employment tax? A. Distributive share of partnership income. B. Wages, salaries, and tips received as an employee. C. Net profits from sole proprietorship. D. Non-employee compensation.
B. Wages, salaries, and tips received as an employee. In some instances, a self-employed individual may also earn wages while working as a full- or part-time employee. In such a case, the income is not subject to self-employment tax, but is subject to withholding.
The following Year 1 annual report was received by Clark from the qualified-defined contribution plan provided by Clark's employer: 1. Beginning balance: $12,700 2. Employer contribution600Plan earnings: 250 3. Ending balance: $13,550 What income must be included in Clark's gross income for Year 1? A. $600 B. $250 C. $0 D. $850
C. $0 Employer contributions to qualified retirement plans are not included in income until distributed. Earnings from the plan also are not taxed until distribution. Clark's report includes an employer contribution and earnings but no distribution; therefore, there is no income inclusion for Year 1.
Kirk Bennett, a cash-basis taxpayer, is a self-employed accountant. During 2020, he established a qualified defined contribution retirement plan of which he will be the only beneficiary. In examining his records for 2020, the following information is available: 1. Earned income from self-employment: $57,000 2. Interest income: 6,000 3. Dividend income: 4,000 4. Net long-term capital gains: 10,000 5. Gross income: $77,000 Kirk deducted $4,027 of self-employment tax on his tax return. What is the maximum amount that Kirk can deduct as a contribution to his qualified retirement plan for 2020? A. $57,000 B. $14,250 C. $10,595 D. $11,400
C. $10,595 Under IRC, the maximum amount that can be deducted for a contribution on behalf of a self-employed individual is the lesser of $57,000 or 25% of the self-employed individual's earned income from the trade or business. Kirk's only income which qualifies as earned income is $57,000. The employer portion of payroll tax rate times the net earnings from self-employment reduces the earned income amount. The income is further reduced by the contribution deduction based on a 20% rate used for sole owners. The maximum deduction allowed is calculated as follows: 1. Earned income: $57,000 2. Less: Self-employment tax adjustment: (4,027) 3. Net earnings: $52,973 Contribution rate × .20 4. Allowable deduction: $10,595
For 2020, Val and Pat White, both age 30, filed a joint return. Val earned $45,000 in wages and was covered by his employer's qualified pension plan. Pat was unemployed and received $6,000 in alimony payments (pursuant to a pre-2019 divorce) for the first 4 months of the year before remarrying. The couple had no other income. Each contributed $6,000 to an IRA account. The allowable IRA deduction on their 2020 joint tax return is: A. $6,000 B. $6,250 C. $12,000 D. $0
C. $12,000 The maximum amount that any taxpayer under the age of 50 may deduct for a contribution to an IRA is limited to the lesser of $6,000 ($7,000 if qualified for a catch-up contribution) or the taxpayer's compensation gross income for the year. The limit is applied separately to each spouse who has compensation and makes a contribution to a separate IRA account. Taxable alimony is treated as compensation for this purpose. The deduction is for AGI. If one spouse is covered by an employer's retirement plan, the deduction is proportionately reduced once earned income exceeds $106,000 in 2020. Thus, Val and Pat may deduct $12,000.
Bob Rogers is single and has taxable income in 2020 of $165,000. His only tax preference item is on the sale of qualified small business stock, which he has held since January 2006. He sold the stock on December 31, 2020. The gain realized on the sale was $35,000. However, Bob was able to exclude 50% of this gain. Bob has no other adjustments or loss limitations. What is Bob's gross AMTI? A. $200,000 B. $165,000 C. $166,225 D. $163,775
C. $166,225 Generally, gross AMTI is taxable income after amounts are added or subtracted for tax preferences, adjustments, and loss limitations. Tax preference items allow relatively favorable treatment in determining regular tax. An amount reflecting the relative preference is added to taxable income in computing AMTI. Bob's gross AMTI would be $166,225 [$165,000 + ($35,000 × 50% × 7%)]. The 7% is the amount of preference added back for AMTI, not the entire 50% gain exclusion.
A retiree invested $100,000 in an annuity that pays $12,000 annually for 10 years. What portion of the first payment should be included in the retiree's gross income? A. $12,000 B. $10,000 C. $2,000 D. $0
C. $2,000 Annuity payments are included in gross income unless a statute provides for their exclusion. Retirees are able to recover their contributions to their pensions (cost of annuity) tax-free. Any proceeds in excess of the cost of the annuity or contributions are included in gross income. The $12,000 annual payment multiplied by the 10-year life of the annuity is equal to $120,000. The proceeds ($20,000) in excess of the cost of the annuity ($100,000) should be recognized over the life of the annuity. Therefore, $2,000 is correct because it is the portion of the first payment included in gross income ($20,000 excess ÷ 10 years).
Michael operates his health food store as a sole proprietorship out of a building he owns. Based on the following information regarding Year 6, compute his net self-employment income (for SE tax purposes) for Year 6. 1. Gross receipts: $100,000 2. Cost of goods sold: 49,000 3. Utilities: 6,000 4. Real estate taxes: 1,000 5. Gain on sale of business truck: 2,000 6. Depreciation expense: 5,000 7. Section 179 expense: 1,000 8. Mortgage interest on building: 7,000 9. Contributions to Keogh retirement plan: 2,000 Net operating loss (NOL) from Year5: 10,000 A. $14,000 B. $24,000 C. $31,000 D. $16,000
C. $31,000 Net earnings from self employment are gross income derived from a trade or business, less allowable deductions attributable to the trade or business. Capital gains and losses and contributions to retirement plans are not considered income or expenses for self-employment purposes. Also, net operating losses are not considered for self-employment purposes. Michael's net self-employment income is computed as follows: 1. Gross receipts: $100,000 2. Cost of goods sold: (49,000) 3. Utilities: (6,000) 4.Real estate taxes: (1,000) 4. Depreciation expense: (5,000) 5. Section 179 expense: (1,000) 6. Mortgage interest: (7,000) 7. Net self-employment income$ 31,000
Jamal and Ronee Smith, both age 49, are married and filed a joint return for 2020. Jamal earned a salary of $100,000 in 2020 from his job at Sunshine Corporation. Ronee earned $7,000 from her part-time job at Rain Corporation. On March 1, 2020, Jamal contributed $6,000 to a Roth IRA for himself. What is the maximum contribution Ronee may make in 2020 to her Roth IRA? A. $13,000 B. $1,000 C. $6,000 D. $0
C. $6,000 Roth IRAs are subject to income limits. The maximum yearly contribution that can be made to a Roth IRA is phased out for joint filers with adjusted gross income (AGI) between $196,000 and $206,000. Since the Smiths' AGI does not exceed $196,000, Ronee is permitted her maximum contribution of $6,000 (for taxpayers under the age of 50) for a total yearly IRA contribution of $12,000 for the married couple.
West is single, has no dependents, and does not itemize. West provides the following information regarding his current-year's return: 1. Long-term capital gain: $15,000 2.Percentage depletion in excess of property's adjusted basis: 9,000 3. Dividends from publicly-held companies: 10,000 What is the amount of West's AMT tax preference items? A. $34,000 B. $19,000 C. $9,000 D. $24,000
C. $9,000 AMT preferences are items that are allowed relatively favorable treatment in determining regular taxable income. These preferences are added back to taxable income (TI) to arrive at the alternative minimum taxable income (AMTI). Among the three items, only the depletion in excess of property's adjusted basis of $9,000 is an AMT preference item.
The credit for prior-year alternative minimum tax liability may be carried: A. Forward for a maximum of 5 years. B. Back to the 3 preceding years. C. Forward until exhausted or refunded. D. Back to the 3 preceding years or carried forward for a maximum of 5 years.
C. Forward until exhausted or refunded. The minimum tax credit can be carried forward until any unused credit is completely refunded in 2021. It may be used to offset regular tax liabilities in future years.
Juan recently started operating a flower shop as a proprietorship. In its first year of operations, the shop had a taxable income of $60,000. Assuming that Juan had no other employment-related earnings: A. Juan will be exempt from self-employment taxes for the first 3 years of operations. B. The flower shop must withhold FICA taxes from Juan's earnings. C. Juan must pay self-employment tax on the earnings of the business. D. Juan will be exempt from the Medicare tax because the business earnings are below the threshold amount.
C. Juan must pay self-employment tax on the earnings of the business. Self-employed taxpayers must pay a self-employment tax on the earnings of their business. The FICA tax liability is imposed on net earnings from self-employment at the employer rate plus the employee rate.
The self-employment tax is: A. Fully deductible in determining net income from self-employment. B. Fully deductible as an itemized deduction. C. Partially deductible from gross income in arriving at adjusted gross income. D. Not deductible.
C. Partially deductible from gross income in arriving at adjusted gross income. To arrive at AGI, a self-employed person may deduct the employer's portion of the self-employment tax paid. This is an above-the-line deduction.
Alternative minimum taxable income is: A. The sum of all tax preferences. B. Computed the same for individuals and corporations. C. Taxable income increased by tax preferences and increased or decreased by adjustments and other statutory modifications. D. Taxable income adjusted by tax preferences and reduced by an exemption amount.
C. Taxable income increased by tax preferences and increased or decreased by adjustments and other statutory modifications. Taxable income is adjusted by positive and negative adjustments and various other statutory items to arrive at alternative minimum taxable income. There are numerous adjustments to items taken into account in determining taxable income as well as some additional adjustments. Tax preference items are also added to taxable income to arrive at alternative minimum taxable income.
Mark established a Roth IRA at age 40 and contributed $6,000 per year to the account for 20 years. He met the income limits for contributing to the account and was therefore eligible to hold a Roth IRA. Mark now wishes to withdraw the $200,000 of accumulated funds from his Roth IRA. What is the amount of the distribution that is included in Mark's gross income? A. $200,000 B. $120,000 C. $80,000 D. $0
D. $0 Qualified distributions from a Roth IRA are not included in the taxpayer's gross income and are not subject to the 10% early withdrawal tax. To be a qualified distribution, the distribution must satisfy a 5-year holding period and must be: (1) made on or after the date an individual attains age 59 1/2 (2) made to a beneficiary (or the individual's estate) on or after the individual's death (3) attributed to the individual being disabled (4) used to pay qualified first-time homebuyer expenses (5) made upon the birth or adoption of a child. Since Mark has held the funds over 5 years and is over age 59 1/2, he may withdraw the funds tax-free.
Sol and Julia Crane, both age 48, are married and filed a joint return for 2020. Sol received a distribution of $80,000 from his employer's pension plan. In addition, Sol and Julia earned interest of $3,000 in 2020 on their joint savings account. Julia is not employed, and the couple had no other income. On January 15, 2020, Sol contributed $3,000 to an IRA for himself and $3,250 to an IRA for his spouse. The allowable IRA deduction in the Cranes' 2020 joint return is: A. $6,250 B. $3,250 C. $3,000 D. $0
D. $0 The allowable deduction for contributions to an IRA is limited to the lesser of $6,000 or compensation. Compensation represents earned income and does not include distributions from pension plans or interest income. Therefore, since compensation is $0, the allowable IRA deduction is limited to $0. Note that the maximum amount otherwise deductible is $6,000 for Sol and another $6,000 for the contribution for his spouse.
Farr, an unmarried taxpayer, had $70,000 of adjusted gross income and the following deductions for regular income tax purposes: 1. Home mortgage interest on a loanto acquire a principal residence: $11,000 2. State and local taxes: 2,000 What are Farr's total allowable itemized deductions for computing alternative minimum taxable income? A. $2,000 B. $13,000 C. $0 D. $11,000
D. $11,000 Only certain itemized deductions are allowed in calculating the AMT. Taxes are not allowed, so the only allowable itemized deduction for computing Farr's AMT is the $11,000 home mortgage interest on a loan to acquire a principal residence.
A 33-year-old taxpayer withdrew $30,000 (pretax) from a traditional IRA. The taxpayer has a 28% effective tax rate and a 35% marginal tax rate. What is the total tax liability associated with the withdrawal? A. $10,000 B. $10,500 C. $13,000 D. $13,500
D. $13,500 IRA distributions made before age 59 1/2 are subject to taxation as well as a 10% penalty. Each amount is calculated based on the distribution. No penalty is applied if the distribution is used for death or disability, medical expenses in excess of the percent limitation, the purchase of a first home (up to $10,000), higher education expenses, or the birth or adoption of a child (up to $5,000). None of these circumstances are applicable; therefore, the tax and penalty apply to the entire $30,000. The applicable tax rate is 35% for a tax liability of $10,500 ($30,000 × 35%), which is added to the penalty of $3,000 ($30,000 × 10%), for a total of $13,500.
In 2020, Don Mills, a single taxpayer, had $70,000 in taxable income. Mills had no tax preferences. His itemized deductions were as follows: 1. State and local income taxes: $10,000 2. Home mortgage interest on loan to acquire residence: 12,000 3. Qualified investment interest: 2,000 What amount did Mills report as alternative minimum taxable income before the AMT exemption? A. $80,000 B. $72,000 C. $94,000 D. $82,000
D. $82,000 The itemized deduction for state and local income taxes and qualified investment interest are AMT adjustment items that must be added back to TI to find AMTI. Therefore, AMTI is $82,000 ($70,000 TI + $10,000 + $2,000).
Alternative minimum tax for individuals requires certain adjustments and preferences. Generally, which of the following is a preference or adjustment item for taxpayers? A. Standard deduction. B. Incentive stock options. C. Tax-exempt interest on certain private activity bonds. D. All of the answers are correct.
D. All of the answers are correct. There are several adjustments that individuals must make when computing AMT. Standard deduction, tax-exempt interest on private activity bonds (which is included in investment income), and incentive stock options are examples of these adjustments.
A calendar-year individual is eligible to contribute to a deductible IRA. The taxpayer obtained a 4-month extension to file until August 15 but did not file the return until November 1. What is the latest date that an IRA contribution can be made in order to qualify as a deduction on the prior year's return? A. August 15. B. November 1. C. October 15. D. April 15.
D. April 15. A taxpayer will be credited with making a contribution on the last day of the preceding year if the contribution is made by the due date of the return without regard to extensions. The return due date of a calendar-year individual is April 15.
Sanderson has made deductible contributions to his traditional IRA for many years. Sanderson recently retired at age 60 and received a distribution of $150,000. In which way, if any, will the distribution be taxed? A. It will not be taxed. B. Subject to a 10% penalty. C. As a capital gain. D. As ordinary income.
D. As ordinary income. Distributions received from a traditional IRA are taxed as ordinary income.
All of the following are considered adjustments for arriving at alternative minimum taxable income except: A. Real property taxes. B. Standard deduction. C. Foreign income taxes. D. Home mortgage interest (debt used to purchase, build, or substantially improve a residence).
D. Home mortgage interest (debt used to purchase, build, or substantially improve a residence). Taxable income must be adjusted to arrive at alternative minimum taxable income. The adjustments are described in Secs. 56 and 58, with tax preferences in Sec. 57. The adjustments with respect to itemized deductions of an individual are contained in Sec. 56(b)(1).
For property placed in service after 1998, which of the following is a true statement of the adjustment required for alternative minimum taxable income? A. It is the same as for property placed in service prior to 1987. B. The alternative depreciation system of Sec. 168(g) is used in its entirety. C. For personal property, the alternative depreciation system of Sec. 168(g) is used with the 150%-declining-balance method (switching to straight-line when larger), but the MACRS recovery period that applies for regular tax purposes also applies for AMT purposes. D. Section 1250 property and other property depreciated under MACRS using the straight-line method are depreciated using the alternative depreciation system of Sec. 168(g).
For personal property, the alternative depreciation system of Sec. 168(g) is used with the 150%-declining-balance method (switching to straight-line when larger), but the MACRS recovery period that applies for regular tax purposes also applies for AMT purposes. The deduction allowed for depreciation of tangible property (personal and real) placed in service after 1998 is generally determined under the alternative depreciation system of Sec. 168(g). However, for personal property, the 150%-declining-balance method is used and switches to a straight-line method in the first year the straight-line method yields a larger deduction. For tax years after 1998, the MACRS recovery period that applies for regular tax purposes also applies for AMT purposes. Therefore, the requirement that the 150%-declining-balance method be used over the applicable ADS recovery period for AMT purposes is no longer necessary. The former rules apply to property placed in service before 1999.
When determining his alternative minimum tax, Edward had the following adjustments and preference items: 1. Itemized deduction for state taxes: $1,800 2. Refund of prior year state income tax: 300 3. Cash contributions: 800 4. Capital gain: 700 5. Depletion in excess of adjusted basis: 700 What are the amounts of tax preference items and adjustments to taxable income for alternative minimum tax purposes on Edward's 2020 tax return?
The depletion is a tax preference item that must be added back for alternative minimum tax purposes. The adjustments, on the other hand, include only the itemized deduction reduced by the refund of prior-year state income tax. Thus, the tax preference items total $700, and the adjustments equal $1,500 ($1,800 - $300).
