R2_M4: AMT and other taxes.

Mary has an AMT adjustment in the amounts of $2,000 in Year 1, and $5,000 each in Years 2 and 3. These adjustments will increase AMTI because more income is being recognized for AMT purposes than for regular tax purposes. In Year 4, Mary has an adjustment of

$12,000 that will decrease AMTI in Year 4. This is because regular tax recognized the entire $20,000 income in Year 4, but AMT only recognized $8,000 under percentage of completion. Because AMT recognized less income in the final year of the contract, the adjustment is a decrease to AMTI.

The CPA Examination has focused the majority of the questions concerning individual alternative minimum tax on the following four areas:

(1). the exemption formula. (2). distinguish "adjustments" from "preferences." (3). the AMT credit carryforward period [against regular tax]. (4). credits: available to reduce AMT [Not regular tax].

Alternative Minimum Taxable Income [AMTI] Calculation.

(2). Adjustments [adds or subtracts]. (3). Tax preference items [always "adds" to regular taxable income].

Adjustments. Examples of common adjustments include: [Increase or decrease] (P). passive activity losses. (A). accelerated depreciation [post - 1986 purchase]. (N). net operating loss of the individual taxpayer. (I). installment income of a dealer.

(C). contracts- percentage completion versus completed contract. Only increase [itemized deduction]. (T). tax "deductions." (I). interest deductions on some home equity loans. (M). miscellaneous deductions not allowed. (E). exemptions [personal] and standard deduction.

☐ Itemized Deductions [always "adds" to regular taxable income]. (T). Taxes reduced by taxable refunds [if refunds meet the tax benefit rule] are added back. (I). Interest. (M). Medical expenses must exceed 10 percent of AGI. No adjustment is needed for taxpayers under age 65.

(M). Miscellaneous deductions subject to the 2 percent floor are not allowed [i.e., they are added back]. OK/NA since the 10% is also used in itemized deduction (E). Exemptions: Personal and standard deductions may not be claimed. Note: charity is not ad add-back for AMT.

(2). Adjustments [adds or subtracts]. (P). Passive activity losses are added back, or recalculated. (A). Accelerated depreciation adjustment.

(N). Net operating loss must be recomputed. (I). Installment method may not be used by dealer for property sales. (C). Contracts [long term].

(I). Interest. (b). investment interest expense must be recalculated.

(a). mortgage interest not used to buy, build, or improve a qualified dwelling [house, apartment, condominium, or mobile home not used on a transient basis] is added back.

Entertainment for clients immediately after a business discussion is 50% deductible

(directly related to or associated with the active conduct of a trade or business, the same rule as for business meals).

Interest paid on a home equity loan is deductible up to the lesser of $100,000 or the fair market value of the property reduced by the amount of acquisition indebtedness

(in this question, the FMV of the property exceeds the acquisition indebtedness by $70,000, so the interest paid would be deductible up to $70,000).

self-employment tax: boss, employee. the self-employment tax represents the employer portion and the employee portion of FICA taxes [social security and medicare] imposed on self-employment income.

100 percent of self-employment tax is collected as an "other tax" and reported in the "other taxes" section. [Note that 50 percent of this amount is reported as an adjustment to arrive at AGI.] (1). additional medicare tax. (2). net investment income tax.

Parents may elect to include on their own return the unearned income of the applicable child provided that the income is between $1,050 and $10,500 and consists solely of interest, dividends, and capital gains distributions.

2017 child's unearned income: $0-$1,050 Tax rate: 0%. 2017 child's unearned income: $1,050-$2,100. Tax rate: Child's. 2017 child's unearned income: $2,101 and over. Tax rate: Parent's.

5. Mr. Carlin paid $2,500 in real property taxes on his vacation home, which he used exclusively for personal use

5. Deductible in full on Schedule A—Itemized Deductions Real estate taxes on personal residences are deductible in full on Schedule A

7. Mr. Carlin paid $3,600 real property taxes on residential rental property in which he actively participates. There was no personal use of the rental property. Deductible on Schedule E—Supplemental Income and Loss

7. Deductible on Schedule E—Supplemental Income and Loss. Real property taxes on residential rental property are deductible on Schedule E. The deductibility of any net loss on rental activities is subject to passive loss limitations.

Calculation. [Pay greater of (1). regular tax , or (2) tentative minimum tax.] Regular taxable income Add / Deduct: adjustments. Add: Preference

= Alternative minimum taxable income Less: Exemption. = Alternative minimum tax base. x AMT rate. = Tentative AMT tax Less : AMT foreign tax credit, = Tentative minimum tax. Less Regular income tax. = Alternative minimum tax. [Pay in addition to regular tax].

Adjustment Related to Contracts. Mary has a long-term construction contract in Year 1 and uses the completed-contract method for regular tax purposes. She reports income for regular tax of $20,000 in Year 4, the year the contract is completed.

AMT requires the use of the percentage-of-completion method. Under this method, income would be reported as follows: $2,000 in Year 1; $5,000 in Year 2; $5,000 in Year 3; and $8,000 in Year 4.

Alternative Minimum Tax- Individuals.(2)

Alternative Minimum Tax [AMT].

Alternative Minimum Tax- Individuals.

Alternative Minimum Taxable Income.

Personal and Dependency Exemptions We can claim a total of four personal and dependency exemptions at $4,050 each, or $16,200. John and Susan may each claim a personal exemption and a dependency exemption for both Sam and Sara for a total of $16,200 ($4,050 each).

Because Sam is age 24, he is not a qualifying child. However, he satisfies all of the tests for a qualifying relative, so the Adamses can claim him as a dependent. Sara appears to meet the requirements of a qualifying child.

Mr. Carlin had investment interest expense that did not exceed his net investment income.

Deductible in full on Schedule A—Itemized Deductions Investment interest expense is deductible up to net investment income. Unused expenses can be carried forward indefinitely.

Mr. Carlin paid $900 toward continuing education courses (not to qualified higher education institutions and not qualified for any tax credits) and was not reimbursed by his employer.

Deductible on Schedule A—Itemized Deductions, as a miscellaneous deduction subject to a threshold of 2% of adjusted gross income Employee unreimbursed business expenses are deductible as miscellaneous deductions subject to the 2% of AGI threshold.

While performing the legal services for his church, Mr. Carlin incurred $50 of expenses for software utilized in performing the services.

Deductible on Schedule A—Itemized Deductions, subject to a limitation of 50% of adjusted gross income. Out-of-pocket expenses incurred in the performance of donated services to a qualified charity are deductible on Schedule A, subject to a limitation of 50% of adjusted gross income.

Coverdell Education Savings Account We should not report the $125 in Coverdell education savings account earnings as taxable interest income because Coverdell earnings accumulate tax-free.

Earnings on a Coverdell education savings account are not taxable. Additionally, if the income represented a type of income that is taxable, it would not be reported on the tax return for John and Susan Adams because it is reported under the Social Security number of Sara.

Calculation. The alternative minimum tax is computed by first subtracting the AMT exemption amount from "alternative minimum taxable income" [AMTI] to compute the "taxable excess" AMTI or "AMT base."

For all taxpayers except married taxpayers filing separately, tax is then applied at 26 percent on the first $187,800 [2017] of taxable excess AMTI and at 28 percent on all taxable excess AMTI exceeding $187,800 [2017]. The alternative minimum tax is mandatory if it exceeds the regular tax.

(1). additional medicare tax. The Affordable Care Act imposes an additional medicare tax of 0.9 percent on wages in excess of $250,000 for married filing jointly; $125,000 for married filing separately; and $200,000 for all other taxpayers. ☐ additional medicare tax is calculated on

Form 8959 and reported in "other taxes" on Form 1040. ☐ employers are responsible for withholding this addition tax on all wages paid to an employee that exceed $200,000 in a calendar year. ☐ any amounts withheld in excess can be claimed as a credit on the taxpayer's individual income tax return.

Calculation of AMT Exemption. Bob and Mary file a joint return in 2017. If their AMTI is $258,900, their exemption is $59,000 as follows: AMTI: $258,900 less: Threshold: 160,900. = Excess over threshold: 98,000. x 25% rate = 24,500 reduction.

Full exemption $84,500. Less: 24,500 reduction. = $60,000 AMT exemption.

The cost of meals during which business was discussed with potential customers is 50% deductible. The expense must be directly related to or associated with the active conduct of a trade or business and must not be lavish or extravagant under the circumstances.

Further, the employee must be present at the meal. A business meal is not deductible unless business is discussed before, during (this question), or after the meal. Business meals are considered the same category as entertainment expenses.

Tuition and Fees Deduction We have no tuition and fees deduction. An amount can only be deducted as a qualified education expense if it represents tuition and certain related expenses required for enrollment or attendance at an eligible educational institution.

Furthermore, a deduction for qualified education expenses cannot be taken if the American opportunity or lifetime learning credit has been claimed for that same student in the same year.

AMT Credit. [carryforward against regular tax forever]. In year 2, Bart pays alternative minimum tax. his AMT credit carryover is calculated to be $5,000.

If Bart is subject to AMT in a future year, this credit is not allowed to be applied to the AMT. But if Bart is not subject to AMT in a future year, he may apply this $5,000 credit against his regular tax.

Dry cleaning costs for business suits worn at the dealership are considered personal expenses and are not deductible.

If the costs had been incurred while traveling away from the dealership on business, they would have been deductible as incidental travel expenses.

Total casualty losses are first reduced by an amount of $100 per loss.

In this question, there is only one deductible loss, so there is only one $100 reduction.

Tax Preference Items [Always "add-backs"] By definition in the tax code, tax preference items are always add-backs. These items will result in more income or fewer deductions being recognized for AMT versus regular tax. Examples of common tax preference items include:

Increase. (P). *Private activity bond interest income [on certain bonds]. (P). *"Percentage depletion" deduction [excess over adjusted basis of property]. (P). Pre-1987 accelerated depreciation.

Adjustments. Adjustments are defined in the tax code as specific items that may increase or decrease AMT, because the treatment of the item for AMT purposes is different from that for regular tax purposes.

Items 1-5 are "timing differences" that may increase or decrease AMTI. Items 6-9 are items that may be included in deductions for regular tax purposes, but not for AMT purposes, and will only increase AMTI.

9. Mr. Carlin performed free legal services for his church. The estimated value of the services was $800. Not deductible on Form 1040.

Not deductible on Form 1040 The value of services donated (even to a qualified charity) is not deductible on Form 1040.

Mr. Carlin paid a $1,000 premium for a homeowner's insurance policy on his principal residence.

Not deductible on Form 1040 Personal expenses (such as homeowner's insurance) are not deductible on Form 1040.

Alternative Minimum Tax- Individuals. (3)

Tax Computation Using Maximum Capital Gains Rates.

The cost to rebuild a detached garage due to damage from termites is not deductible.

Termite damage is generally not considered to be "sudden and unexpected."

The Penalty Imposed by Individual Mandate Section of the Affordable Care Act.

The affordable Care act further imposes a tax penalty on certain individuals who are not covered by health insurance. (1). tax amount.

Alternative Minimum Tax. The alternative minimum tax [AMT] is a tax designed to ensure that taxpayers who take a large number of tax-preference deductions pay a minimum amount of tax on their income.

The alternative minimum tax is the excess of the tentative AMT over the regular tax.

Damage to articles stored in a basement due to a water heater explosion is deductible, net of insurance reimbursements.

The casualty must be sudden and unexpected.

Tax-Exempt Interest Preference Item. In Year 2, Janet has total tax-exempt interest of $15,000. Of this tax-exempt interest, $1,300 is deemed to be from private-activity bonds. Her total preference add-back for AMT purposes is $1,300.

The result here is that $15,000 tax-exempt interest is exempt from regular tax, but $1,300 of that amount must be recognized for AMT. Therefore, only $13,700 is exempt for AMT purposes [$15,000-$1,300].

(2). net investment income tax. The net investment income tax went into effect January , 1, 2013, and applies a rate of 3.8 percent to certain net investment income of individuals who have income above the statutory threshold amounts.

The statutory threshold amounts are $250,000 for a filing status of married filing jointly , and $200,000 for taxpayers with a single filing status or head of household filing status.

Mortgage interest paid on a principal (and one other secondary) residence is fully deductible as qualified residence interest.

There are limitations but none of them seem to apply here.

Her total adjustments for AMT purposes are as follows: State income taxes: $9,200. Add: Home equity interest: 6,500. = Total: $15,700.

These adjustments increase AMTI because they are the disallowance of deductions that are allowed for regular tax purposes. Note that the charitable contributions and acquisition indebtedness are not adjustments for purposes of AMT.

AMTI Calculation. Continuing with illustrations for Janet from above: Assume that in Year 2, Janet has regular taxable income of $60,000. From the above illustrations, her adjustments are $15,700 and her preference item are $1,300.

These are both added back to taxable income to arrive at alternative minimum taxable income [AMTI] of $77,000.

AMT Adjustments. In Year 2, Janet has various itemized deductions.

They include interest on acquisition in indebtedness on her home of $11,200; state income tax deductions of $9,200; charitable contributions of $3,000; and home equity interest on a loan not used to improve the home of $6,500.

Kiddies Tax = interest & dividend income. Net unearned income is calculated by taking the child's total unearned income [from dividends, interest, rents, royalties, etc.] and subtracting $2,100: the child's allowable 2017 standard deduction of $1,050

[or investment expense, if greater] plus an additional $1,050 [which is taxed at the child's rate]. Although the income in excess of $2,100 is taxed at the parent's marginal tax rate, it is nonetheless reported on the child's tax return.

Kiddies Tax = interest & dividend income. the net unearned income of a dependent child under 18 years of age

[or, a child age 18 to under 24 who does not provide over half of his / her own support and is a full-time student] is taxed at the parent's higher tax rate.

Gambling losses are deductible as

a miscellaneous itemized deduction up to the amount of gambling winnings (stated in the facts of the question as $4,000).

Casualty losses are deductible

after a 10.0% of AGI limitation.

Points on a 30-year mortgage on the purchase of a personal residence are fully deductible. Points on a home mortgage loan to purchase a principal residence are deductible in the year paid to the extent that the payment of points is

an established practice in the area and the amount paid does not exceed the points generally charged in the area for a home loan. Other than that, the points are capitalized and amortized over the life of the loan (this is the normal treatment).

Unreimbursed employee business travel expenses for airfare are fully deductible. [Note: Travel expenses include transportation expenses

and meals and lodging while away from home in the pursuit of a trade or business; however, meals are 50% deductible.]

Repair costs to prevent further roof deterioration from water damages

are not a casualty loss and are not deductible.

Personal disability insurance premiums are not deductible [but they are also generally not taxable when received— the premiums

are paid by the taxpayer with post-tax dollars]. Only medical and hospital insurance premiums are deductible as medical expenses.

Regular taxable income $60,000. Add: AMT adjustments $15,700. Add: AMT preference items: 1,300. =AMTI $77,000.

as indicated in the previous illustrations, these items will both increase AMTI because they are eliminating deductions from the regular taxable income and adding income to the regular taxable income.

(2). net investment income tax. Generally, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, nonqualified annuities, and income from businesses involved in the trading of financial instruments or

commodities and businesses that are passive activities to the taxpayer. Expenses allocable to the income can be deducted. Form 8960 is used to calculate the net investment income tax in the "other taxes" section.

(A). Accelerated depreciation adjustment. (1). On real property, this is the difference between regular tax depreciation and straight-line using a 40-year life for property placed in service after 1986. (3). no adjustment is required for property expensed under Sect. 179. (2).On personal property, this is the

difference between regular tax depreciation and 150 percent declining balance [with switch to straight-line]. [if a taxpayer elects 150 percent declining-balance depreciation for regular tax purposes, there will be no AMT depreciation adjustment of 200 percent declining-balance eligible property.]

American Opportunity Tax Credit We can claim the full American opportunity tax credit of $2,500. Sam is a graduate student and, as such, qualifies for the lifetime learning credit, but not the American opportunity tax credit. Sara, however, as an undergraduate and a junior

does qualify (presumably) and her maximum credit is $2,500 (100 percent of the first $2,000 of qualifying expenses plus 25 percent of the next $2,000) after reducing the expenses for the scholarship and the Coverdell distribution. Higher AGI limits apply in the case of the AOTC, so her credit is not phased out.

Exemption Amounts. For 2017, the exemption amount is $54,300 less [25 percent x [AMTI -$120,700]] for single taxpayers; $84,500 less [25 percent x [AMTI - $160,900]] for joint filers; and $42,250 less [25 percent x [AMTI -$80,450]] for married individuals filing separately.

in no case can the exemption be less than zero. AMTI Less: $160,900. = Excess x 25% = Reduction ------------------------ "Joint " Exemption : 2017: $84,500. Less: Reduction = AMT Exemption.

The purchase of a tuxedo to wear to trade show functions

is considered a personal expense and is not deductible. A tuxedo is not a "uniform."

The lifetime learning credit that we can take must be reduced based on our adjusted gross income for the year. The lifetime learning credit is equal to 20 percent of qualifying expenses (per taxpayer) for qualifying students, including graduate students, such as Sam.Unlike the more generous American opportunity

tax credit, this is a limit per taxpayer and cannot be used for a student for whom the AOTC is also claimed. Because Sam is not eligible for the AOTC, his parents' credit is limited based on their AGI, which exceeds the base limit provided of $110,000, and their credit will be limited.

There is no AGI limitation on

the deductibility of qualified interest.

(C). Contracts [long term].

the difference between the percentage-of-completion method and completed-contract method or any other method of accounting is an adjustment.

Medical (and hospital) insurance premiums paid by a taxpayer (not by the employer)

with after-tax dollars are fully deductible as a medical expense.

Page 2 of Form 1040 Used for Reporting Tax Credits and Tax Liability.

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Other AMT Adjustments: ☐ incentive stock options. ☐ recalculate gain or loss on sale of depreciable assets.

☐ Pollution control facilities. ☐ Mining exploration and development costs. ☐ circulation expenses. ☐ research and experimental expenditures. ☐ [Passive] tax shelter farm activities.

Tax Preference Items [Always "Adds" to Regular Taxable Income]. ☐ Private activity bond tax-exempt interest [exceptions apply].

☐ Pre-1987 accelerated depreciation on real property and leased personal property [excess over straight-line for property placed in service before 1987.] ☐ "Percentage depletion" deduction [excess over adjusted basis of property].

Credit for Prior Year Minimum Tax [AMT Credit]. ☐ certain allowable AMT paid in a taxable year may be carried over as a credit to subsequent taxable years. It may only reduce regular tax, not future alternative minimum tax.

☐ The carryforward is forever. ☐ Asterisks above: AMT created from certain permanent differences, identified by the asterisks, cannot be carried forward as part of the "credit." therefore, if AMT is paid because of these items, it is never recovered.

(1). tax amount. in 2017, the amount of the tax is the lesser of $695 per person or 2.5 percent of family income, with a maximum of $2,085. ☐ children are assessed at 50 percent of the minimum penalty.

☐ certain low-income taxpayers are exempt from the tax. ☐ the penalty is prorated by month. ☐ no penalty applies to a gap in coverage of three months or less. ☐ the IRS is prohibited from using liens or levies to collect the tax.

Credits. Taxpayers can reduce their AMT liability by the full amount of their nonrefundable personal tax credits. for example, the following tax credits are permitted as a credit to reduce the alternative minimum tax:

☐ child and dependent care credit. ☐ adoption credit. ☐ child tax credit. ☐ contributions to retirement plans credit. ☐ residential energy credit. Foreign adoption child contribution IRA Earned income.