Alternative Minimum Tax

Transcription

1 CPE/CE 4 Credit Hours Alternative Minimum Tax Step-by-Step Guide to AMT 2014 Tax Year Interactive Self-Study CPE/CE Course

2 Alternative Minimum Tax (AMT) Self-Study CPE/CE Course Overview Program Content: Publication Date: September Expiration Date: Field of Study: Program Level: Recommended Participants: Prerequisites: Advance Preparation: Type of Delivery Method: CPE/CE Credit Hours: Passing Grade: Record Retention: This course provides continuing professional education (CPE) for tax professionals to enhance competence in helping clients comply with computing and reporting alternative minimum tax (AMT). Topics include explanations of adjustments, preferences, deferrals, and common triggers for AMT. The course also addresses computation of the credit for prior-year AMT, and proper reporting to ensure availability of the credits. Court cases addressing various topics are also examined. The Final Exam must be completed online within one year from your date of purchase or shipment. See the Final Examination Instructions on the next page for information regarding final exam completion. Taxes. Overview. This course provides a general overview of the subject area from a broad perspective. It is appropriate for tax professionals at all organization levels. Tax professionals who prepare individual income tax returns are encouraged to participate in this course. Individuals who have prepared Form 1040 tax returns. No advanced preparation is needed to complete this course. Interactive self-study. 4 Credit Hours. One 50-minute period equals one CPE/CE Credit Hour. Participants who answer a minimum of 70% correct on the final exam will receive a Certificate of Completion. See the Final Examination Instructions on the next page for further information regarding passing requirements and acquiring the Certificate of Completion. As an IRS-approved provider of continuing education, Tax Materials, Inc. will report successful completion of this course to the IRS. According to the IRS, at some point in the future, you will be able to view your completed continuing education credits through your online PTIN account. Complaint Resolution Policy: Please contact our customer service department toll-free at Refund Policy: 30-day money-back guarantee. For information about our refund, complaint, and/or program cancellation policies, visit our website at Tax Materials, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: National Registry of CPE Sponsors ID Number In accordance with the standards set forth in Circular 230, section 10.6, CPE/CE credits have been granted based on a 50-minute hour. IRS Program Number is 7VT8K-T S Tax Materials, Inc. has been approved by the California Tax Education Council to offer the Alternative Minimum Tax (AMT) for Individuals Self-Study CPE/CE Course 6193-CE-0031, which provides 4 hours of federal credit and 0 hours of state credit towards the annual continuing education requirement imposed by the State of California. A listing of additional requirements to register as a tax preparer may be obtained by contacting CTEC at P.O. Box 2890, Sacramento, CA, , toll-free by phone at , or on the internet at CTEC Course ID Number 6193-CE-0031 Copyright 2014 Tax Materials, Inc. All Rights Reserved TheTaxReview Alternative Minimum Tax (AMT) Overview i

3 Alternative Minimum Tax (AMT) Self-Study CPE/CE Course Completion Instructions Helpful Hint: Attempt to relate your tax preparation experience with the information you are studying. By doing so, you will increase retention and maximize your results. Also, utilize the Notes sections to jot down reminders and information that will be helpful to you in your tax practice. Follow the instructions below: 1) Start each chapter by reading the Learning Objectives. 2) Read the course materials in the chapter. Pay close attention to: a) Key Facts: Information that is particularly pertinent to the Learning Objective. b) Examples: Review the examples to associate the information to real-world application. c) Notes: Many of the main points of the chapter are highlighted. Review the notes and try to relate the content with your experience. 3) Complete the Self-Quiz at the end of the chapter. The questions are broken out by Learning Objective. Review the Learning Objectives before completing each set of questions. Determine your progress by comparing your answers to the correct ones on the pages that follow. 4) After all chapters have been studied, and each Self-Quiz has been taken, complete the Final Exam located at the back of this instruction booklet. Final Examination Instructions Expiration Date Reminder: The Final Exam must be completed online within one year from your date of purchase or shipment. CPE/CE credits are not available more than one year after your date of purchase or shipment. All Final Exams are administered online at It is recommended that you review the Final Exam at the end of the course before taking it online. Final Exams mailed in will not be graded. Follow the instructions below: 1) Go to 2) Click on Login to Education Center, where you will find a location to log in to the Final Exam. 3) Enter your User Name in the self-study CPE/CE login location. The address associated with your account at Tax Materials, Inc. is your User Name. If you do not have an address, or have not provided one, please call our toll-free number at to be assigned a User Name. 4) Enter your Password. The zip code associated with your account is your password. If you are having difficulty logging onto the Final Exam, please call our toll-free number at ) Select the Alternative Minimum Tax (AMT) Exam and click the Take Exam button. 6) You will be taken to the Final Exam. First confirm your First Name and Last Name are correct. This is how your name will appear on your Certificate of Completion should you achieve a score of 70% or higher. Take the Final Exam. Read the questions carefully and answer them to the best of your ability. At the bottom of the exam, click on Submit Answers when finished. You will instantly know if you have passed the test. If you failed, you are able to retake the test. If you passed, the Certificate of Completion will be available for you to print. Complete Evaluation Form Please provide suggestions and feedback regarding this CPE/CE course. The last page contains an Evaluation Form. After completion, please mail to: Tax Materials, Inc Minnetonka Ind. Rd., Ste. 221 Minnetonka, MN Thank you for helping us improve our CPE/CE course offerings! ii Overview TheTaxReview Alternative Minimum Tax (AMT)

4 Learning Objectives/Table of Contents Chapter 1 Basics of the Individual Alternative Minimum Tax (AMT) A Recognize the components in calculating individual AMT and how it can affect the income tax return. 1-B Identify adjustments and preferences that can trigger individual AMT. 1-C Compute the difference between regular tax and AMT for common adjustment or preference items. 2 Credit for Prior Year AMT A Recognize prior-year AMT items that will potentially produce a current-year tax credit on an individual return. 2-B Compute the Credit for Prior-Year Minimum Tax 2-C Identify proper recordkeeping and reporting methods to ensure AMT credits are available for a year in which the credit will benefit the taxpayer. 3 Specific AMT Items Examined A Identify situations where a taxpayer may be subject to AMT even if they do not have any preference items by reviewing facts in Birts vs. Commissioner. 3-B Discern concepts set forth in Tax Court s disallowance of an alternative minimum tax net operating loss deduction created by AMT basis adjustments related to incentive stock options, as discussed in Marcus vs. Commissioner. 3-C Recognize principles set forth in Revenue Ruling on mortgage interest when refinancing occurs more than one time for AMT purposes. 4 Alternative Minimum Tax (AMT) Corporations A Identify corporations subject to AMT and items that may trigger corporate AMT. 4-B Compute the adjusted current earnings (ACE) adjustment. 4-C Calculate the corporate alternative minimum tax and the minimum tax credit. Final Exam Index Course Evaluation TheTaxReview Alternative Minimum Tax (AMT) Table of Contents iii

5 iv Table of Contents TheTaxReview Alternative Minimum Tax (AMT)

6 1 Basics of the Individual Alternative Minimum Tax (AMT) Learning Objectives Successful completion of this course will enable the participant to: 1-A Recognize the components in calculating individual AMT and how it can affect the income tax return. 1-B Identify adjustments and preferences that can trigger individual AMT. 1-C Compute the difference between regular tax and AMT for common adjustment or preference items. Glossary Terms Adjustments. AMT adjustments are items of income or deductions that must be added or subtracted from regular taxable income due to different tax treatment for AMT. AMT adjustments may increase or decrease alternative minimum taxable income. Exemptions. Instead of personal or dependency exemptions, a special AMT exemption amount is applied to determine whether a taxpayer is subject to AMT. The amount is based on filing status. AMT exemption phaseout. A special exemption amount is allowed for AMT purposes. If income is over a certain amount, depending on filing status, the exemption amount phases out. Preferences. Preference items are deductions or income exclusions that are allowed for regular tax but are added back in calculating alternative minimum taxable income. AMT preference items are always add backs and can only increase alternative minimum taxable income. Exclusions. Deductions that are not allowed for AMT. Any AMT liability resulting from exclusion items is a permanent difference in tax and cannot be recovered through credits. Deferrals. Differences in timing of income or deductions. An AMT credit may be allowed in subsequent years for liability that resulted from deferral items. CPE/CE Learning Objective 1-A Recognize the components in calculating individual AMT and how it can affect the income tax return. AMT was created to reduce the ability of high-income individuals to escape payment of tax on income by using tax preferences under the regular tax system. A type of minimum tax was first enacted in The minimum tax has been amended a number of times. While the mechanics of AMT were modified, the objective of limiting high-income taxpayers ability to avoid significant tax liability by using tax preferences was retained. AMT was created to reduce the ability of high-income individuals to escape payment of tax on income by using tax preferences under the regular tax system. TheTaxReview Alternative Minimum Tax (AMT) Chapter 1 1

7 NOTES Every taxpayer is subject to AMT rules. Parallel Tax System In general, AMT is a separate tax system that parallels the regular individual income tax system. It has its own definitions of income and expenses, and its own rules for accounting, timing, exemptions, and tax rates. It generates an alternative tax liability by: Applying different tax rates to a broader base of income than the regular individual income tax system does, and Limiting the use of certain tax credits available under the regular tax system. Every taxpayer is subject to AMT rules. If the AMT computation does not result in higher tax than regular income tax rules, AMT is not reported and does not show up on the taxpayer s Form If the AMT computation does result in a higher tax than regular income tax, the difference is added to tax liability on line 45, Form Taxpayers complete a series of steps to determine if they are subject to AMT. Step 1: Calculate Regular Tax Liability Income Exclusions and deductions for AGI Standard or itemized deductions Personal exemptions = Regular taxable income Regular tax rates = Regular tax liability (before credits) Tax credits = Regular tax liability Step 2: Calculate AMT Liability Regular taxable income + Personal exemptions + Standard or AMT adjusted itemized deductions +/ AMT adjustments and preferences AMT exemption = AMT taxable income AMT tax rates = AMT liability Step 3: Compare Tax Liabilities Is the AMT > regular tax (before credits)? No...Pay regular tax less allowable credits. Yes...Pay AMT amount less allowable credits. 2 Chapter 1 TheTaxReview Alternative Minimum Tax (AMT)

8 Common AMT Triggers Certain items that are deductible for regular tax purposes are not deductible for computing AMT. The following is a list of items that commonly trigger AMT. High gross income relative to taxable income. Large number of dependents. Exercise of incentive stock options. Long-term capital gains. Large Schedule A deduction for taxes. Large Schedule A deduction for miscellaneous itemized deductions. Tax-exempt interest. See Learning Objective 1-B, page 7, for more details about the above items. AMT Computation Adjustments and preferences. Adjustments and preferences to income for AMT purposes are added to or subtracted from the taxpayer s income reported on Form This results in alternative minimum taxable income (AMTI). Standard deduction. The standard deduction is not allowed to reduce income under AMT rules. Personal and dependent exemptions. Personal and dependent exemptions are not allowed under AMT rules. A complete listing of adjustments for AMT purposes is shown in the Form 6251, AMT Adjustments and Preferences Summary Chart, page 8. The chart shows how specific items are treated for regular tax purposes, and how the items are treated under AMT rules. AMT exemption. An AMT exemption amount is subtracted from alternative minimum taxable income (AMTI). If AMTI is above a certain level, the exemption amount is phased out. To arrive at AMTI, add or subtract adjustments from the starting amount on Form 1040 (AGI for taxpayers using the standard deduction; or line 41, Form 1040, for taxpayers using itemized deductions). AMTI higher than the beginning phaseout amount results in reduction of the exemption at the rate of 25% for each dollar above the starting phaseout amount. The exemption amounts are as follows. Filing Status 2014 AMT Exemption Single or HOH... $52,800 MFJ or QW... $82,100 MFS... $41, AMT Exemption Phaseout Range based on AMTI Single or HOH... $117,300 to $328,500 MFJ or QW... $156,500 to $484,900 MFS... $ 78,250 to $242,450 NOTES If AMTI is above a certain level, the exemption amount is phased out. TheTaxReview Alternative Minimum Tax (AMT) Chapter 1 3

9 NOTES AMT tax rate. After AMT adjustments, preferences, and exemption amount are added or subtracted, an AMT tax rate between 26% and 28% is applied. The amount applied to the AMT tax rate schedule is the amount from line 30, Form 6251, Alternative Minimum Tax Individuals. For 2014, if the amount on line 30 is $182,500 or less ($91,250 or less if MFS), multiply line 30 by 26%. Otherwise, multiply line 30 by 28% and subtract $3,650 ($1,825 if MFS) from the result. Key Fact Long-term capital gains are taxed at normal capital gain tax rates for AMT purposes. However, capital gains are included in income for purposes of determining the AMT exemption, which can be limited based on AGI. If the taxpayer s regular tax bracket is less than the AMT rate, the taxpayer could have an AMT liability despite the preferential tax treatment given long-term gains. Example Nathan and Denise Kinsley are married with three young children. They will file a joint return. Their only income is Nathan s employee wages in the amount of $230,000. Their itemized deductions total $60,425, which includes $18,425 for taxes. Even though the Kinsleys do not have any other adjustments or preference items, they do have five personal exemptions which are not allowed in computing AMT. The AMT exemption is reduced because of their income. The Kinsleys are subject to AMT of $384, which is added to their regular income tax on line 45, Form See pages 5 and 6 for excerpts from the Kinsley s Form 1040, Schedule A, Itemized Deductions, and Form 6251, Alternative Minimum Tax Individuals, which show the items from their return that are used in computing AMT. Key Fact Although the starting point for AMT income allows itemized deductions, the standard deduction is never allowed in the AMT computation. This can create a situation where it might benefit a taxpayer to claim itemized deductions even if itemized deductions are less than the standard deduction. The tax professional should perform a comparison if AMT is triggered when the taxpayer is claiming the standard deduction. AMT and Children A child is subject to AMT and Form 6251 must be filed with the child s 2014 tax return if both of the following are true. 1) The child is required to file Form 8615, Tax for Certain Children Who Have Unearned Income, and 2) The child s adjusted gross income on line 38, Form 1040, exceeds the child s earned income by more than $7,250. Child s AMT exemption limited. When a child is subject to AMT, the child s 2014 AMT exemption may be limited to $7,250, plus the child s earned income. 4 Chapter 1 TheTaxReview Alternative Minimum Tax (AMT)

10 1040 Department of the Treasury Internal Revenue Service (99) 2014 U.S. Individual Income Tax Return 13 OMB No IRS Use Only Do not write or staple in this space. For the year Jan. 1 Dec. 31, 2013, or other tax year beginning, 2013, ending, 20 See separate instructions. Your first name and initial Last name Your social security number Nathan Kinsley xxx xx xxx1 If a joint return, spouse s first name and initial Last name Spouse s social security number Denise Kinsley xxx xx xxx2 Home address (number and street). Limit If you have applies. a P.O. box, see instructions. Apt. no. Make sure the SSN(s) above 1234 Easy Street and on line 6c are correct. City, town or post office, state, and ZIP Limit code. If you applies have a foreign unless address, also complete the child s spaces below (see earned instructions). income was more Presidential than Election half Campaign Minnetonka, MN Check here if you, or your spouse if filing of his or her support. jointly, want $3 to go to this fund. Checking Foreign country name Foreign province/state/county Foreign postal code a box below will not change your tax or refund. You Spouse Limit applies unless the child provided more than half of his or her 1 Single 4 Head of household (with qualifying person). (See instructions.) If Filing Status 2 X support Married filing jointly with (even earned if only one income. had income) the qualifying person is a child but not your dependent, enter this Check only one 3 Married filing separately. Enter spouse s SSN above child s name here. box. Limit and full name does here. not apply if either of the 5 following Qualifying widow(er) is true. with dependent child 6a X Yourself. If someone can claim you as a dependent, do not check box 6a..... Boxes checked Exemptions } on 6a and 6b b X Spouse The child.. files... a. joint.. return.... for No. of children c Dependents: (2) Dependent s (3) Dependent s (4) if child under age 17 on 6c who: Neither parent is qualifying for child tax credit (1) First name Last name social alive security number at the relationship end of to you lived with you (see instructions) did not live with 3 you due to divorce Naida Kinsley Daughter X or separation If more than four X (see instructions) Nicki Kinsley Daughter dependents, see Dependents on 6c instructions and Nora Kinsley Daughter X not entered above check here Add numbers on d Total number of exemptions claimed lines above 5 7 Wages, salaries, tips, etc. Attach Form(s) W ,000 Form Child s 2014 AMT Exemption: $7,250 plus child s earned income Under 18 Age 18* Full-time student age 19 23* Any age * For purposes of Forms 8615 and 6251, a child s age for 2014 is determined on January 1, Income 8a Taxable interest. Attach Schedule B if required a b Tax-exempt interest. Do not include on line 8a Department of the Treasury Internal Revenue Service (99) b Attach Form(s) 9 a Ordinary dividends. Attach Schedule B if required a W-2 here. Also U.S. Individual Income Tax Return 13 OMB No IRS Use Only Do not write or staple in this space. attach For the Forms b Qualified dividends b year Jan. 1 Dec. 31, 2013, or other tax year beginning, 2013, ending, 20 See separate instructions. W-2G and 10 Taxable refunds, credits, or offsets of state and local income taxes Your first name and initial Last name Your social security number 1099-R if tax Nathan 11 Alimony received... Kinsley was withheld. xxx xx xxx1 If a joint return, spouse s 12 first name Business and initial income or (loss). Last Attach name Schedule C or C-EZ Spouse s social security number 13 Capital gain or (loss). Attach Schedule D if required. If not required, check here 13 If you Denise did not Kinsley xxx xx xxx2 Home address (number 14 and street). Other If you gains have or a (losses). P.O. box, Attach see instructions. Form Apt.. no. 14 get a W-2, Make sure the SSN(s) above see 1234 instructions. 15 a IRA distributions. 15a b Taxable amount... 15b Easy Street and on line 6c are correct. City, town or post office, state, 16 a and Pensions ZIP code. If and you annuities have a foreign 16a address, also complete spaces below (see b instructions). Taxable amount... 16b Presidential Election Campaign 17 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E 17 Minnetonka, MN Check here if you, or your spouse if filing 18 Farm income or (loss). Attach Schedule F jointly, want $3 to go to this fund. Checking Foreign country name Foreign province/state/county Foreign postal code a box below will not change your tax or 19 Unemployment compensation refund. You Spouse 20 a Social security benefits 20a b Taxable amount... 20b 1 Single 4 Head of household (with qualifying person). (See instructions.) If Filing Status 21 Other income. List type and amount 21 2 X Married filing jointly (even if only one had income) the qualifying person is a child but not your dependent, enter this 22 Combine the amounts in the far right column for lines 7 through 21. This is your total income ,000 Check only one 3 Married filing separately. Enter spouse s SSN above child s name here. box. 23 Educator expenses and full name here. 5 Qualifying widow(er) with dependent child Adjusted 24 Certain business expenses of reservists, performing artists, and 6a X Yourself. If someone can claim you as a dependent, do not check box 6a..... Boxes checked Exemptions Gross fee-basis government officials. Attach Form 2106 or 2106-EZ 24 } on 6a and 6b 2 Income b X Spouse Health savings account deduction. Attach Form No. of children c Dependents: (2) Dependent s (3) Dependent s (4) if child under age 17 on 6c who: 26 Moving expenses. Attach Form 3903 (1) First name Last name social security.. number... relationship. 26 to you qualifying for child tax credit lived with you 3 (see instructions) did not live with 27 Deductible part of self-employment tax. Attach Schedule SE. 27 you due to divorce Naida Kinsley Daughter X or separation If more than four 28 Self-employed SEP, SIMPLE, and qualified plans.. 28 X (see instructions) Nicki Kinsley Daughter dependents, see 29 Self-employed health insurance deduction Dependents on 6c instructions and Nora Kinsley Daughter X not entered above 30 Penalty on early withdrawal of savings check here 31a Alimony paid b Recipient s SSN Add numbers on d Total number of exemptions claimed 31a lines above 5 32 IRA deduction Wages, salaries, tips, etc. Attach Form(s) W ,000 Income 33 Student loan interest deduction a Taxable interest. Attach Schedule B if required a 34 Tuition and fees. Attach Form b Tax-exempt interest. Do not include on line 8a... 8b Attach Form(s) 35 Domestic production activities deduction. Attach Form a Ordinary dividends. Attach Schedule B if required 9a W-2 here. Also 36 Add lines 23 through attach Forms b Qualified dividends b 37 Subtract line 36 from line 22. This is your adjusted gross income ,000 W-2G and 10 Taxable refunds, credits, or offsets of state and local income taxes For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions. Cat. No B Form 1040 (2013) 1099-R if tax 11 Alimony received was withheld. 12 Business income or (loss). Attach Schedule C or C-EZ Form 13 Capital gain or (loss). Attach Schedule D if required. If not required, check here 13 If you did not 14 Other gains or (losses). Attach Form get a W-2, see instructions. 15 a IRA distributions. 15a b Taxable amount... 15b Form 1040 (2013) Nathan a Pensions and and Denise annuities Kinsley 16a b Taxable amount... 16b Page 2 17 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E Amount from line 37 (adjusted gross income) ,000 Tax and 18 Farm income or (loss). Attach Schedule F a Check You were born before January 2, 1949, Blind. Total boxes Credits 19 Unemployment { compensation }... if: Spouse was born before January 2, 1949, Blind. checked a 20 a Social security benefits 20a b Taxable amount Standard b If your spouse itemizes on a separate return or you were a dual-status alien, check here... 20b 39b Deduction 21 Other income. List type and amount 21 for 40 Itemized deductions (from Schedule A) or your standard deduction (see left margin) , Combine the amounts in the far right column for lines 7 through 21. This is your total income People who 41 Subtract line 40 from line , ,575 check any 23 Educator expenses box on line 42 Exemptions. If line 38 is $150,000 or less, multiply $3,900 by the number on line 6d. Otherwise, see instructions 42 19,750 Adjusted 39a or 39b or 24 Certain business expenses of reservists, performing artists, and 43 Taxable income. Subtract line 42 from line 41. If line 42 is more than line 41, enter ,825 Gross who can be fee-basis government officials. Attach Form 2106 or 2106-EZ 24 claimed as a 44 Tax (see instructions). Check if any from: a Form(s) 8814 b Form 4972 c 44 29,198 Income dependent, 25 Health savings account deduction. Attach Form see 45 Alternative minimum tax (see instructions). Attach Form instructions. 26 Moving expenses. Attach Form Add lines 44 and ,582 All others: 27 Deductible part of self-employment tax. Attach Schedule SE Foreign tax credit. Attach Form 1116 if required Single or 28 Self-employed SEP, SIMPLE, and qualified plans.. 28 Married filing 48 Credit for child and dependent care expenses. Attach Form separately, 29 Self-employed health insurance deduction $6, Education credits from Form 8863, line Penalty on early withdrawal of savings Married filing 50 Retirement savings contributions credit. Attach Form jointly or 31a Alimony paid b Recipient s SSN 31a Qualifying 51 Child tax credit. Attach Schedule 8812, if required widow(er), 32 IRA deduction $12, Residential energy credits. Attach Form Student loan interest deduction Head of 53 Other credits from Form: a 3800 b 8801 c 53 household, 34 Tuition and fees. Attach Form $8, Add lines 47 through 53. These are your total credits , Subtract Domestic line 54 production from line 46. activities If line deduction. 54 is more Attach than line Form 46, 8903 enter Add lines 23 through Self-employment tax. Attach Schedule SE 56 Other 37 Subtract line 36 from line 22. This is your adjusted gross income , Unreported social security and Medicare tax from Form: a 4137 b Taxes For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions. Cat. No B Form 1040 (2013) 58 Additional tax on IRAs, other qualified retirement plans, etc. Attach Form 5329 if required a b Household employment taxes from Schedule H First-time homebuyer credit repayment. Attach Form 5405 if required NOTES TheTaxReview Alternative Minimum Tax (AMT) Chapter Taxes from: a Form 8959 b Form 8960 c Instructions; enter code(s) Add lines 55 through 60. This is your total tax Federal income tax withheld from Forms W-2 and a 59b

11 NOTES SCHEDULE A (Form 1040) Information about Schedule A and its separate instructions is at Department of the Treasury Internal Revenue Service (99) Attach to Form Name(s) shown on Form 1040 Nathan and Denise Kinsley Medical and Dental Expenses Taxes You Paid Interest You Paid Note. Your mortgage interest deduction may 6251 Itemized Deductions Caution. Do not include expenses reimbursed or paid by others. 1 Medical and dental expenses (see instructions) Enter amount from Form 1040, line Multiply line 2 by 10% (.10). But if either you or your spouse was born before January 2, 1949, multiply line 2 by 7.5% (.075) instead 3 4 Subtract line 3 from line 1. If line 3 is more than line 1, enter State and local (check only one box): a X Income taxes, or b General sales taxes } ,625 6 Real estate taxes (see instructions) ,800 7 Personal property taxes Other taxes. List type and amount 8 9 Add lines 5 through Home mortgage interest and points reported to you on Form Home mortgage interest not reported to you on Form If paid to the person from whom you bought the home, see instructions and show that person s name, identifying no., and address Alternative Minimum Tax Individuals OMB No Attachment Sequence No. 07 Your social security number xxx-xx-xxx1 2 18,425 OMB No Form be limited (see 12 Points not reported to you on Form See instructions for instructions) Department of the Treasury special rules Information... about.. Form and. its. separate... instructions.... is at 12 Attachment Internal Revenue Service 13 (99) Mortgage insurance premiums (see Attach instructions) to Form or. Form. 1040NR Sequence No. 32 Name(s) shown on Form Investment or Form interest. 1040NR Attach Form 4952 if required. (See instructions.) 14 Your social security number Nathan and Denise Kinsley xxx-xx-xxx1 15 Add lines 10 through Gifts Part to I Alternative 16 Gifts Minimum by cash or Taxable check. If Income you made (See any instructions gift of $250 or for more, how to complete each line.) Charity 1 If filing Schedule see A instructions (Form 1040),. enter.. the. amount... from. Form ,.. line.. 41,. and. go 16 to line 2. Otherwise, 1 enter the amount If you made a 17 Other from than Form by 1040, cash line or 38, check. and go If any to line gift 7. of (If $250 less than or more, zero, enter see as a negative amount.) 1 169,575 gift 2 and Medical got a and dental. instructions. If you or You your must spouse attach was Form older, if enter over the $500 smaller.. of. Schedule 17 A (Form 1040), benefit line for 4, it, or 2.5% 18 Carryover (.025) of Form from 1040, prior line year 38. If. zero. or. less,.. enter see 3 instructions. Taxes from 19 Schedule Add lines A (Form 16 through 1040), line ,425 Casualty 4 Enter and the home mortgage interest adjustment, if any, from line 6 of the worksheet in the instructions for this line 4 Theft 5 Miscellaneous Losses 20 deductions Casualty or from theft Schedule loss(es). A Attach (Form Form 1040), line 27. (See. instructions.) Job 6 Expenses If Form 1040, 21 line Unreimbursed 38, is $150,000 employee or less, enter expenses job -0-. Otherwise, travel, see instructions union dues, ( ) and 7 Certain Tax refund from job Form education, 1040, line etc. 10 or Attach line 21 Form or EZ... if. required ( ) Miscellaneous 8 Investment interest (See expense instructions.) (difference between regular tax and AMT) Deductions 9 Depletion (difference 22 Tax preparation between regular fees tax.. and. AMT) Net operating 23 loss Other deduction expenses investment, from Form 1040, line safe 21. deposit Enter as box, a positive etc. List amount type Alternative tax net and operating amount loss deduction ( ) 12 Interest from specified private activity bonds exempt from the regular tax Qualified small 24 Add business lines stock 21 through (7% of 23 gain. excluded... under.. section ) Exercise of 25 incentive Enter stock amount options from Form (excess 1040, of AMT line income over regular tax income) Estates and 26 trusts Multiply (amount line from 25 by Schedule 2% (.02) K-1. (Form ),.. box.. 12,. code.. A) Electing large 27 partnerships Subtract line (amount 26 from from line Schedule 24. If line K-1 26 (Form is more 1065-B), than line box 24, 6) enter Other 17 Disposition 28 of property Other from (difference list in between instructions. AMT List and type regular and tax amount gain or loss) Miscellaneous 18 Depreciation on assets placed in service after 1986 (difference between regular tax and AMT) Deductions 19 Passive activities (difference between AMT and regular tax income or loss) Total 20 Loss limitations 29 Is (difference Form 1040, between line 38, AMT over and $150,000? regular tax income or loss) Itemized 21 Circulation costs (difference No. Your between deduction regular is not tax limited. and AMT) Add the.. amounts... in. the. far. right.. column Deductions 22 Long-term contracts for (difference lines 4 through between 28. AMT Also, and enter regular this tax amount income) on Form ,.. line Mining costs (difference Yes. Your between deduction regular tax may and be AMT) limited.. See. the. Itemized.... Deductions } Research and experimental Worksheet costs in the (difference instructions between to figure regular the tax amount and AMT) to enter Income from 30 certain If you installment elect to itemize sales before deductions January even 1, 1987 though. they.. are.. less. than.. your.. standard ( ) 26 Intangible drilling deduction, costs preference check here For 27 Paperwork Other adjustments, Reduction including Act Notice, income-based see Form 1040 related instructions. adjustments.... Cat.. No C Schedule A (Form 1040) Alternative minimum taxable income. Combine lines 1 through 27. (If married filing separately and line 28 is more than $238,550, see instructions.) ,000 Part II Alternative Minimum Tax (AMT) 29 Exemption. (If you were under age 24 at the end of 2013, see instructions.) (limited by phaseout) IF your filing status is... AND line 28 is not over... THEN enter on line Single or head of household.... $115, $51,900 Married filing jointly or qualifying widow(er) 153, ,800.. } Married filing separately , ,400 If line 28 is over the amount shown above for your filing status, see instructions. 30 Subtract line 29 from line 28. If more than zero, go to line 31. If zero or less, enter -0- here and on lines 31, 33, and 35, and go to line If you are filing Form 2555 or 2555-EZ, see instructions for the amount to enter. If you reported capital gain distributions directly on Form 1040, line 13; you reported qualified dividends on Form 1040, line 9b; or you had a gain on both lines 15 and 16 of Schedule D (Form 1040) (as refigured for the AMT, if.. 31 necessary), complete Part III on the back and enter the amount from line 60 here. All others: If line 30 is $179,500 or less ($89,750 or less if married filing separately), multiply line 30 by 26% (.26). Otherwise, multiply line 30 by 28% (.28) and subtract $3,590 ($1,795 if married filing separately) from the result. 32 Alternative minimum tax foreign tax credit (see instructions) Tentative minimum tax. Subtract line 32 from line , Tax from Form 1040, line 44 (minus any tax from Form 4972 and any foreign tax credit from Form 1040, line 47). If you used Schedule J to figure your tax, the amount from line 44 of Form 1040 must be refigured without using Schedule J (see instructions) , AMT. Subtract line 34 from line 33. If zero or less, enter -0-. Enter here and on Form 1040, line For Paperwork Reduction Act Notice, see your tax return instructions. Cat. No G Form 6251 (2013) } , ,775 29,582 6 Chapter 1 TheTaxReview Alternative Minimum Tax (AMT)

12 Learning Objective 1-B Identify adjustments and preferences that can trigger individual AMT. AMT Adjustments and Preferences Adjustments and preferences are items of income or deduction that are treated favorably for purposes of computing regular income tax. Adjustments. AMT adjustments are items of income or deductions that must be added or subtracted from regular taxable income due to different tax treatment for AMT. AMT adjustments may increase or decrease alternative minimum taxable income. Preferences. Preference items are deductions or income exclusions that are allowed for regular tax but are added back in calculating alternative minimum taxable income. AMT preference items are always add backs and can only increase alternative minimum taxable income. See Form 6251, AMT Adjustments and Summary Preferences Chart, page 8, for examples of AMT adjustments and preferences. NOTES AMT preference items are always add backs and can only increase alternative minimum taxable income. Deferral and Exclusion Items AMT is caused by two types of adjustments and preferences, deferral items and exclusion items. Deferral items. Deferral items (for example, depreciation) generally do not cause a permanent difference in taxable income over time. Exclusion items. Exclusion items (for example, the standard deduction), on the other hand, do cause a permanent difference. The minimum tax credit is allowed only for AMT caused by deferral items. See Form 6251, AMT Adjustments and Preferences Summary Chart, page 8, to determine whether a particular item of adjustment or preference is an exclusion or a deferral. Example In 2014, Nathan and Denise reported AMT of $384 on line 45, Form The only preference item for Nathan and Denise for regular tax purposes was an amount of $18,425 for tax deducted on Schedule A, Form State taxes are not allowed as a deduction when computing AMT. Therefore the state taxes are an exclusion item, and AMT generated by adding back the state taxes cannot be offset by AMT credits in future years. Example In 2013, Barry exercised incentive stock options acquired from his employer. His cost for the incentive stock options was $25,000. The FMV of the stock at the time Barry exercised the options was $60,000. This resulted in a bargain element of $35,000 (FMV $60,000 minus cost $25,000). For regular tax purposes, the bargain element is not taxed at the time the options are exercised. There is no taxable income until the options are eventually continued on next page TheTaxReview Alternative Minimum Tax (AMT) Chapter 1 7

13 NOTES Example continued sold, at which time a capital gain or loss will result. Therefore there was no income to report on Barry s Form 1040 from the exercise of the incentive stock options. However, the bargain element was added to income for purposes of computing Barry s AMT for The bargain element also increased Barry s adjusted basis in the stock for AMT purposes. In 2014, Barry sold the stock for $62,000. His gain for regular tax purposes was $37,000 (sales price $62,000 minus cost of $25,000). His gain for AMT purposes was $2,000 (sales price $62,000 minus adjusted basis of $60,000 [cost of $25,000 plus bargain element of $35,000 recognized as AMT income in 2013]). Since the bargain element was recognized in 2014 for AMT purposes, and is then recognized as an addition to basis in 2014, the amount is a deferral item. If the bargain element generated AMT for Barry in 2013, he may be eligible for an AMT credit in Transaction Regular Tax AMT No effect. Exercise stock option. Cost $25,000; FMV $60,000 Bargain element of $35,000 added to AMT income. Basis $25,000 (cost) $60,000 (cost of $25,000 plus bargain element $35,000). Sold for $62,000 in 2014 $37,000 gain ($62,000 minus $25,000 adjusted basis) $2,000 gain ($62,000 minus $60,000 adjusted basis [$25,000 cost plus 35,000 previously subject to AMT]). See Credit for Prior Year AMT, page 27. Form 6251, AMT Adjustments and Preferences Summary Chart Medical and dental expenses Taxes from Schedule A Mortgage interest Regular Tax Treatment Deductible to the extent medical costs exceed: 7.5% of AGI for taxpayers age 65 or older. 10% of AGI for all others, unless filing with a spouse who is age 65 or older. The 7.5% limitation is a temporary limitation from January 1, 2013 to December 31, State and local income taxes or sales taxes, real estate taxes, and personal property taxes are deductible. Mortgage interest on refinancing is deductible, subject to dollar limits. Alternative Minimum Tax Adjustment Deductible to the extent medical costs exceed 10% of AGI. Add back the lesser of 2.5% of AGI or the amount deducted on Schedule A if the taxpayer or spouse was 65 or older. Add back all taxes deducted on Schedule A, including any state and local sales taxes, but not including any generation-skipping transfer taxes on income distributions. Exclusion / Deferral E Mortgage interest on refinancing is E limited to amount used to buy, build, or substantially improve main or second home. A qualified home includes a house, apartment, condominium, or mobile home. Add back excess interest. continued on next page E 8 Chapter 1 TheTaxReview Alternative Minimum Tax (AMT)

14 Form 6251, AMT Adjustments and Preferences Summary Chart continued Miscellaneous itemized deductions Tax refund Investment interest expense Depletion Interest from private activity bonds Tax-exempt interest reported on Form 8814 Qualified small business stock ( 1202) Exercise of incentive stock options Disposition of property Depreciation on assets placed in service after 1986 Passive activities Regular Tax Treatment Deductible, subject to a limit of 2% of AGI. Tax refunds are included in gross income to the extent a tax benefit was received for tax deducted in a prior year. Interest expense allocable to tax-exempt income is not deductible. The deduction for investment interest is limited to net investment income. A deduction for depletion is allowed subject to income limits. Interest from specified private activity bonds issued after August 7, 1986, is generally not taxable. Tax-exempt interest is reported by the payer in box 8, Form 1099-INT, Interest Income. The portion of tax-exempt interest attributable to private activity bonds is reported in box 9, Form 1099-INT. A parent electing to file Form 8814, Parents Election to Report Child s Interest and Dividends, reports the child s tax-exempt interest on line 1b of that form. An exclusion of 50% of the gain from small business stock is available (maximum 28% rate). No income is recognized upon the exercise of an incentive stock option (ISO). Gain or loss from sale of property is computed using regular tax basis. Depreciation is computed under MACRS general depreciation system or alternate depreciation system. Income and gains are computed using regular tax rules. Alternative Minimum Tax Adjustment Miscellaneous itemized deductions are not allowed for AMT. Add back amount reported on line 27, Schedule A. Tax refunds included in income on line 10 or line 21, Form 1040, are a subtraction from income for AMT. A separate Form 4952, Investment Interest Expense Deduction, is completed. Adjustments are made to account for AMT items, such as private activity bonds. Add back excess investment interest expense. Recompute depletion deduction based on AMT income and basis of property. Add back excess depletion. Interest from specified private activity bonds issued after August 7, 1986, must be added to income for AMT purposes, less any deduction allowable had the bonds been taxable under regular tax. IRC section 57(a)(5) lists exceptions for certain exempt facility bonds, qualified mortgage bonds, and qualified veteran mortgage bonds. Interest earned on qualified GO Zone or Midwestern disaster area bonds is also excluded. Any amounts reported on line 1b, Form 8814, must be added to the parents income for AMT purposes. Include this interest with any private activity bond interest. Add back 7% of the amount that was excluded from gross income under IRC section Add back the difference between the FMV and the amount paid (unless sold during the same tax year). Gain or loss from sale of property must be recomputed if AMT basis is different from regular tax basis (such as from AMT depreciation adjustments, etc.). Adjust for the difference between AMT and regular gain or loss. Add back regular depreciation minus AMT deprecation. This may be a positive or negative adjustment. Exclusion / Deferral E A separate Form 8582, Passive Activity D Loss Limitations, must be completed for AMT purposes, taking into account AMT adjustments and preferences that apply to the activity. continued on next page E E E E E E D D D NOTES TheTaxReview Alternative Minimum Tax (AMT) Chapter 1 9

15 NOTES Form 6251, AMT Adjustments and Preferences Summary Chart continued Loss limitations Circulation costs Long-term contracts Mining costs Research and experimental costs Income from installment sales Intangible drilling costs (IDC) AMT net operating loss adjustments Regular Tax Treatment At-risk limitations apply. Circulation costs are generally deductible in the year paid. Options exist for accounting method. Costs are generally deducted in the year paid unless the election is made for the optional 10-year write-off. Costs may be deducted as current expenses if not amortized. Generally reported as income in the year payments are received. Generally allowed as a current deduction or optional 60-month write-off. Net operating losses are computed using regular tax rules. Alternative Minimum Tax Adjustment Recompute gains or losses taking into account AMT adjustments to basis. Circulation costs deducted in the year incurred for regular tax purposes must be capitalized and amortized over three years for AMT. Long-term contracts must be accounted for by the percentage-ofcompletion method for AMT (does not apply to certain home construction contracts). If deducted in full for regular tax, must be capitalized and amortized over 10 years for AMT. If deducted in the year paid or incurred for regular tax, costs must be capitalized and amortized over 10 years. Does not apply if taxpayer materially participated. Add back for certain nondealer dispositions that occurred before January 1, If a current deduction for IDC was claimed instead of optional 60-month amortization, add back the excess of IDC over the amount allowable had IDC been amortized over 120 months. Any permitted method for cost depletion may be used instead of 120-month amortization. Net operating losses must be recomputed using AMT rules. Exclusion / Deferral D D D D D D D D Medical Expenses For tax years through 2012, medical expenses were allowed as itemized deductions to the extent the expenses exceeded 7.5% of the taxpayer s AGI. For AMT purposes, medical expenses were further limited, and allowed as a deduction only to the extent the qualified expenses exceeded 10% of AGI. For tax years 2013 forward, the AGI limit for taxpayers under age 65 was increased to 10% of AGI for purposes of regular tax. The limit remains at 7.5% of AGI for taxpayers age 65 and over for the period January 1, 2013 through December 31, The effect of the new limit on AMT is that no adjustment is necessary for taxpayers below age 65. Taxpayers age 65 and over must use reduce their deductible medical expenses by 10% of their AGI for AMT purposes instead of 7.5%. 10 Chapter 1 TheTaxReview Alternative Minimum Tax (AMT)

16 Example Barnaby is single and age 65. His AGI is $100,000. Barnaby has $12,000 in qualified medical expenses. For regular tax purposes, he can deduct $4,500 [$12,000 minus $7,500 (7.5% of AGI)]. For purposes of AMT, Barnaby can deduct only $2,000 [$12,000 minus $10,000 (10% of AGI)]. NOTES Identifying AMT Situations More taxpayers are affected by AMT every year. In terms of tax planning, computing estimated tax payments, or simply helping a client know what to expect next year at tax time, AMT can be a significant, unwelcome addition on a client s tax return. A significant AMT liability is sometimes as much a surprise to the tax preparer as it is to the client. In many situations AMT is not considered until the computer tax program notifies the user of its existence. There are clues that can warn a tax preparer an AMT liability may apply on a client s return. The following will identify items that are likely triggers for AMT and will explain how these items affect the tax return. High AGI relative to taxable income. High AGI relative to taxable income on Form 1040 is the result of large itemized deductions or personal exemptions. Personal exemptions are not allowed in computing AMT. Although some itemized deductions are allowed for both regular tax and AMT computations, certain items such as state taxes and miscellaneous itemized deductions are not allowed for AMT purposes. If a tax return has relatively high gross income compared to taxable income, the preparer should be on the lookout for possible AMT liability in future years. Example Last year Joan prepared a 2013 tax return for her clients, Nathan and Denise Kinsley. Their gross income was $205,000, with taxable income of $136,000. For 2013 Nathan and Denise did not owe AMT. Joan did projections for the 2014 return and helped her clients adjust their employee withholding so they would break even on their 2014 tax return, taking into consideration an expected increase in wages of $25,000. In 2014, Joan prepared the return for the Kinsleys. There was an unpleasant surprise for Joan s clients when they learned they had a federal balance due of approximately $400, generated by an unexpected AMT liability. Although Joan had correctly estimated the tax for 2014 under regular tax rules, she failed to take into consideration the AMT. A look at the Kinsley s 2014 estimates and 2013 return would have indicated high gross income relative to taxable income. Although in 2013 the Kinsleys were not subject to AMT, a check on the computation would have revealed they were very close to being subject to AMT. With the increase in wages of $25,000 and additional state tax paid in 2014, AMT kicked in, increasing the Kinsley s tax liability and putting a dent in Joan s credibility with her clients. If a tax return has relatively high gross income compared to taxable income, the preparer should be on the lookout for possible AMT liability in future years. TheTaxReview Alternative Minimum Tax (AMT) Chapter 1 11

17 NOTES In some cases, a taxpayer subject to AMT will have a lower tax liability if the taxpayer itemizes deductions even if itemized deductions are less than the standard deduction. Large number of dependents. Although an AMT exemption based on filing status is allowed in computing AMT, personal and dependent exemptions are not allowed for AMT purposes. The AMT exemption amount is reduced when alternative minimum taxable income (AMTI) exceeds phaseout thresholds. This can create a situation where liability for AMT may be generated even if the taxpayer does not have any of the listed adjustments or preferences. See AMT exemption, page 3. Standard deduction. Although a standard deduction is allowed for regular tax purposes on Form 1040, the standard deduction is not allowed for purposes of computing the AMT. In some cases, a taxpayer subject to AMT will have a lower tax liability if the taxpayer itemizes deductions even if itemized deductions are less than the standard deduction. A tax preparer should do a comparison of the total tax generated on Form 1040 if there is an AMT liability and the return reflects the standard deduction. Example Danica is a single mother, with three children, filing as HOH. She earned $160,000 in wages in 2014, which was her only income. Danica lives in a state with no state income tax. Her deduction for general sales taxes is $1,528, and she had qualifying charitable contributions in the amount of $4,300 for total itemized deductions of $5,828. Danica s tax professional prepares her return using the standard deduction of $9,100 since the standard deduction is higher than Danica s itemized deductions. This results in regular income tax of $28,414, plus an AMT liability of $2,234, for a total tax liability of $30,648. Upon review of the tax return, Danica s tax professional makes a comparison and realizes that because the standard deduction is not allowed under AMT rules, Danica will pay less total tax if she uses itemized deductions instead of the standard deduction. Danica s tax professional checks the Force Itemized Deductions box on her tax software, and the AMT is eliminated, leaving a total tax liability of $29,330. Using itemized deductions saved Danica $1,318 in total tax. Using Standard Deduction Using Itemized Deductions AGI... $ 160,000...$ 160,000 Deductions... 9, ,828 Exemptions... 15, ,800 Taxable Income... $ 135,100...$ 138,372 Regular Tax... $ 28,414...$ 29,330 AMT... 2, Total Tax... $ 30,648...$ 29,330 See Danica s Form 6251, page 13, to view the computation. 12 Chapter 1 TheTaxReview Alternative Minimum Tax (AMT)

18 6251 Alternative Minimum Tax Individuals OMB No Form Department of the Treasury Information about Form 6251 and its separate instructions is at Attachment Internal Revenue Service (99) Attach to Form 1040 or Form 1040NR. Sequence No. 32 Name(s) shown on Form 1040 or Form 1040NR Your social security number Danica xxx-xx-xxx3 Part I Alternative Minimum Taxable Income (See instructions for how to complete each line.) 1 If filing Schedule A (Form 1040), enter the amount from Form 1040, line 41, and go to line 2. Otherwise, Standard Deduction Itemizing enter the amount from Form 1040, line 38, and go to line 7. (If less than zero, enter as a negative amount.) 1 160, ,172 2 Medical and dental. If you or your spouse was 65 or older, enter the smaller of Schedule A (Form 1040), line 4, or 2.5% (.025) of Form 1040, line 38. If zero or less, enter Taxes from Schedule A (Form 1040), line ,528 4 Enter the home mortgage interest adjustment, if any, from line 6 of the worksheet in the instructions for this line 4 5 Miscellaneous deductions from Schedule A (Form 1040), line If Form 1040, line 38, is $150,000 or less, enter -0-. Otherwise, see instructions ( ) 7 Tax refund from Form 1040, line 10 or line ( ) 8 Investment interest expense (difference between regular tax and AMT) Depletion (difference between regular tax and AMT) Net operating loss deduction from Form 1040, line 21. Enter as a positive amount Alternative tax net operating loss deduction ( ) 12 Interest from specified private activity bonds exempt from the regular tax Qualified small business stock (7% of gain excluded under section 1202) Exercise of incentive stock options (excess of AMT income over regular tax income) Estates and trusts (amount from Schedule K-1 (Form 1041), box 12, code A) Electing large partnerships (amount from Schedule K-1 (Form 1065-B), box 6) Disposition of property (difference between AMT and regular tax gain or loss) Depreciation on assets placed in service after 1986 (difference between regular tax and AMT) Passive activities (difference between AMT and regular tax income or loss) Loss limitations (difference between AMT and regular tax income or loss) Circulation costs (difference between regular tax and AMT) Long-term contracts (difference between AMT and regular tax income) Mining costs (difference between regular tax and AMT) Research and experimental costs (difference between regular tax and AMT) Income from certain installment sales before January 1, ( ) 26 Intangible drilling costs preference Other adjustments, including income-based related adjustments Alternative minimum taxable income. Combine lines 1 through 27. (If married filing separately and line 28 is more than $238,550, see instructions.) , ,700 Part II Alternative Minimum Tax (AMT) 29 Exemption. (If you were under age 24 at the end of 2013, see instructions.) (Reduced Exemption) IF your filing status is... AND line 28 is not over... THEN enter on line Single or head of household.... $115, $51,900 Married filing jointly or qualifying widow(er) 153, ,800.. } Married filing separately , , ,125 43,200 If line 28 is over the amount shown above for your filing status, see instructions. 30 Subtract line 29 from line 28. If more than zero, go to line 31. If zero or less, enter -0- here and on lines 31, 33, and 35, and go to line If you are filing Form 2555 or 2555-EZ, see instructions for the amount to enter. If you reported capital gain distributions directly on Form 1040, line 13; you reported qualified dividends on Form 1040, line 9b; or you had a gain on both lines 15 and 16 of Schedule D (Form 1040) (as refigured for the AMT, if.. 31 necessary), complete Part III on the back and enter the amount from line 60 here. All others: If line 30 is $179,500 or less ($89,750 or less if married filing separately), multiply line 30 by 26% (.26). Otherwise, multiply line 30 by 28% (.28) and subtract $3,590 ($1,795 if married filing separately) from the result. 32 Alternative minimum tax foreign tax credit (see instructions) Tentative minimum tax. Subtract line 32 from line Tax from Form 1040, line 44 (minus any tax from Form 4972 and any foreign tax credit from Form 1040, line 47). If you used Schedule J to figure your tax, the amount from line 44 of Form 1040 must be refigured without using Schedule J (see instructions) AMT. Subtract line 34 from line 33. If zero or less, enter -0-. Enter here and on Form 1040, line For Paperwork Reduction Act Notice, see your tax return instructions. Cat. No G Form 6251 (2013) }. 117,875 30,648 30,648 28,414 2, ,500 29,250 29,250 29,330 0 NOTES Exercise of incentive stock options (ISOs). Note that ISOs must qualify under provisions set forth in section 422 of the Internal Revenue Code. If an option is exercised and sold in the same year, no adjustment for AMT is necessary, including same-day transactions, where an option to purchased company stock at a price lower than FMV is granted, exercised, and sold in the same day. Grant. In a typical ISO offering, an employer will grant an employee the option to purchase stock of the employer s company at a price that is lower than FMV. Since the employer has merely granted the option to purchase the stock, the employee is not considered to have received any income either for regular income tax purposes or for AMT purposes. TheTaxReview Alternative Minimum Tax (AMT) Chapter 1 13

19 NOTES Taxable refunds of state and local income taxes from line 10, Form 1040, are subtracted from income when computing AMT. Exercise. If an employee takes advantage of an employer s grant of an option to buy stock under an ISO program, the employee is considered to have exercised the option at the time of purchase. The difference between the exercise price and FMV is called a bargain element. The bargain element is not taxable for regular income tax purposes, but is considered income for purposes of computing AMT. Sale. When stock purchased under an ISO is sold, gain or loss for regular income tax purposes is computed by subtracting the cost of the stock (exercise price) from the sales price. For AMT purposes however, the adjusted basis in the stock includes the exercise price plus the bargain element. See the Barry example in Learning Objective 1-B, page 7. Taxes. The total amount of taxes claimed as itemized deductions (line 9, Schedule A, Form 1040) is added back to income for AMT purposes. Tax refunds. Since taxes are not considered as deductions when computing AMT, tax refunds are also not considered. Taxable refunds of state and local income taxes from line 10, Form 1040, are subtracted from income when computing AMT. Tax refunds are included as a negative item on line 7, Form 6251, Alternative Minimum Tax. This subtraction also includes any tax amount included on line 21, Form 1040, such as refund of real property taxes. Long-term capital gains. Long-term capital gains are eligible for favorable tax rates on Form Key Fact Although long-term capital gains are given the same preferential tax rate for AMT as for regular income tax, capital gains are included in income and can increase AMT by accelerating the phaseout of the exemption amount. Miscellaneous itemized deductions. Miscellaneous itemized deductions subject to the 2% AGI limitation are exclusion items and are not allowed for AMT. The amount from line 27, Schedule A, is added back to income on Form 6251, Alternative Minimum Tax. This can generate AMT liability for taxpayers who have especially large deductions for employee business expenses. Example Leonid incurs large out-of-pocket employee business expenses, including significant unreimbursed business mileage. In 2014, his wages amounted to $160,000, which was his entire income for the year. Leonid is single with no dependents. Including his unreimbursed employee business expenses, miscellaneous deductions from line 27 of Leonid s Schedule A (after the reduction for 2% of AGI) was 25,000. He had other itemized deductions of $6,000. Because of Leonid s large deduction for employee business expenses, he is subject to AMT of $508. See Leonid s Form 6251, page 15, to view the computation. 14 Chapter 1 TheTaxReview Alternative Minimum Tax (AMT)

20 6251 Alternative Minimum Tax Individuals OMB No Form Department of the Treasury Information about Form 6251 and its separate instructions is at Attachment Internal Revenue Service (99) Attach to Form 1040 or Form 1040NR. Sequence No. 32 Name(s) shown on Form 1040 or Form 1040NR Your social security number Leonid xxx-xx-xxx4 Part I Alternative Minimum Taxable Income (See instructions for how to complete each line.) 1 If filing Schedule A (Form 1040), enter the amount from Form 1040, line 41, and go to line 2. Otherwise, enter the amount from Form 1040, line 38, and go to line 7. (If less than zero, enter as a negative amount.) 1 129,000 2 Medical and dental. If you or your spouse was 65 or older, enter the smaller of Schedule A (Form 1040), line 4, or 2.5% (.025) of Form 1040, line 38. If zero or less, enter Taxes from Schedule A (Form 1040), line Enter the home mortgage interest adjustment, if any, from line 6 of the worksheet in the instructions for this line 4 5 Miscellaneous deductions from Schedule A (Form 1040), line ,000 6 If Form 1040, line 38, is $150,000 or less, enter -0-. Otherwise, see instructions ( ) 7 Tax refund from Form 1040, line 10 or line ( ) 8 Investment interest expense (difference between regular tax and AMT) Depletion (difference between regular tax and AMT) Net operating loss deduction from Form 1040, line 21. Enter as a positive amount Alternative tax net operating loss deduction ( ) 12 Interest from specified private activity bonds exempt from the regular tax Qualified small business stock (7% of gain excluded under section 1202) Exercise of incentive stock options (excess of AMT income over regular tax income) Estates and trusts (amount from Schedule K-1 (Form 1041), box 12, code A) Electing large partnerships (amount from Schedule K-1 (Form 1065-B), box 6) Disposition of property (difference between AMT and regular tax gain or loss) Depreciation on assets placed in service after 1986 (difference between regular tax and AMT) Passive activities (difference between AMT and regular tax income or loss) Loss limitations (difference between AMT and regular tax income or loss) Circulation costs (difference between regular tax and AMT) Long-term contracts (difference between AMT and regular tax income) Mining costs (difference between regular tax and AMT) Research and experimental costs (difference between regular tax and AMT) Income from certain installment sales before January 1, ( ) 26 Intangible drilling costs preference Other adjustments, including income-based related adjustments Alternative minimum taxable income. Combine lines 1 through 27. (If married filing separately and line 28 is more than $238,550, see instructions.) ,000 Part II Alternative Minimum Tax (AMT) 29 Exemption. (If you were under age 24 at the end of 2013, see instructions.) Reduced Exemption IF your filing status is... AND line 28 is not over... THEN enter on line Single or head of household.... $115, $51,900 Married filing jointly or qualifying widow(er) 153, ,800.. } 1 Married filing separately , , ,625 If line 28 is over the amount shown above for your filing status, see instructions. 30 Subtract line 29 from line 28. If more than zero, go to line 31. If zero or less, enter -0- here and on lines 31, 33, and 35, and go to line If you are filing Form 2555 or 2555-EZ, see instructions for the amount to enter. If you reported capital gain distributions directly on Form 1040, line 13; you reported qualified dividends on Form 1040, line 9b; or you had a gain on both lines 15 and 16 of Schedule D (Form 1040) (as refigured for the AMT, if.. 31 necessary), complete Part III on the back and enter the amount from line 60 here. All others: If line 30 is $179,500 or less ($89,750 or less if married filing separately), multiply line 30 by 26% (.26). Otherwise, multiply line 30 by 28% (.28) and subtract $3,590 ($1,795 if married filing separately) from the result. 32 Alternative minimum tax foreign tax credit (see instructions) Tentative minimum tax. Subtract line 32 from line Tax from Form 1040, line 44 (minus any tax from Form 4972 and any foreign tax credit from Form 1040, line 47). If you used Schedule J to figure your tax, the amount from line 44 of Form 1040 must be refigured without using Schedule J (see instructions) AMT. Subtract line 34 from line 33. If zero or less, enter -0-. Enter here and on Form 1040, line For Paperwork Reduction Act Notice, see your tax return instructions. Cat. No G Form 6251 (2013) }. 110,375 28,698 28,698 28, NOTES TheTaxReview Alternative Minimum Tax (AMT) Chapter 1 15

21 NOTES Exemption Worksheet Line 29, Form ) Enter: $52,800 if Single or Head of Household; $82,100 if Married Filing Jointly or Qualifying Widow(er); $41,050 if Married Filing Separately... 1) $ 52,800 2) Enter your alternative minimum taxable income (AMTI) from Form 6251, line ) $ 154,000 3) Enter: $117,300 if Single or Head of Household; $156,500 if Married Filing Jointly or Qualifying Widow(er); $78,250 if Married Filing Separately... 3) $ 117,300 4) Subtract line 3 from line 2. If zero or less, enter ) $ 36,700 5) Multiply line 4 by 25% (.25)... 5) $ 9,175 6) Subtract line 5 from line 1. If zero or less, enter -0-. If any of the three conditions under Certain Children Under Age 24 apply to you, complete lines 7 through 10. Otherwise, STOP here and enter this amount on Form 6251, line 29, 1 and go to Form 6251, line ) $43,625 7) Minimum exemption amount for certain children under age ) $7,250 8) Enter your earned income, if any (see instructions)... 8) 0 9) Add lines 7 and ) 0 10) Enter the smaller of line 6 or line 9 here and on Form 6251, line 29, and go to Form 6251, line ) 0 Learning Objective 1-C Compute the difference between regular tax and AMT for common adjustment or preference items. Adjustments to depreciation must be made for purposes of computing AMT for certain types of property. Depreciation Adjustments to depreciation must be made for purposes of computing AMT for certain types of property. For example, for most property placed in service after 1998 and depreciated using the 200DB method for regular tax purposes, an adjustment must be made for AMT purposes by applying the 150DB method using the same convention and recovery period used for regular tax. See What depreciation must be refigured for AMT, page 17. AMT adjustment. To report the adjustment for AMT, subtract the AMT depreciation deduction from the amount computed for regular tax purposes and report the result on line 18, Form 6251, Alternative Minimum Tax Individuals. This amount can be either positive or negative. 16 Chapter 1 TheTaxReview Alternative Minimum Tax (AMT)

22 Example In 2012, Lee purchased a widget maker for $27,000. He depreciated the asset using the 200DB method with half-year convention over the prescribed recovery period of seven years. For purposes of making the adjustment for AMT, Lee uses the 150DB method. The following chart shows the computations using seven-year property halfyear convention depreciation percentage rates. Regular Tax 200DB AMT 150DB $27, % = $3,853 $27, % = $2, $27, % = $6,612 $27, % = $5, $27, % = $4,722 $27, % = $4,058 AMT adjustment for 2014: $4,722 $4,058 = $664 (reported on line 18, Form 6251) Note: Since different depreciation amounts apply for AMT compared to regular tax, the basis adjustments for the property will also be different. This can create a difference in the gain or loss for regular tax purposes versus AMT if the property is disposed of during the recovery period. Disposition of Property, page 19, discusses differences in basis between regular tax and AMT. NOTES What depreciation must be refigured for AMT. Generally, depreciation must be recomputed for AMT purposes, including depreciation allocable to inventory costs, for the following property. Property placed in service after 1998 that is depreciated for regular tax purposes using the 200DB method (generally 3-, 5-, 7-, and 10-year property under MACRS. Also see Special depreciation and Section 179 property, page 18. Section 1250 property placed in service after 1998 that is not depreciated for regular tax purposes using the straight-line method. Tangible property placed in service after 1986 and before What depreciation is not refigured for AMT. Do not refigure depreciation for AMT for the following property. Residential rental property placed in service after Nonresidential real property with a class life of 27.5 years or more placed in service after 1998 that is depreciated for regular tax purposes using the straight-line method. Other section 1250 property placed in service after 1998 that is depreciated for regular tax purposes using the straight-line method. Property (other than section 1250 property) placed in service after 1998 that is depreciated for regular tax methods using the 150DB method or the straightline method. Property for which the taxpayer elected to use the alternative depreciation system (ADS) for regular tax purposes. Motion picture films, videotapes, or sound recordings. Property depreciated under the unit-of-production method or any other method not expressed in a term of years. TheTaxReview Alternative Minimum Tax (AMT) Chapter 1 17

23 NOTES The cost of qualified property expensed under Section 179 is not adjusted for AMT purposes. Indian reservation property that meets the requirements of IRC section 168(j). Qualified revitalization expenditures for which the taxpayer elected to claim the commercial revitalization deduction under IRC section 1400L. A natural gas gathering line placed in service after April 11, Special depreciation and Section 179 property. The cost of qualified property expensed under Section 179 is not adjusted for AMT purposes. The reduction to the depreciable basis of section 179 property by the amount of the Section 179 expense is the same for regular tax and for AMT. Depreciation on qualified property that is or was eligible for the special depreciation allowance is not adjusted for AMT. This applies to any special depreciation allowance, including those for qualified disaster assistance property, qualified reuse and recycling property, qualified cellulosic biofuel plant property, qualified New York Liberty Zone property, qualified Gulf Opportunity Zone property, and Kansas disaster area qualified recovery assistance property. There is also no adjustment required on the remaining basis of the property if the depreciable basis of the property for AMT is the same as for regular tax. Property for which an election is in effect to not have the special allowance apply is not qualified property. Property placed in service after For property placed in service after 1998, use the same convention and recovery period used for regular tax purposes. For property other than section 1250 property, use the 150% declining balance method, switching to straight-line the first tax year it gives a larger deduction. For section 1250 property, use the straight-line method. Property placed in service before For property placed in service before 1999, refigure depreciation for AMT purposes using the alternative depreciation system (ADS) with the same convention used for regular tax purposes. Property Placed in Service Before 1999 If the property is Section 1250 property Tangible property (other than section 1250 property) depreciated using the straight-line method for regular tax purposes Any other tangible property Then use the Straight-line method over 40 years Straight-line method over the property s AMT class life 150DB declining balance method, switching to straight-line method the first tax year it gives a larger deduction, over the property s AMT class life Determining AMT class life. For property placed in service before 1999, the class lives for AMT purposes are shown in IRS Pub. 946, How to Depreciate Property. Where to report AMT adjustments for depreciation: Line 18, Form Generally, adjustments for AMT depreciation are reported on line 18, Form However, depreciation adjustments reported related to the following items are reported on other lines. Employee business expenses line 5. Depreciation for employee business expenses claimed as itemized deductions should be included on line 5, Form Chapter 1 TheTaxReview Alternative Minimum Tax (AMT)

24 Passive activities line 19. Gains and losses from passive activities are refigured for AMT by taking into account all adjustments and preferences and any AMT prior year unallowed losses that apply to that activity. This adjustment is reported on line 19, Form At-risk adjustment line 20. Depreciation adjustments for activities for which the taxpayer is not at risk are reported on line 20, Form Partnerships and S corporations line 20. Adjustments relating to AMT depreciation that affect income or loss from a partnership or S corporation where basis limitations apply is reported on line 20, Form Tax-shelter farm activities line 27. Depreciation adjustments for tax-shelter farm activities are taken into account on line 27, Form Disposition of Property Gain or loss from the sale of property must be recomputed if AMT basis is different from regular tax basis (such as from prior AMT depreciation adjustments). When the basis is different for AMT purposes than for regular tax purposes, an adjustment reflecting the difference in gain or loss must be made for AMT purposes in the year of disposition. The following items must be refigured for AMT purposes. 1) Gain or loss from the sale, exchange, or involuntary conversion of property reported on Form 4797, Sales of Business Property. 2) Casualty gain or loss to business or income-producing property reported on Form 4684, Casualties and Thefts. 3) Ordinary income from the disposition of property not already taken into account in (1) or (2) or on any other line on Form 6251, such as a disqualifying disposition of stock acquired in a prior year by exercising an incentive stock option, and 4) Capital gain or loss, including any carryover that is different for the AMT report on Form 8949, Sales and Other Dispositions of Capital Assets, or Schedule D (Form 1040), Capital Gains and Losses. First figure any ordinary income adjustment related to (3) above. Then, refigure Form 4684, Form 4797, Form 8949, and Schedule D for AMT, if applicable, by taking into account any adjustments made this year or in prior years that affect the property s basis or otherwise results in a different amount for AMT purposes. If there is a capital loss after refiguring Schedule D for AMT purposes, apply the $3,000 capital loss limitation separately to the AMT loss. Because the amount of gains and losses may be different for AMT purposes, the amount of any capital loss carryover also may be different. The Capital Loss Carryover Worksheet in the Schedule D instructions may be used to figure the AMT capital loss carryover. NOTES When the basis is different for AMT purposes than for regular tax purposes, an adjustment reflecting the difference in gain or loss must be made for AMT purposes in the year of disposition. TheTaxReview Alternative Minimum Tax (AMT) Chapter 1 19

25 NOTES Example On March 13, 2013, Victor, whose filing status is single, paid $20,000 to exercise an incentive stock option (which was granted to him on January 3, 2012) to buy 200 shares of stock worth $200,000. The $180,000 difference between his cost and the value of the stock at the time he exercised the option is not taxable for the regular tax. His regular tax basis in the stock at the end of 2013 is $20,000. For the AMT, however, Victor must include the $180,000 as an adjustment on his 2013 Form His AMT basis in the stock at the end of 2013 is $200,000. On January 18, 2014, Victor sold 100 of the shares for $75,000. Because Victor did not hold these shares more than one year, that sale is a disqualifying disposition. For the regular tax, Victor has ordinary income of $65,000 ($75,000 minus his $10,000 basis in the 100 shares). Victor has no capital gain or loss for the regular tax resulting from the sale. For the AMT, Victor has no ordinary income, but has a short-term capital loss of $25,000 ($75,000 minus his $100,000 AMT basis in the 100 shares). On April 21, 2014, Victor sold the other 100 shares for $60,000. Because he held the shares for more than one year and more than two years had passed since the option was granted to him, the sale is not a disqualifying disposition. For the regular tax, Victor has a long-term capital gain of $50,000 ($60,000 minus his regular tax basis of $10,000). For the AMT, Victor has a long-term capital loss of $40,000 ($60,000 minus his AMT basis of $100,000). Victor has no other sales of stock or other capital assets for Victor enters a total negative adjustment of $118,000 on line 17 of his 2014 Form 6251, figured as follows: Victor figures a negative adjustment of $65,000 for the difference between the $65,000 of regular tax ordinary income and the $0 of AMT ordinary income for the first sale. For the regular tax, Victor has $50,000 capital gain net income from the second sale. For the AMT, Victor has a $25,000 short-term capital loss from the first sale, and a $40,000 long-term capital loss from the second sale, resulting in a net capital loss of $65,000 for the AMT. However, only $3,000 of the $65,000 net capital loss is allowed for 2014 for the AMT. The difference between the regular tax gain of $50,000 and the $3,000 loss allowed for the AMT results in a $53,000 negative adjustment to include on line 17. Victor has an AMT capital loss carryover from 2014 to 2015 of $62,000, of which $22,000 is short-term and $40,000 is long-term. If he has no other Form 8949 or Schedule D transactions for 2015, his adjustment reported on his 2015 Form 6251 would be limited to ($3,000), the amount of his capital loss limitation for Investment Interest If Form 4952, Investment Interest Expense Deduction, is filled out for regular tax, a second Form 4952 for the AMT must be filled out as follows. Step 1. Follow the Form 4952 instructions for line 1, but also include the following amounts when completing line Chapter 1 TheTaxReview Alternative Minimum Tax (AMT)

26 Any interest expense on Form 6251, line 4, that was paid or accrued on indebtedness attributable to property held for investment within the meaning of IRC section 163(d)(5) (for example, interest on a home equity loan whose proceeds were invested in stocks or bonds). Any interest that would have been deductible if tax-exempt interest on private activity bonds were includible in gross income. Step 2. Enter the AMT disallowed investment interest expense from the prior year on line 2. Complete line 3. Step 3. When completing Part II, refigure the following amounts, taking into account all AMT adjustments and preferences. Gross income from property held for investment. Net gain from the disposition of property held for investment. Net capital gain from the disposition of property held for investment. Investment expenses. Include on line 4a any tax-exempt interest income from private activity bonds that must be included on Form 6251, line 12. If there are any investment expenses that would have been deductible if the interest on the bonds were includible in gross income for the regular tax, use them to reduce the amount on line 4a or include them on line 5. On line 4g, enter the smaller of: The amount from line 4g of the regular tax Form 4952, or The total of lines 4b and 4e of this AMT Form Step 4. Complete Part III. Enter on Form 6251, line 8, the difference between line 8 of the AMT Form 4952 and line 8 of the regular tax Form If the AMT expense is greater, enter the difference as a negative amount. Investment interest expense that is not an itemized deduction. If there are no itemized deductions and the taxpayer had investment interest expense, do not enter an amount on Form 6251, line 8, unless there is investment interest expense reported on Schedule E, Supplemental Income and Loss. If there were itemized deductions, follow the steps above for completing Form Allocate the investment interest expense allowed on line 8 of the AMT Form 4952 in the same way used for the regular tax. Enter on Form 6251, line 8, the difference between the amount allowed on Schedule E for the regular tax and the amount allowed on Schedule E for the AMT. Example Your client, Thomas Misterly, is single with AGI of $253,000 for He is subject to AMT. During the year he sold stock and realized a gain of $6,000, which is included in his AGI and is his only investment income. Mister Misterly itemizes deductions, and paid $5,200 in investment interest during the year. In 2013, there was $300 of investment interest that was disallowed for AMT purposes. See the Forms 4952, Investment Interest Expense Deduction, for regular tax purposes and for AMT purposes, page 22. NOTES TheTaxReview Alternative Minimum Tax (AMT) Chapter 1 21

27 NOTES Form 4952 Investment Interest Expense Deduction Information about Form 4952 and its instructions is at Department of the Treasury Internal Revenue Service (99) Attach to your tax return. Name(s) shown on return Thomas M. Misterly Identifying number OMB No Attachment Sequence No. 51 Part I DRAFT AS OF June 9, 2014 DO NOT FILE Total Investment Interest Expense 1 Investment interest expense paid or accrued in 2014 (see instructions) Disallowed investment interest expense from 2013 Form 4952, line Total investment interest expense. Add lines 1 and Part II Net Investment Income 4 a Gross income from property held for investment (excluding any net gain from the disposition of property held for investment)... 4a 6,000 b Qualified dividends included on line 4a b c Subtract line 4b from line 4a c d Net gain from the disposition of property held for investment.. 4d e Enter the smaller of line 4d or your net capital gain from the disposition of property held for investment (see instructions). 4e f Subtract line 4e from line 4d f g Enter the amount from lines 4b and 4e that you elect to include in investment income (see instructions) g h Investment income. Add lines 4c, 4f, and 4g h 5 Investment expenses (see instructions) Net investment income. Subtract line 5 from line 4h. If zero or less, enter Part III Investment Interest Expense Deduction 5,200 5,200 6, ,000 6,000 7 Disallowed investment interest expense to be carried forward to Subtract line 6 from line 3. If zero or less, enter Investment interest expense deduction. Enter the smaller of line 3 or 6. See instructions ,200 For Paperwork Reduction Act Notice, see page 4. Cat. No Y Form 4952 (2014) Form 4952 Department of the Treasury Internal Revenue Service (99) Name(s) shown on return Thomas M. Misterly FOR ALTERNATIVE MINIMUM TAX PURPOSES ONLY Investment Interest Expense Deduction Information about Form 4952 and its instructions is at Attach to your tax return. Identifying number OMB No Attachment Sequence No. 51 Part I DRAFT AS OF June 9, 2014 DO NOT FILE Total Investment Interest Expense 1 Investment interest expense paid or accrued in 2014 (see instructions) Disallowed investment interest expense from 2013 Form 4952, line Total investment interest expense. Add lines 1 and Part II Net Investment Income 4 a Gross income from property held for investment (excluding any net gain from the disposition of property held for investment)... 4a 6,000 b Qualified dividends included on line 4a b c Subtract line 4b from line 4a c d Net gain from the disposition of property held for investment.. 4d e Enter the smaller of line 4d or your net capital gain from the disposition of property held for investment (see instructions). 4e f Subtract line 4e from line 4d f g Enter the amount from lines 4b and 4e that you elect to include in investment income (see instructions) g h Investment income. Add lines 4c, 4f, and 4g h 5 Investment expenses (see instructions) Net investment income. Subtract line 5 from line 4h. If zero or less, enter Part III Investment Interest Expense Deduction 5, ,500 6, ,000 6,000 7 Disallowed investment interest expense to be carried forward to Subtract line 6 from line 3. If zero or less, enter Investment interest expense deduction. Enter the smaller of line 3 or 6. See instructions ,500 For Paperwork Reduction Act Notice, see page 4. Cat. No Y Form 4952 (2014) 22 Chapter 1 TheTaxReview Alternative Minimum Tax (AMT)

28 Chapter 1 Self-Quiz NOTES Instructions Test your knowledge and comprehension of information presented in Chapter 1. 1) The following is the maximum tax rate for purposes of computing AMT. a) 20% b) 26% c) 28% d) 39.6% 2) In 2014, Bob exercised incentive stock options (ISOs) when the exercise price was $7,500 and the FMV of the stock was $16,000. Bob did not sell the stock in How much is added to income for AMT purposes as a result of exercising the ISOs? a) $0 b) $7,500 c) $8,500 d) $16,000 3) Arnie purchased a machine in 2014 for use in his sole proprietorship. For regular tax purposes he depreciated the property over seven years using the 200DB method. What method must Arnie use for purposes of determining the AMT adjustment? a) Straight-line method. b) 150DB method over the property s regular MACRS recovery period. c) The AMT depreciation method for personal property is 200DB, so no adjustment is required. d) Arnie may expenses the cost of the property under Section 179 and create a negative adjustment in AMT income. TheTaxReview Alternative Minimum Tax (AMT) Chapter 1 23

29 NOTES Chapter 1 Self-Quiz Answers 1) The following is the maximum tax rate for purposes of computing AMT. a) 20% Incorrect. The 20% tax rate is the minimum long-term capital gains tax rate. The maximum tax rate for AMT purposes is 28%. b) 26% Incorrect. For AMT purposes, income up to a certain amount is taxed at 26%, but the maximum tax rate for AMT is 28%. c) 28% Correct. In computing AMT, tax rates of 26% or 28% are applied, depending on income level. d) 39.6% Incorrect. The 39.6% tax rate is the maximum for regular income tax purposes. For AMT purposes, the maximum tax rate is 28%. 2) In 2014, Bob exercised incentive stock options (ISOs) when the exercise price was $7,500 and the FMV of the stock was $16,000. Bob did not sell the stock in How much is added to income for AMT purposes as a result of exercising the ISOs? a) $0 Incorrect. For regular income tax purposes, there is no income recognized upon exercise of an ISO. However, the bargain element of $8,500 is recognized for purposes of AMT ($16,000 FMV minus $7,500 exercise price). b) $7,500 Incorrect. Bob paid $7,500 for the stock when he exercised it, resulting in a bargain element of $8,500. The $8,500 bargain element is added to income for purposes of computing AMT. c) $8,500 Correct. The bargain element of $8,500 is recognized for purposes of AMT ($16,000 FMV minus $7,500 exercise price). d) $16,000 Incorrect. Only the bargain element of $8,500 is added to income for purposes of computing AMT. 24 Chapter 1 TheTaxReview Alternative Minimum Tax (AMT)

30 3) Arnie purchased a machine in 2014 for use in his sole proprietorship. For regular tax purposes he depreciated the property over seven years using the 200DB method. What method must Arnie use for purposes of determining the AMT adjustment? a) Straight-line method. Incorrect. Section 1250 property is generally real property. Personal property depreciated using the 200DB method must be recomputed using the 150DB method for AMT purposes. NOTES b) 150DB method over the property s regular MACRS recovery period. Correct. The AMT adjustment for property depreciated using the 200DB method is computed by using the 150DB method over the same recovery period. c) The AMT depreciation method for personal property is 200DB, so no adjustment is required. Incorrect. Personal property depreciated using the 200DB method must be recomputed using the 150DB method for AMT purposes. d) Arnie may expenses the cost of the property under Section 179 and create a negative adjustment in AMT income. Incorrect. If Arnie had elected the Section 179 deduction, there would be no adjustment required. However, since he depreciated the property for regular tax purposes using the 200DB method, he must recomputed depreciation for AMT purposes using the 150DB method. TheTaxReview Alternative Minimum Tax (AMT) Chapter 1 25

31 26 Chapter 1 TheTaxReview Alternative Minimum Tax (AMT)

32 2 Learning Objectives Credit for Prior Year AMT Successful completion of this course will enable the participant to: 2-A Recognize prior-year AMT items that will potentially produce a currentyear tax credit on an individual return. 2-B Compute the Credit for Prior-Year Minimum Tax 2-C Identify proper recordkeeping and reporting methods to ensure AMT credits are available for a year in which the credit will benefit the taxpayer. CPE/CE Glossary Terms Carryovers. For AMT purposes, unused credit amounts based on timing differences may be carried forward to future tax years. Exercise of incentive stock options (ISOs). An exercise is when an employee purchases employer s stock at a bargain price. Bargain element. When an employee purchases an employer s stock under an ISO plan, the difference between the purchase price and the stock s FMV is referred to as the bargain element. Learning Objective 2-A Recognize prior-year AMT items that will potentially produce a currentyear tax credit on an individual return. AMT Credit Exclusions and deferrals. The AMT credit is a point of significance with regard to the difference between exclusion items and deferral items that create AMT liability. Exclusion items, such as personal exemptions, disallowed itemized deductions, and certain home equity interest expense, cause a permanent difference in taxable income over time. Deferral items, such as depreciation, generally do not cause a permanent difference. The minimum tax credit is allowed only for the AMT caused by deferral items. The AMT credit may be applied only to the extent that regular income tax is greater than tentative AMT. In other words, if a taxpayer is subject to AMT in a particular tax year, the AMT credit is not available. If the taxpayer is not subject to AMT for a particular tax year, a credit may be available to the extent that regular income tax is greater than AMT (specifically tentative minimum tax). Carryovers. Potential AMT credits carry forward indefinitely, although the credit amounts may be reduced in future years. The minimum tax credit is allowed only for the AMT caused by deferral items. TheTaxReview Alternative Minimum Tax (AMT) Chapter 2 27

33 NOTES Example In tax year 2013, Randy owed AMT because he exercised incentive stock options. Since incentive stock options are a deferral item creating a timing difference, an AMT credit may be available for future years. In 2014, Randy sold the stock for a loss. His regular tax in 2014 was $46,000, and his AMT tentative minimum tax was $42,500. Randy s may have an AMT credit for 2014, but the amount of credit cannot exceed $3,500 ($46,000 $42,500). Example Assume the same facts as the example above, except Randy is also subject to AMT for Randy is not eligible for an AMT credit for The AMT credit items will carry forward to future years. The bargain element from exercise of incentive stock options is equal to the FMV of the stock minus the price paid for the exercise. Deferral Items Exercise of incentive stock options. The bargain element from exercise of incentive stock options is equal to the FMV of the stock minus the price paid for the exercise. The bargain element is an AMT deferral item, and must be added income for purposes of computing AMT. Court Case A taxpayer was hit with a large AMT liability from exercising incentive stock options in 2000, but the company failed and the stock became worthless in The taxpayer tried to carry back the AMT capital loss to offset 2000 AMT income, thereby eliminating AMT on gains he never realized. Since the Internal Revenue Code does not address the treatment of capital losses for AMT purposes, the Tax Court stated that recognition of capital losses must be determined under the same rules used for regular tax purposes. Despite the unintended consequences of AMT, the carryback was not allowed. Another problem for the taxpayer was in the ability to claim the AMT credit. The $3,000 limit on net capital losses for regular tax also applies to AMT. Since the recognizable loss for both regular tax and AMT purposes was $3,000, there was no adjustment available in the year the stock was disposed of. Even though the original AMT liability was over $1 million, after the regular tax capital loss carryovers are exhausted, the AMT credit computation can take into consideration no more than a $3,000 loss per year. (Merlo, 126 T.C. No. 10). Depreciation and disposition of property. Because of differences in allowable depreciation between regular tax and AMT, basis adjustments for property may be different. If an AMT adjustment has been made for depreciation, the property s adjusted basis will be different for purposes of regular tax and AMT. When the property is sold, an adjustment is made to gain or loss to account for prior depreciation differences. Recompute the following items. 1) Gain or loss from the sale, exchange, or involuntary conversion of property reported on Form 4797, Sales of Business Property, 2) Casualty gain or loss to business or income-producing property reported on Form 4684, Casualties and Thefts, 28 Chapter 2 TheTaxReview Alternative Minimum Tax (AMT)

34 3) Ordinary income from the disposition of property not already taken into account in (1) or (2) or on any other line of Form 6251, Alternative Minimum Tax Individuals, such as a disqualifying disposition of stock acquired in a prior year by exercising an incentive stock option, and 4) Capital gain or loss (including any carryover that is different for the AMT) reported on Form 8949, Sales and Other Dispositions of Capital Assets, or Schedule D (Form 1040), Capital Gains and Losses. NOTES Example Ned has business property with a five-year recovery period that he placed in service in The cost of the property was $20,000. He depreciated the property using the 200DB method for regular tax purposes, and used the 150DB method for computing AMT depreciation. In 2014, Ned sold the property for $15,000. Differences between regular depreciation and AMT depreciation are shown below. Regular Depreciation 200DB AMT Depreciation 150DB 2013 $4, $3,000 For computation of AMT for 2013, a positive adjustment of $1,000 is made to AMT income ($4,000 $3,000) 2014 $3, $2,550 For computation of AMT for 2014, a positive adjustment of $650 is made to AMT income ($3,200 $2,550) Total Depreciation $7,200 Total Depreciation $5,550 Regular Tax Basis AMT Tax Basis $20,000 $7,200 = $12,800 $20,000 $5,550 = $14,450 Regular Tax Gain AMT Gain $15,000 $12,800 = $2,200 $15,000 $14,450 = $550 For computation of AMT, a negative adjustment of $1,650 is made to AMT income ($2,200 $550) Passive activities. A separate Form 8582, Passive Activity Loss Limitations, must be completed for AMT purposes taking into account AMT adjustments and preferences that apply to the activity. Example Carol is a partner in a partnership and receives Schedule K-1, Form 1065, showing the following items. Passive activity loss of $4,125. Depreciation adjustment of $500 on post-1986 property. Adjustment of $225 on the disposition of property. Because the two adjustments above are from passive activity and are not allowed for AMT purposes, the taxpayer must first reduce the passive activity loss by those amounts. The result is a passive activity loss for the AMT of $3,400 ($4,125 $500 $225). This amount is then entered on the AMT Form 8582 to refigure the allowable passive activity loss for AMT. The amount of any AMT passive activity loss that is not deductible and is carried forward is likely to differ from the regular tax amount, if any. Keep records of both AMT and regular tax amounts. A separate Form 8582, Passive Activity Loss Limitations, must be completed for AMT purposes taking into account AMT adjustments and preferences that apply to the activity. TheTaxReview Alternative Minimum Tax (AMT) Chapter 2 29

35 NOTES Circulation costs. Circulation costs (expenditures to establish, maintain, or increase the circulation of a newspaper, magazine, or other periodical) deducted in full for regular tax purposes must be capitalized and amortized over three years for AMT purposes. Do not make an adjustment for costs for which the taxpayer elected the optional three-year write-off for regular tax. Long-term contracts. Although several options exist for methods of accounting for long-term contracts for regular tax purposes, the percentage-of-completion method must be used for AMT purposes. This does not apply to certain home construction contracts. Mining costs. For regular tax purposes, mining costs are generally deducted in the year paid unless the election is made for the optional 10-year write-off. If mining costs are deducted in full for regular tax purposes, the costs must be capitalized and amortized over 10 years for AMT. Research and experimental costs. For regular tax purposes, research and experimental costs may be deducted as current expenses or amortized. If the costs are deducted in the year paid for regular tax purposes, the costs must be amortized over 10 years for AMT. This rule does not apply if the taxpayer materially participated in the activity. Income from installment sales. The installment method does not apply for the AMT to any nondealer disposition of property after August 16, 1986, but before January 1, 1987, if an installment obligation to which the proportionate disallowance rule applied arose from the disposition. Intangible drilling costs. For regular tax purposes, intangible drilling costs are generally allowable as a current deduction, or as a 60-month amortization. For AMT purposes, intangible drilling costs are a preference item to the extent that the excess costs are more than 65% of the net income from the wells. Figure the preference for all oil and gas properties separately from the preference for all geothermal properties. If intangible drilling costs are taken as a current deduction, figure the AMT amount as follows. 1) Determine the amount of intangible drilling costs allowed for regular tax purposes under IRC section 263(c), but do not include any IRC section 263(c) deduction for nonproductive wells. 2) Determine the amount that would have been allowed had the taxpayer amortized the intangible drilling costs over a 120-month period starting with the month the well was placed in production. If the taxpayer prefers not to use the 120-month period, an election can be made to use any method that is permissible in determining cost depletion. Net income. Determine net income by reducing the gross income received or accrued during the tax year from all oil, gas, and geothermal wells by the deductions allocable to those wells (reduced by the excess intangible drilling costs). When refiguring income, use only income and deductions allowed for the AMT. Special rules apply for independent producers. Alternative tax net operating loss deduction (ATNOLD). The ATNOLD is the sum of the alternative tax net operating loss (ATNOL) carrybacks and 30 Chapter 2 TheTaxReview Alternative Minimum Tax (AMT)

36 carry forwards to the tax year, subject to limitations. The ATNOLD is limited to 90% of alternative minimum taxable income (AMTI) figured without regard to the ATNOLD and any domestic production activities deduction. Exceptions apply to the limitation amount. Exclusion Items Medical and dental expenses. A taxpayer or spouse age 65 or older must add back the lesser of 2.5% of AGI or the amount deducted on Schedule A as an exclusion item. Taxes from Schedule A. All taxes deducted on Schedule A, including any state and local sales tax, must be added back as an exclusion item. Do not include any generation-skipping transfer taxes on income distributions. Mortgage interest. The deduction for mortgage interest on refinancing is limited to the amount used to buy, build, or substantially improve the main or second home. Any excess interest is added back as an exclusion item. Example In 2014, Eric and Kirsten paid $10,000 in interest on a mortgage they took out to buy their home (an eligible mortgage). In May 2014, they refinanced that mortgage and paid $9,000 in interest through the rest of the year. The balance of the new mortgage is the same as the balance of the old mortgage. In July 2014, they obtained a home equity loan on their home and used the proceeds to buy a new car. They paid $5,000 in interest on the home equity loan in They enter the following amounts on the Form 6251, Home Mortgage Interest Adjustment Worksheet: $24,000 on line 1 ($10,000 plus $9,000 plus $5,000), $10,000 on line 2, $9,000 on line 3, zero on line 4, $19,000 on line 5 ($10,000 plus $9,000), and $5,000 on line 6 ($24,000 minus $19,000). NOTES The ATNOLD is limited to 90% of alternative minimum taxable income (AMTI) figured without regard to the ATNOLD and any domestic production activities deduction. Miscellaneous itemized deductions. Miscellaneous itemized deductions are not allowed for AMT. The add back is an exclusion item. Tax refund. Tax refunds included in taxable income are subtracted from income for AMT and considered an exclusion item. Investment interest expense. A separate computation for AMT investment interest deduction must be completed. Adjustments are made to account for AMT items, such as private activity bonds. Excess investment interest expense is added back as an exclusion item. Depletion. The depletion deduction is recomputed based on AMT income and basis of property. Excess depletion is added back as an exclusion item. Interest from private activity bonds. Interest from specified private activity bonds issued after August 7, 1986 must be added to income for AMT purposes, less any deduction allowable had the bonds been taxable for regular tax. The add back is an exclusion item. Tax-exempt interest reposted on Form 8814, Parent s Election to Report Child s Interest and Dividends. Any amounts listed as the child s tax-exempt interest on line 1b, Form 8814, is added back as an exclusion item. TheTaxReview Alternative Minimum Tax (AMT) Chapter 2 31

37 NOTES Qualified small business stock (section 1202). Add back 7% of the amount that was excluded under section 1202 as an exclusion item. Learning Objective 2-B Compute the Credit for Prior-Year Minimum Tax. The AMT credit can be used against regular tax, but cannot reduce tax below the AMT for the tax year. Computation of Minimum Tax Credit For individuals, the AMT credit available for a tax year is the total of the taxpayer s AMT liability attributable to timing preferences (deferrals) for all tax years beginning after 1986, minus any portion of that amount that has been used as an AMT credit in years after The AMT credit can be used against regular tax, but cannot reduce tax below the AMT for the tax year. Nonrefundable AMT credit. Originally the AMT credit was not refundable, and could not be more than the difference between regular tax and AMT. For individuals, beginning in tax year 2007, a long-term minimum credit was made refundable. The refundable amount was the greater of 50% of the longterm unused minimum credit for the tax year, or the amount (if any) of the refundable credit amount determined for the taxpayer s preceding tax year. A long-term minimum tax credit is the portion of the minimum tax credit attributable to the adjusted net minimum tax for tax years before the third tax year immediately preceding the current tax year. The refundable component of the AMT credit expired after 2012 and was not extended. Example In 2014, Hugh had unused AMT liability attributable to deferral items from prior years in the amount of $7,500. None of this amount had been available for purposes of computing an AMT credit. His regular income tax for 2014 is $45,000. Hugh s tentative AMT is $42,000. The allowable minimum tax credit for 2014 is $3,000. Hugh s AMT credit carryover is $4,500. Example In 2013, Morgan placed equipment in service. The equipment had a basis of $18,000. Regular tax depreciation was $3,600, and AMT depreciation was $2,700. Morgan was subject to AMT in 2013, meaning he got no benefit from the additional $900 in depreciation computed for regular tax purposes. On January 4, 2014, Morgan sold the equipment for 16,200. If Morgan is subject to AMT in 2014, no credit is available because there is no excess of regular tax liability above tentative AMT. However, if Morgan is not subject to AMT in 2014, the basis used in computing gain equals the original cost of $18,000, less regular tax depreciation of $5,400. Therefore, the amount of gain subject to regular tax is $1,800 ($16,200 $14,400). Note that the gain is higher because of additional depreciation taken in 2013, even though Morgan did not get any benefit from the depreciation. The minimum tax credit eliminates this disadvantage. 32 Chapter 2 TheTaxReview Alternative Minimum Tax (AMT)

38 Form 8801, Credit for Prior Year Minimum Tax Individuals, Estates, and Trusts Form 8801 is used to compute and report AMT credit. The form separates exclusion items, and computes the net minimum tax amount for exclusion items, allowing a credit for AMT paid on deferral items. Learning Objective 2-C Identify proper recordkeeping and reporting methods to ensure AMT credits are available for a year in which the credit will benefit the taxpayer. Reporting Carryovers File Form 8801, Credit for Prior Year Minimum Tax Individuals, Estates, and Trusts, each year after an AMT liability resulting from deferral items, even if the credit is not available for that tax year. The carryforward items will vary year-to-year, depending on the taxpayer s income and any other AMT items that apply in subsequent years. Even if the taxpayer is subject to AMT and cannot use the credit, filing Form 8801 keeps the credit alive until a year when the taxpayer can benefit from it. AMT credits can be easily missed. Because of the complexity of AMT in general, and specifically the AMT credit, it is unlikely that clients will understand how AMT credits carry forward. Tax professionals should not only keep detailed records for any clients who have been subject to AMT from deferral items so they can identify and properly report AMT credit carryovers, but they should also make inquiries of new clients about whether they have been subject to AMT in the past. Because of AMT s complexity, it is not uncommon for otherwise allowable credits to be lost. NOTES Form 8801 is used to compute and report AMT credit. The form separates exclusion items, and computes the net minimum tax amount for exclusion items, allowing a credit for AMT paid on deferral items. Tax professionals should not only keep detailed records for any clients who have been subject to AMT from deferral items so they can identify and properly report AMT credit carryovers, but they should also make inquiries of new clients about whether they have been subject to AMT in the past. Alachew vs. Commissioner T.C. Memo As illustrated by Alachew vs. Commissioner, exercising an incentive stock option can not only cause a large AMT liability, if the proper steps are not taken after the year of the AMT liability, credit resulting from the AMT liability can be lost. This can have an extremely negative impact on the taxpayer. Incentive stock options (ISOs). There are two tax benefits for an employee who exercises an ISO. First, recognition of income from the bargain element, the difference between FMV of the stock and the option price at the time the option is exercised, is tax-deferred until such time the stock is sold. Second, if the holding period is met, gain attributable to the bargain element is taxed at favorable capital gain rates, rather than ordinary income from wages. Holding period for ISOs. In order to qualify as an ISO, the employee cannot sell the stock before two years from the date the option was granted, or one year from the date the employee exercises the option. If the stock is sold before the holding period is met, gain is treated as ordinary gain. Findings of fact. Hailu Alachew timely filed his 2000 tax return which included AMT tax liability of $64,675 attributable to his exercise of incentive stock options granted by his employer. His 2000 return showed a balance due of $72,576. Alachew sent a payment of $10,000 with the return, leaving a balance of $62,576. TheTaxReview Alternative Minimum Tax (AMT) Chapter 2 33

39 NOTES In 2001, Alachew sold the stock options. Along with his other income, Alachew had a 2001 tax liability of $77,579 and a balance due on the return of $70,258. Since he did not meet the holding requirement for the ISOs, the bargain element portion of the gain from the sale of the options was treated as ordinary income. AMT credit not filed. The bargain element was added to the taxpayer s AMT income in 2000, and also increased the AMT basis in the stock. When the stock was sold in 2001, since AMT basis was higher than for regular tax, gain on the stock would have been substantially less than for regular tax purposes, resulting in a negative adjustment for AMT. Presumably, the taxpayer s AMT would have been substantially lower than regular tax, which would have resulted in a large AMT credit available to the taxpayer. Unfortunately, the taxpayer did not understand this, and did not file for the credit. Chain of events. The following is a chronological listing of interactions between Alachew and the IRS regarding the tax due on his 2000 and 2001 returns. On June 4, 2001, the IRS assessed tax from Alachew s 2000 return as well as interest and a penalty for failure to pay. On June 26, 2001, Alachew made another $10,000 payment toward his 2000 tax liability. On July 20, 2001, the taxpayer entered into an installment agreement with the IRS. Between September 20, 2001, and January 27, 2003, he made payments totaling $52,600 to the IRS. He did not make any voluntary payments toward his 2000 tax liability after January 27, On October 18, 2002, the IRS assessed tax reported on Alachew s 2001 return, including interest and penalties for failure to pay. On May 29, 2003, Alachew submitted an Offer in Compromise to the IRS. On July 29, 2003, the IRS rejected the offer. On September 13, 2003, the IRS issued the taxpayer a Notice of Intent to Levy and Notice of Your Right to a Hearing. The notice advised Alachew of his right to a hearing with the IRS Appeals Office. Alachew did not request a hearing. On September 17, 2003, the taxpayer submitted a second Offer in Compromise. On December 22, 2003, the IRS rejected the offer. On March 19, 2004, Alachew submitted a third offer in compromise. On July 14, 2004, the IRS issued a Notice of Federal Tax Lien Filing, and also advised the taxpayer of his right to a hearing to appeal the collection action and discuss optional payment methods. On August 16, 2004, the taxpayer mailed to the IRS Form 12153, Request for a Collection Due Process Hearing. In the request, Alachew stated he had lost all the value of the stock from which the tax liability had originated and the loss was beyond his control because it resulted from a downturn in the economy. He also claimed his job security was in uncertain and he was in debt. He asked the IRS not to put a lien on his property because of his precarious financial situation. The IRS scheduled a telephone hearing for December 9, On November 24, 2004, the IRS received a letter from Alachew requesting a face-toface hearing. Alachew attached Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, along with documentation to 34 Chapter 2 TheTaxReview Alternative Minimum Tax (AMT)

40 support the figures. He reported assets of $16,000, $18,500 of credit card debt, and a monthly net income of $2,230. On December 14, 2004, the taxpayer met with a settlement officer to discuss the balanced due. On January 25, 2005, the settlement officer informed Alachew that she was sustaining the previous rejection of the most recent Offer in Compromise. The settlement officer offered the taxpayer the opportunity to enter into an installment agreement requiring a monthly payment of $1,215. Alachew rejected the offer, stating it was too high. On March 16, 2005, the settlement officer informed Alachew she had adjusted his monthly expenses to meet the national standard for one person. As a result, the settlement officer determined that the taxpayer was able to make monthly payments of $1,475. The settlement officer gave Alachew until March 30, 2005, to accept the proposed installment agreement. On March 27, 2005, Alachew rejected the proposed installment agreement, disputing the settlement officer s adjustments to his monthly expenses, and he inquired whether any of the AMT that he had paid could be used to offset his unpaid tax liabilities. Potential AMT credit. When the original return was filed for tax year 2000, an AMT liability was generated by the bargain element on an incentive stock option. Because this was a deferral item, a potential AMT credit would be available in future years, in particular The AMT credit was not computed or reported, and was mentioned only in the form of a question approximately four years after the filing of the 2000 tax return. On July 21, 2005, the settlement officer offered Alachew a reduced installment agreement with monthly payments of $1,250. She gave the taxpayer until August 5, 2005, to respond. On August 3, 2005, the taxpayer rejected the offer. He requested relief based on the poor economy, his lack of knowledge of tax law, and his fear of losing his job. He requested guidance on obtaining an abatement of interest and relief from the additions to tax. On November 18, 2005, the IRS issued a Notice of Determination, stating that the IRS had verified all statutory and administrative requirements had been met, the IRS had addressed all of the taxpayer s arguments raised a the faceto-face hearing, and that the IRS had determined that the lien appropriately balanced the government s need for the efficient collection of taxes and the taxpayer s concern that the action not be more intrusive than necessary in light of the taxpayer s circumstances. Alachew took the case to Tax Court. The trial was held on October 23, Court s opinion. The court decided the settlement officer did not abuse her discretion by the collection activity, and the lien on Alachew s property was appropriately filed and would remain until the tax liabilities for 2000 and 2001 were satisfied. Unused AMT credit. The court acknowledged that the taxpayer had inquired about the possibility of an AMT credit to offset his unpaid liabilities. The record showed no evidence that the settlement officer specifically answered his inquiry during the hearings. The taxpayer again raised the question at trial, and the NOTES TheTaxReview Alternative Minimum Tax (AMT) Chapter 2 35

41 NOTES The Alachew case is an example of a taxpayer being lured into a tax trap involving complicated provisions of the Internal Revenue Code. court stated, Although his argument is unclear, we interpret it as an assertion that his is entitled to a credit under section 53. In a response that could be characterized as Don t look at us, the court stated the following as a response to the taxpayer s inquiry about an AMT credit. Petitioner did not claim a section 53 credit on either his 2000 or 2001 income tax return, and he did not present any information to the settlement officer that he was entitled to claim such a credit. His inquiry about the possibility of a credit, which he made in one of his letters to the settlement officer during his section 6320/6330 hearing, was insufficient to demonstrate either that he was claiming a section 53 credit for 2000 and/or 2001 or that he was entitled to such a credit. In addition, even if we treat petitioner s inquiry as a claim for a section 53 credit, petitioner is precluded from pursing his claim by the fact that he had an earlier opportunity to assert his claim and he did not do so. Petitioner received the September 13, 2003, levy notice, but he did not request a hearing under section 6330 regarding the levy notice. Petitioner s failure to do so precludes him from asserting his claim in this proceeding This issue extended into a post-trial conference call with the court. The taxpayer once again inquired about the law allowing an AMT credit, citing the law at the time which allowed for use of a long-term AMT credit. The IRS stated the taxpayer simply asserted that he has an AMT credit that he has never used and that he will use any refundable credit he may receive under the new law to pay is 2000 and 2001 tax liabilities. Unfortunately for the taxpayer, simply asserting that he has an AMT credit available did not rise to a level of asserting a claim for the credit, and it was therefore disregarded. Summary of Alachew. The Alachew case is an example of a taxpayer being lured into a tax trap involving complicated provisions of the Internal Revenue Code. The initial incentive would produce a large amount of income, enough to produce an AMT liability over $60,000. Even Internal Revenue Code section 422, which sets forth the qualifications for incentive stock options, uses the term incentive. This would be hard to resist for a person well-versed in tax law, and even harder to resist for a person who didn t understand how devastating the effects would be if things went wrong. Consider the apparent legitimacy of the transaction. A legislatively-enacted transaction, complete with strict qualifications and holding periods, would allow the employee to receive a large amount of compensation from an employer under favorable tax terms. Unfortunately, many of these situations occurred with incentive stock options granted, then exercised, shortly before the market value of the stock tumbled. After having entered into the transaction pursuant to an incentive in the Internal Revenue Code, another code section provides a different incentive to hold onto the stock while watching the price drop. The taxpayer, on the downward slide of an emotional roller coaster careening from elation over a compensation windfall to a large AMT tax liability without associated funds available for payment, suffers once again when the financial reward for enduring the pain vanishes. 36 Chapter 2 TheTaxReview Alternative Minimum Tax (AMT)

42 Because of the $3,000 capital loss limit for both regular and AMT purposes, many of these taxpayers had no chance to recoup much of the tax bills due from income that never reached their bank accounts. In the Alachew case, a second wave of bad circumstances hit because the taxpayer, apparently guiding himself through dealing with the IRS without a knowledgeable representative, did not know enough about the system to understand a large AMT credit may be available. In 2001, the taxpayer had a second large amount of tax due from sale of the stock, which would reduce the effect on the AMT credit of the $3,000 capital loss limitation. Claiming the credit could have reduced his tax due significantly. In the many contacts with IRS personnel, none of the government s experts mentioned the possibility of an AMT credit. By the time the taxpayer raised the issue several years later, the court was not willing to compute or apply any AMT credit to the tax due. If the claim for the AMT credit is not made properly and in a timely manner, the benefit of the credit can be lost. This is an area that tax professionals should closely scrutinize, especially with new clients. Recordkeeping and Reporting As illustrated by Alachew, proper recordkeeping and reporting of items associated with AMT and AMT credits is essential to avoid negative tax consequences. Preparer diligence. The tax professional should make inquiries and review prior year returns for indications of AMT liability or credit carryovers for taxpayers. As in the court case above, the taxpayer did not know of the AMT credit until several years into the collection process. By the time the process had worked itself out, the general statute of limitations for a refund had passed for the year in which the original AMT credit would have been available. NOTES If the claim for the AMT credit is not made properly and in a timely manner, the benefit of the credit can be lost. This is an area that tax professionals should closely scrutinize, especially with new clients. The tax professional should make inquiries and review prior year returns for indications of AMT liability or credit carryovers for taxpayers. TheTaxReview Alternative Minimum Tax (AMT) Chapter 2 37

43 NOTES Chapter 2 Self-Quiz Instructions Test your knowledge and comprehension of information presented in Chapter 2. 1) Which of the following statements about the AMT credit is true. a) The credit is allowed only to the extent that regular income tax exceeds tentative AMT. b) The credit is allowed only to the extent that tentative AMT exceeds regular tax. c) An AMT credit is allowed regardless of whether tentative AMT exceeds regular tax. d) The allowable AMT credit carryforward must be reduced by the amount that regular tax exceeds tentative AMT. 2) In 2014, Lou had unused AMT liability attributable to deferral items from prior years of $10,000. His regular income tax for 2014 is $25,000 and his tentative minimum tax is $21,000. What is the allowable minimum tax credit for 2014? a) $0 b) $4,000 c) $6,000 d) $10,000 3) In Alachew vs. Commissioner, what did the Tax Court find with regard to allowing AMT credits? a) AMT credits were never addressed in the Alachew case. b) The court determined that the AMT credit could be applied against tax liability, and the excess refunded. c) The court remanded the case back to the Appeals Office of the IRS and instructed them to compute the credit. d) The court stated that simply asserting an AMT credit should be available did not rise to a level of asserting the credit, and the credit was not taken into consideration. 38 Chapter 2 TheTaxReview Alternative Minimum Tax (AMT)

44 NOTES TheTaxReview Alternative Minimum Tax (AMT) Chapter 2 39

45 NOTES Chapter 2 Self-Quiz Answers 1) Which of the following statements about the AMT credit is true. a) The credit is allowed only to the extent that regular income tax exceeds tentative AMT. Correct. If a taxpayer is subject to AMT in a tax year, no credit is allowable that year. b) The credit is allowed only to the extent that tentative AMT exceeds regular tax. Incorrect. If tentative AMT exceeds regular tax, the credit is not allowed. c) An AMT credit is allowed regardless of whether tentative AMT exceeds regular tax. Incorrect. The credit is allowed only if regular tax exceeds tentative AMT. d) The allowable AMT credit carryforward must be reduced by the amount that regular tax exceeds tentative AMT. Incorrect. The AMT credit is allowed by the amount that regular tax exceeds AMT. 2) In 2014, Lou had unused AMT liability attributable to deferral items from prior years of $10,000. His regular income tax for 2014 is $25,000 and his tentative minimum tax is $21,000. What is the allowable minimum tax credit for 2014? a) $0 Incorrect. Lou is allowed a minimum tax credit since his regular tax is greater than his tentative minimum tax. b) $4,000 Correct. The minimum tax credit is allowed against regular tax liability but cannot reduce the tax below the tentative minimum tax for the year. Lou s regular tax for 2014 is $25,000 less his tentative minimum tax of $21,000 equals the minimum tax credit allowed of $4,000. c) $6,000 Incorrect. This is Lou s minimum tax credit carryforward to The carryforward minimum tax credit of $10,000 less the $4,000 minimum tax credit allowed in 2014 of $4,000 equals the minimum tax credit carryforward to 2015 of $6,000. d) $10,000 Incorrect. This is the total minimum tax credit carryforward to Only $4,000 of the carryforward is allowed as a credit in 2014 since the credit is limited to the amount by which the regular tax exceeds the tentative minimum tax. 40 Chapter 2 TheTaxReview Alternative Minimum Tax (AMT)

46 3) In Alachew vs. Commissioner, what did the Tax Court find with regard to allowing AMT credits? a) AMT credits were never addressed in the Alachew case. Incorrect. The taxpayer asked if a credit would be available, but the court determined that the question did not constitute a computation of the credit or claim for refund. NOTES b) The court determined that the AMT credit could be applied against tax liability, and the excess refunded. Incorrect. The taxpayer inquired about a refundable AMT credit, but the court determined that inquiry did not rise to the level of actually making a claim for the credit. c) The court remanded the case back to the Appeals Office of the IRS and instructed them to compute the credit. Incorrect. The court found that there had not been a valid claim for an AMT credit made. d) The court stated that simply asserting an AMT credit should be available did not rise to a level of asserting the credit, and the credit was not taken into consideration. Correct. The court did not rule in favor of or against the taxpayer regarding the AMT credit. TheTaxReview Alternative Minimum Tax (AMT) Chapter 2 41

47 42 Chapter 2 TheTaxReview Alternative Minimum Tax (AMT)

48 3 Specific AMT Items Examined Learning Objectives Successful completion of this course will enable the participant to: 3-A Identify situations where a taxpayer may be subject to AMT even if they do not have any preference items by reviewing facts in Birts vs. Commissioner. 3-B Discern concepts set forth in Tax Court s disallowance of an alternative minimum tax net operating loss deduction created by AMT basis adjustments related to incentive stock options, as discussed in Marcus vs. Commissioner. 3-C Recognize principles set forth in Revenue Ruling on mortgage interest when refinancing occurs more than one time for AMT purposes. CPE/CE Glossary Terms Regular basis. Basis of property determined under regular federal income tax rules. AMT basis. Basis of property determined under AMT rules, resulting from adjustments such as deprecation that affect basis. Qualified housing interest. Interest that is qualified residence interest paid or accrued during the taxable year on indebtedness incurred in acquiring, constructing, or substantially improving the principal residence of the taxpayer. Qualified residence. The principal residence of the taxpayer and one other residence of the taxpayer that is selected by the taxpayer for the taxable year and used by the taxpayer as a residence. Learning Objective 3-A Identify situations where a taxpayer may be subject to AMT even if they do not have any preference items by reviewing facts in Birts vs. Commissioner. Birts vs. Commissioner T.C. Summary Opinion The IRS determined a deficiency in Birts federal income tax for the taxable year 1997 in the amount of $2,982. The deficiency was attributable solely to AMT. Edward Birts resided in Houston, Texas, at the time that his petition was filed with the court. Birts filed Form 1040, for On his return, he listed his filing status as married filing separately, and he claimed deductions for two personal exemptions. Birts reported adjusted gross income (AGI) in the amount of $37,850, consisting solely of wages from employment. In addition, Birts itemized deductions on Schedule A. He claimed total deductions in the amount of $28,403, consisting of charitable contributions in the amount of $1,500 and miscellaneous itemized deductions (in the form of unreimbursed employee expenses) in the net amount of $26,903, calculated as follows: TheTaxReview Alternative Minimum Tax (AMT) Chapter 3 43

49 NOTES Miscellaneous itemized deductions: (Unreimbursed employee expenses)...$27,660 Less: 2% AGI...(757) Net amount...$26,903 After taking into account itemized deductions and personal exemptions, Birts reported taxable income in the amount of $4,147 and reported regular income tax in the amount of $619. Birts did not attach Form 6251, Alternative Minimum Tax Individuals, to his 1997 return, nor did Birts report any liability for AMT on his return. In October 1999, The IRS issued a notice of deficiency to Birts for the taxable year In the notice, The IRS did not disallow any of the itemized deductions or personal exemptions claimed by Birts on his return. Rather, The IRS determined that Birts is liable for alternative minimum tax, as prescribed by IRC section 55, in the amount of $2,982. Birts filed a petition contesting The IRS deficiency determination. In the petition (as well as at trial), Birts contends that he is not the type of person who should be liable for alternative minimum tax. Facts in Birts The court used the following computation to show the potential AMT. AGI...$37,850 Less: Itemized Deductions Schedule A...(28,403) Balance... $9,447 Less: Exemptions...(5,300) Taxable Income... $4,147 Regular Income Tax...$619 Taxable Income... $4,147 AMT Adjustments Items of Tax Preference... 0 Unreimbursed Employee Expenses (Schedule A)... 26,903 Exemptions...5,300 Alternative Minimum Taxable Income...$36,350 Less: AMT Exemption Amount... 22,500 AMT Taxable Excess...$13,850 Times AMT Rate ( 26%) Tentative Minimum Tax... $3,601 The court stated, As relevant herein, the term alternative minimum taxable income means the taxpayer s taxable income for the taxable year determined with the adjustments provided in section 56 and increased by the amount of items of tax preference described in section 57. Birts had no items of tax preference in Accordingly, alternative minimum taxable income means Birts taxable income determined with the adjustments provided in section Chapter 3 TheTaxReview Alternative Minimum Tax (AMT)

50 Birts taxable income for 1997 was $4,147, the amount reported on line 38 of Form As relevant herein, the adjustments provided in section 56(b) are twofold. First, IRC section 56(b)(1)(A)(i) states that no deduction shall be allowed for any miscellaneous itemized deduction as defined in section 67(b), such as unreimbursed employee expenses, in computing alternative minimum taxable income. Second, section 56(b)(1)(E) states that no personal exemptions shall be allowed in computing alternative minimum taxable income. The effect of section 56(b)(1)(A)(i) and (b)(1)(e) is to increase Birts taxable income by: (1) $26,903, the amount claimed on Birts Schedule A for miscellaneous itemized deductions (i.e., unreimbursed employee expenses); and (2) $5,300, the amount claimed on Birts Form 1040 for personal exemptions. After taking into account the foregoing two adjustments, Birts alternative minimum taxable income for 1997 equals $36,350. Alternative minimum taxable income exceeds the applicable exemption amount of $22,500 by $13,850. See sec. 55(d)(1)(C)(i). Birts tentative minimum tax is therefore 26 percent of the excess, or $3,601. Sec. 55(b)(1)(A)(i) (I), (iii). Because Birts tentative minimum tax exceeds the regular tax of $619, Birts is liable for the alternative minimum tax in the amount of such excess; i.e., $3,601 less $619, or $2,982. See sec. 55(a). The taxpayer did not challenge the mechanics of the computation. Rather, he contended that the AMT was not meant to apply to him because he is not wealthy and had no items of tax preference. The court indicated that the expression of legislative intent is found in the actual language used by Congress in enacting legislation. As the Supreme Court has stated: There is no more persuasive evidence of the purpose of a statute than the words by which the legislature undertook to give expression to its wishes. The statutory scheme governing the imposition and computation of the alternative minimum tax is clear and precise, and leaves, on these facts, no room for interpretation. Thus, the court stated there was no justification in this case to ignore the plain language of the statute, particularly with a complex set of statutory provisions marked by a high degree of specificity. The alternative minimum tax serves to impose a tax whenever the sum of specified percentages of the excess of alternative minimum taxable income over the applicable exemption amount exceeds the regular tax for the taxable year. Alternative minimum taxable income essentially means the taxpayer s taxable income for the taxable year determined with the adjustments provided in IRC section 56 and increased by the amount of items of tax preference described in IRC section 57. In Huntsberry vs. Commissioner, supra, Tax Court held that tax preferences are a significant, but not necessarily an indispensable, component of alternative minimum taxable income. NOTES In Huntsberry vs. Commissioner, supra, Tax Court held that tax preferences are a significant, but not necessarily an indispensable, component of alternative minimum taxable income. TheTaxReview Alternative Minimum Tax (AMT) Chapter 3 45

51 NOTES The court stated if Congress had intended to tax only tax preferences, it would have defined alternative minimum taxable income differently, for example, solely by reference to items of tax preference. Accordingly, the taxpayers in that case were held liable for the alternative minimum tax computed in accordance with the specific provisions of IRC section 55, notwithstanding the fact that the taxpayers did not have any items of tax preference for the taxable year in issue. The same result applies in Birts. The court stated if Congress had intended to tax only tax preferences, it would have defined alternative minimum taxable income differently, for example, solely by reference to items of tax preference. Instead, Congress provided for a tax measured by a broader base, namely, alternative minimum taxable income, in which tax preferences are merely included as potential components. Absent some constitutional defect, the court was constrained to apply the law as written, and it could not rewrite the law because they may deem its effects susceptible of improvement. The court found Birts liable for AMT. Learning Objective 3-B Discern concepts set forth in Tax Court s disallowance of an alternative minimum tax net operating loss deduction created by AMT basis adjustments related to incentive stock options, as discussed in Marcus vs. Commissioner. Marcus vs. Commissioner 129 T.C. No. 4 Evan and Carol Marcus argued that the difference between the AMT basis and regular tax basis of shares sold pursuant to an incentive stock option plan should be treated as an AMT net operating loss, which would allow the taxpayers to carry the loss back two years. The IRS determined deficiencies in Evan and Carol Marcus federal income taxes of $491,829 and $178,664 for the years 2000 and 2001 (years at issue), respectively. After concessions, the issue for decision was whether the taxpayers may increase their 2001 alternative tax net operating loss (ATNOL) by the difference between the adjusted alternative minimum tax (AMT) basis and the regular tax basis of stock received through the exercise of incentive stock options (ISOs) in 2000, but sold in Details of the Marcus Case On October 14, 1996, Evan Marcus began employment as Senior Staff Systems Engineer at Veritas Software Corporation (Veritas). He was employed by Veritas through As part of his compensation package, Marcus was granted several ISOs to purchase Veritas common stock. He exercised ISOs in transactions beginning November 18, 1998, and ending March 10, 2000, acquiring 40,362 shares of Veritas common stock. Marcus paid $175,841 to exercise the ISOs, acquiring shares with an aggregate fair market value of $5,922,522 on the various dates of exercise. The Marcus held their Veritas shares for investment purposes and not as dealers or traders. During 2001, petitioners sold 30,297 Veritas shares acquired by the exercise of ISOs, for a total of $1,688, Chapter 3 TheTaxReview Alternative Minimum Tax (AMT)

52 The Marcus timely filed their 2000 federal income tax return. On the return they reported the following: Regular taxable income... $315,472 Regular tax...$58,427 Alternative minimum taxable income (AMTI)...$5,990,714 AMT...$1,602,874 Total tax...$1,661,301 On March 6, 2003, the Marcus filed their first amended 2000 return reporting the following: Regular taxable income... $261,835 Regular tax...$56,039 Alternative minimum taxable income (AMTI)...$4,180,033 AMT...$1,099,051 Total tax...$1,155,090 The taxpayers claimed a refund of $506,451. On May 12, 2001, the IRS issued a check to petitioners in the amount of $575,471, representing a refund of 2000 income tax of $506,211 and interest of $69,260. The Marcus timely filed their 2001 federal income tax return. On the return the taxpayers reported the following: Regular taxable income... $467,505 Regular tax... $105,600 Alternative minimum taxable income (AMTI)...$(3,537,753) AMT...$0 Total tax...$0 On March 6, 2003, they filed their first amended 2001 income tax return reporting the following: Regular taxable income...$1,897,072 Regular tax... $414,212 Alternative minimum taxable income (AMTI)...$(2,249,867) AMT...$0 Total tax...$0 The taxpayers attempted to file three other amended returns. On April 15, 2003, they submitted their second amended 2000 return, and second amended 2001 return, which were both designated Notice of protective/incomplete claim. The IRS did not process these returns. On January 26, 2004, the Marcus submitted their third amended 2000 return, which the IRS did not process. On March 14, 2005, the IRS issued a notice of deficiency to petitioners with respect to 2000 and With respect to 2000, the IRS denied Evan and Carol Marcus claimed ATNOL deduction, carried back from 2001, of $1,909,562, resulting in a deficiency of $491,829. With respect to 2001, the IRS reduced Evan and Carol Marcus prior year minimum tax credit from $414,212 to $213,748, resulting in a deficiency of $178,664. NOTES TheTaxReview Alternative Minimum Tax (AMT) Chapter 3 47

53 NOTES The court held that the difference between the adjusted AMT basis and the regular tax basis of stock received by ISO is not a tax adjustment taken into account in the calculation of an ATNOL in the year the stock is sold. The Decision The court stated for purposes of computing a taxpayer s AMTI, IRC section 56(b)(3) provides that IRC section 421 shall not apply to the transfer of stock acquired pursuant to the exercise of an ISO. Therefore, the spread between the exercise price and the fair market value of the stock on the date of exercise is treated as an item of adjustment and is included in AMTI. As a result of these differing treatments, a taxpayer subject to the AMT has two different bases in the shares of stock received upon exercising the ISO: a regular basis and an adjusted AMT basis. With respect to the 30,297 Veritas shares sold in 2001, the taxpayers had a regular tax basis of $127,920, the exercise price, and had an adjusted AMT basis of $4,472,288, consisting of the $127,920 exercise price and $4,344,368 of gain included in AMTI by reason of the exercise of the ISOs in the year exercised. Generally, a taxpayer may carry back a net operating loss (NOL) to the two taxable years preceding the loss, then forward to each of the 20 taxable years following the loss. For AMT purposes, taxpayers take an alternative tax net operating loss (ATNOL) deduction in lieu of an NOL deduction. However, under IRC section 421, the carryback shall not apply to the transfer of stock acquired pursuant to the exercise of an incentive stock option. The court noted the statutes do not provide for an adjustment in the year of sale. The court held that the difference between the adjusted AMT basis and the regular tax basis of stock received by ISO is not a tax adjustment taken into account in the calculation of an ATNOL in the year the stock is sold. Furthermore, the sale of Evan and Carol Marcus Veritas stock received through the exercise of ISOs is a sale of a capital asset and thus does not create an ATNOL. Learning Objective 3-C Recognize principles set forth in Revenue Ruling on mortgage interest when refinancing occurs more than one time for AMT purposes. Revenue Ruling AMT on refinanced mortgage interest. Interest paid on a home mortgage that has been refinanced more than one time is deductible as qualified housing interest for purposes of the alternative minimum tax to the extent the interest on the mortgage that was refinanced is qualified housing interest and the amount of the mortgage indebtedness is not increased. Facts of the Case In 1990, the taxpayer borrowed $100,000 to purchase a principal residence (the 1990 mortgage). In 2000, the outstanding principal balance on the 1990 mortgage was $90,000 and the taxpayer refinanced the $90,000 balance of the 1990 mortgage (the 2000 mortgage). In 2004, the outstanding principal balance on the 2000 mortgage was $80,000. The taxpayer refinanced the $80,000 balance of the 2000 mortgage and borrowed an additional $30,000. Thus, the total amount 48 Chapter 3 TheTaxReview Alternative Minimum Tax (AMT)

54 of the taxpayer s mortgage in 2004 was $110,000 (the 2004 mortgage). The taxpayer did not use the $30,000 to acquire, construct, or substantially improve any property that was a principal residence or a qualified residence. At no time did the taxpayer s indebtedness to acquire his principal residence or a qualified residence exceed $1,000,000. The taxpayer is not a married individual filing a separate return. Law and Analysis Section 55 of the Internal Revenue Code provides that the alternative minimum tax is a tax equal to the excess (if any) of the tentative minimum tax for the taxable year over the regular tax for the taxable year. AMT is defined for noncorporate taxpayers as the sum of 26% of so much of the taxable excess as does not exceed $175,000, plus 28% of so much of the taxable excess as exceeds $175,000. The term taxable excess is defined as so much of the alternative minimum taxable income for the taxable year as exceeds the AMT exemption amount. Internal Revenue Code section 56(b) contains the adjustments applicable to individuals, which include the adjustment for interest in IRC section 56(b)(1)(C). IRC section 56(b)(1)(C) provides that, in determining the AMT amount allowable as a deduction for interest, IRC section 163(d), which provides limitations on investment interest, and IRC section 163(h), which disallows deductions for personal interest, shall apply, except that instead of the exception under IRC section 163(h)(2)(D) for qualified residence interest, the term personal interest shall not include any qualified housing interest. Qualified housing interest is defined as interest that is qualified residence interest and is paid or accrued during the taxable year on indebtedness that is incurred in acquiring, constructing, or substantially improving any property that is the principal residence of the taxpayer at the time such interest accrues, or is a qualified dwelling that is a qualified residence. In addition, the last sentence of IRC section 56(e)(1) provides that qualified housing interest includes interest on any indebtedness resulting from the refinancing of indebtedness meeting the requirements of qualified housing interest, but only to the extent that the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness immediately before the refinancing. The legislative history to the enactment of IRC section 56 as part of the Tax Reform Act of 1986 states, It is clarified that, for minimum tax purposes, upon a refinancing of a loan that gives rise to qualified housing interest, interest paid on the loan is treated as qualified housing interest to the extent that (1) it so qualified under the prior loan, and (2) the amount of the loan was not increased. Section 163(h) of the Internal Revenue Code provides that, in the case of a taxpayer other than a corporation, no deduction shall be allowed for personal interest paid or accrued during the taxable year. Under IRC section 163(h)(2)(D), personal interest does not include qualified residence interest. NOTES AMT is defined for noncorporate taxpayers as the sum of 26% of so much of the taxable excess as does not exceed $175,000, plus 28% of so much of the taxable excess as exceeds $175,000. It is clarified that, for minimum tax purposes, upon a refinancing of a loan that gives rise to qualified housing interest, interest paid on the loan is treated as qualified housing interest to the extent that (1) it so qualified under the prior loan, and (2) the amount of the loan was not increased. TheTaxReview Alternative Minimum Tax (AMT) Chapter 3 49

55 NOTES Qualified residence interest is defined as any interest that is paid or accrued during the taxable year on acquisition indebtedness or home equity indebtedness with respect to any qualified residence of the taxpayer. The definition of acquisition indebtedness includes any indebtedness that is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer and is secured by such residence. Acquisition indebtedness also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of acquisition indebtedness, or refinancing of acquisition indebtedness, but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness. The aggregate amount of acquisition indebtedness for any period cannot exceed $1,000,000 (or $500,000 in the case of a married individual filing a separate return). The term qualified residence is the principal residence of the taxpayer and one other residence of the taxpayer that is selected by the taxpayer for the taxable year and that is used by the taxpayer as a residence. The Revenue Procedure determined the 1990 mortgage was indebtedness incurred in acquiring the taxpayer s principal residence. The interest paid or accrued on the 1990 mortgage met the requirements of qualified residence interest. Thus, the interest paid or accrued by the taxpayer on the 1990 mortgage was qualified housing interest for purposes of the alternative minimum tax. The last sentence of IRC section 56(e)(1), as clarified by the legislative history, indicates that when IRC section 56(b)(1)(C) was enacted as part of the alternative minimum tax provisions, Congress intended that interest with respect to a refinancing of a loan that gives rise to qualified housing interest would be deductible for alternative minimum tax purposes to the extent the amount of the loan was not increased. When the taxpayer refinanced the 1990 mortgage in 2000, the refinanced amount equaled the amount of the outstanding principal. Thus, the interest paid or accrued on the 2000 mortgage is deductible as qualified housing interest for purposes of the alternative minimum tax because the interest on the 1990 mortgage is qualified housing interest and the amount of the loan is not increased. Similarly, when the taxpayer refinanced the 2000 mortgage in 2004, the interest on the 2004 mortgage was qualified housing interest to the extent of the outstanding principal balance of the 2000 mortgage at the time of the refinancing because the interest on the 2000 mortgage was qualified housing interest. However, as part of the 2004 refinancing the taxpayer borrowed an additional $30,000, and did not use the $30,000 to acquire, construct, or substantially improve any property that was a principal residence or a qualified residence. Accordingly, for alternative minimum tax purposes the taxpayer could deduct only the interest paid or incurred on $80,000 and not the interest attributable to the additional $30,000 of the $110,000 of the 2004 mortgage. 50 Chapter 3 TheTaxReview Alternative Minimum Tax (AMT)

56 Ruling Interest paid on a home mortgage that has been refinanced more than one time is deductible as qualified housing interest for purposes of the alternative minimum tax to the extent the interest on the mortgage that was refinanced is qualified housing interest and the amount of the mortgage indebtedness is not increased. NOTES Chapter 3 Self-Quiz Instructions Test your knowledge and comprehension of information presented in Chapter 3. 1) In Birts vs. Commissioner, the items that increased the taxpayers alternative minimum taxable income (AMTI) compared to regular taxable income were: a) Unreimbursed employee expenses. b) Exemptions. c) Unreimbursed employee expenses and exemptions. d) Charitable contributions. 2) As stated in Revenue Ruling , how many times can a mortgage be refinanced and be considered to generate qualified residence interest? a) Refinanced interest cannot be claimed as qualified residence interest. b) Once. c) Twice. d) There is no limit on the number of refinances. 3) In Marcus vs. Commisioner, what was the issue for decision? a) Whether the taxpayers could carryback the ATNOL two years. b) Whether the ATNOL may be increased by the difference between the AMT basis and regular tax basis on the sale of stock received through the exercise of ISOs. c) Whether the AMTI increase by the exercise of ISOs be recognized in 2000 or d) Whether the regular tax basis and the AMT basis of the stock received through exercise of ISOs is the same. TheTaxReview Alternative Minimum Tax (AMT) Chapter 3 51

57 NOTES Chapter 3 Self-Quiz Answers 1) In Birts vs. Commissioner, the items that increased the taxpayers alternative minimum taxable income (AMTI) compared to regular taxable income were: a) Unreimbursed employee expenses. Incorrect. Unreimbursed employee expenses did add to AMTI, but so did exemptions. b) Exemptions. Incorrect. Exemptions did add to AMTI, but so did unreimbursed employee expenses. c) Unreimbursed employee expenses and exemptions. Correct. Both unreimbursed employee expenses and exemptions added to Birts AMTI. d) Charitable contributions. Incorrect. Charitable contributions are allowed as a deduction for regular taxable income and AMTI. 2) As stated in Revenue Ruling , how many times can a mortgage be refinanced and be considered to generate qualified residence interest? a) Refinanced interest cannot be claimed as qualified residence interest. Incorrect. Interest on a refinanced loan can be considered acquisition interest up to the amount refinanced. b) Once. Incorrect. The taxpayer referred to in the Revenue Ruling refinanced twice. There is not a limit on the number of refinanced mortgages for purposes of determining qualified residence interest. c) Twice. Incorrect. Although the taxpayer referred to in the Revenue Ruling refinanced twice, there is no statutory limit on the number of times a mortgage can be refinanced in order to generate qualified residence interest. d) There is no limit on the number of refinances. Correct. Limits on allowable interest are determined by the amount refinanced. It does not matter how many times the loan has been refinanced. 52 Chapter 3 TheTaxReview Alternative Minimum Tax (AMT)

58 3) In Marcus vs. Commisioner, what was the issue for decision? a) Whether the taxpayers could carryback the ATNOL two years. Incorrect. Generally NOLs may be carried back two years however this is not an issue before the court. NOTES b) Whether the ATNOL may be increased by the difference between the AMT basis and regular tax basis on the sale of stock received through the exercise of ISOs. Correct. The taxpayers contended the ATNOL should be increased by the difference between the AMT basis and the regular tax basis on the sale of stock received through the exercise of ISOs. The court held that the difference is not a tax adjustment taken into account in the calculation of an ATNOL in the year the stock is sold. c) Whether the AMTI increase by the exercise of ISOs be recognized in 2000 or Incorrect. The taxpayers exercised ISOs in 2000 and sold some shares in The AMT income recognized in 2000 due to the exercise of the ISOs is not an issue. d) Whether the regular tax basis and the AMT basis of the stock received through exercise of ISOs is the same. Incorrect. The difference between the exercise price and the FMV of stock on the date of exercise is treated as an item of adjustment and included in AMTI. As a result, the taxpayer has two different bases in the shares of stock received upon exercising the ISO, a regular basis and an AMT basis. The taxpayers were not arguing this fact. TheTaxReview Alternative Minimum Tax (AMT) Chapter 3 53

59 54 Chapter 3 TheTaxReview Alternative Minimum Tax (AMT)

60 4 Alternative Minimum Tax (AMT) Corporations Learning Objectives Successful completion of this course will enable the participant to: 4-A Identify corporations subject to AMT and items that may trigger corporate AMT. 4-B Compute the adjusted current earnings (ACE) adjustment. 4-C Calculate the corporate alternative minimum tax and the minimum tax credit. CPE/CE Glossary Terms Adjusted gain or loss. The gain or loss on property that is disposed of and that property had any current or prior AMT adjustments (i.e. depreciation) must be refigured. The adjusted gain or loss is the difference between the regular tax gain or loss and the recalculated gain or loss for AMT purposes. Alternative tax net operating loss deduction (ATNOLD). The ATNOLD is the sum of the alternative tax net operating loss (ATNOL) carrybacks and carryforwards to the current tax year, subject to limitations. Minimum tax credit. Corporations are allowed a tax credit against regular tax for some or all of its AMT paid in previous years. The minimum tax credit is limited by the amount that the regular tax exceeds the tentative minimum tax for the year. Small corporation. A corporation that is exempt from AMT if it (1) is in the first year of its existence, or (2) has been treated as a small corporation for all prior years beginning after 1997 and its average gross receipts for the prior three tax years did not exceed $7.5 million. Learning Objective 4-A Identify corporations subject to AMT and items that may trigger corporate AMT. Corporate AMT Basics Corporations are also subject to the alternative minimum tax rules. Similar to the rules for individuals, the AMT is a parallel calculation of taxable income and tax. Under the corporate AMT system, tentative minimum tax is assessed at 20% of alternative minimum taxable income (AMTI). A $40,000 exemption is available to offset AMTI, but the exemption is fully phased out if AMTI exceeds $310,000. Corporations pay the higher of the regular tax or the tentative minimum tax. A corporation that is not a small corporation (as explained on page 57) completes a series of steps to determine if they are subject to AMT. Similar to the rules for individuals, the AMT is a parallel calculation of taxable income and tax. TheTaxReview Alternative Minimum Tax (AMT) Chapter 4 55

61 NOTES Form 4626 Department of the Treasury Internal Revenue Service Name Alternative Minimum Tax Corporations OMB No Attach to the corporation's tax return. Information about Form 4626 and its separate instructions is at Employer identification number 14 Note: See the instructions to find out if the corporation is a small corporation exempt from the alternative minimum tax (AMT) under section 55(e). 1 Taxable income or (loss) before net operating loss deduction DRAFT AS OF June 13, 2014 DO NOT FILE 2 Adjustments and preferences: a Depreciation of post-1986 property a b Amortization of certified pollution control facilities b c Amortization of mining exploration and development costs c d Amortization of circulation expenditures (personal holding companies only) d e Adjusted gain or loss e f Long-term contracts f g Merchant marine capital construction funds g h Section 833(b) deduction (Blue Cross, Blue Shield, and similar type organizations only) h i Tax shelter farm activities (personal service corporations only) i j Passive activities (closely held corporations and personal service corporations only) j k Loss limitations k l Depletion l m Tax-exempt interest income from specified private activity bonds m n Intangible drilling costs n o Other adjustments and preferences o 3 Pre-adjustment alternative minimum taxable income (AMTI). Combine lines 1 through 2o Adjusted current earnings (ACE) adjustment: a ACE from line 10 of the ACE worksheet in the instructions a b Subtract line 3 from line 4a. If line 3 exceeds line 4a, enter the difference as a negative amount (see instructions) b c Multiply line 4b by 75% (.75). Enter the result as a positive amount c d Enter the excess, if any, of the corporation s total increases in AMTI from prior year ACE adjustments over its total reductions in AMTI from prior year ACE adjustments (see instructions). Note: You must enter an amount on line 4d (even if line 4b is positive) d e ACE adjustment. If line 4b is zero or more, enter the amount from line 4c... 4e If line 4b is less than zero, enter the smaller of line 4c or line 4d as a negative amount } 5 Combine lines 3 and 4e. If zero or less, stop here; the corporation does not owe any AMT Alternative tax net operating loss deduction (see instructions) Alternative minimum taxable income. Subtract line 6 from line 5. If the corporation held a residual interest in a REMIC, see instructions Exemption phase-out (if line 7 is $310,000 or more, skip lines 8a and 8b and enter -0- on line 8c): a Subtract $150,000 from line 7 (if completing this line for a member of a controlled group, see instructions). If zero or less, enter a b Multiply line 8a by 25% (.25) b c Exemption. Subtract line 8b from $40,000 (if completing this line for a member of a controlled group, see instructions). If zero or less, enter c 9 Subtract line 8c from line 7. If zero or less, enter Multiply line 9 by 20% (.20) Alternative minimum tax foreign tax credit (AMTFTC) (see instructions) Tentative minimum tax. Subtract line 11 from line Regular tax liability before applying all credits except the foreign tax credit Alternative minimum tax. Subtract line 13 from line 12. If zero or less, enter -0-. Enter here and on Form 1120, Schedule J, line 3, or the appropriate line of the corporation s income tax return For Paperwork Reduction Act Notice, see separate instructions. Cat. No I Form 4626 (2014) 56 Chapter 4 TheTaxReview Alternative Minimum Tax (AMT)

62 Step 1: Calculate Regular Tax Liability Income Deductions Net operation loss deduction Special deductions = Regular taxable income Regular tax rates = Regular tax liability (before credits) Foreign tax credit = Regular tax liability after foreign tax credit NOTES Step 2: Calculate AMT Liability Regular taxable income before the net operating loss deduction +/ AMT adjustments and preferences +/ ACE adjustment AMT exemption = AMT taxable income 20% = Tentative minimum tax before AMT foreign tax credit AMT foreign tax credit = Tentative minimum tax Step 3: Compare Tax Liabilities Is the TMT > regular tax (before all credits except foreign tax credit)? No...Pay regular tax less allowable credits. Yes...Pay AMT amount less allowable credits. Corporations Subject to AMT A corporation is subject to AMT if any of the following apply. The corporation is not a small corporation exempt from AMT (as explained below). The corporation s taxable income or (loss) before the net operating loss (NOL) deduction plus its adjustments and preferences total more than $40,000 or, if smaller, its allowable exemption amount. The corporation claims any general business credit, any qualified electric vehicle passive activity credit from prior years, or the credit for prior year minimum tax. Exemption for small corporations. A corporation is treated as a small corporation exempt from the AMT for its current year if: 1) The current year is the corporation s first tax year in existence (regardless of its gross receipts for the year), or 2) Both of the following apply. a) It was treated as a small corporation exempt from the AMT for all prior tax years beginning after TheTaxReview Alternative Minimum Tax (AMT) Chapter 4 57

63 NOTES b) Its average gross receipts for all 3-tax-year periods (or portions thereof during which the corporation was in existence) ending before its current tax year did not exceed $7.5 million ($5 million for the corporation s first 3-tax-year period). Gross receipts. The following rules apply when figuring gross receipts. Gross receipts must be figured using the corporation s tax accounting method and include total sales (net of returns and allowances), amounts received for services, and income from investments and other sources. Gross receipts include those of any predecessor of the corporation, including non-corporate entities. For a short tax year, gross receipts must be annualized by multiplying them by 12 and dividing the result by the number of months in the tax year. The gross receipts of all persons treated as a single employer under the rules for a controlled group of corporations or partnerships and proprietorships which are under common control, must be aggregated. Loss of small corporation status. If the corporation qualified as a small corporation exempt from the AMT for its previous tax year, but does not meet the gross receipts test for its current tax year, it loses its AMT exempt status. Special rules apply in figuring AMT for the tax year beginning on the change date. The change date is the first day of the corporation s tax year for which the corporation ceased to be a small corporation. Where this applies, complete Form 4626, Alternative Minimum Tax Corporations, taking into account the following modifications. The adjustments for depreciation and amortization of pollution control facilities apply only to property placed in service on or after the change date. The adjustment for mining exploration and development costs applies only to amounts paid or incurred on or after the change date. The adjustment for long-term contracts applies only to contracts entered into on or after the change date. When figuring the amount to enter for the alternative tax net operating loss deduction, for any loss year beginning before the change date, use the corporation s regular tax NOL for that year. Figure the limitation for the adjusted current earnings (ACE) adjustment only for prior tax years beginning on or after the change date. ACE worksheet. Enter zero for the ACE depreciation adjustment. When completing the line for other adjustments based on rules for figuring E&P, take into account only amounts from tax years beginning on or after the change date. For the depletion adjustment, take into account only property placed in service on or after the change date. Key Fact Once a corporation loses its small corporation status, it cannot qualify as a small corporation for any subsequent tax year. 58 Chapter 4 TheTaxReview Alternative Minimum Tax (AMT)

64 Credit for Prior Year Minimum Tax A corporation may be able to take a minimum tax credit against the regular tax for AMT incurred in prior years. Recordkeeping Certain items of income, deductions, and credits receive different tax treatment for AMT than for the regular tax. Therefore, the corporation should keep adequate records to support items refigured for the AMT. Examples include: Tax forms used for regular tax purposes that are completed a second time to refigure items of income, deductions, and credits for the AMT. The computation of a carryback or carryforward to other tax years of certain deductions or credits (for example, net operating loss, capital loss, and foreign tax credit) if the AMT amount is different from the regular tax. The computation of a carryforward of a passive loss or tax shelter farm activity loss if the AMT amount is different from the regular tax amount. A running balance of the excess of the corporation s total increases in alternative minimum taxable income (AMTI) from prior year adjusted current earnings (ACE) adjustments over the total reductions in AMTI from prior year ACE adjustments. NOTES The corporation should keep adequate records to support items refigured for the AMT. Short Period Return If the corporation is filing for a period less than 12 months, the AMTI must be annualized and the tentative minimum tax prorated based on the number of months in the short period. Optional Write-Off for Certain Expenditures There is no AMT adjustment for the following items if the corporation elects to deduct them ratably over the period of time shown for the regular tax. Circulation expenditures (personal holding companies only) three years. Mining exploration and development costs 10 years. Intangible drilling costs 60 months. Adjustments and Preferences Depreciation of post-1986 property: What adjustments are not included as depreciation adjustments? Do not make depreciation adjustments for: A tax shelter farm activity. This adjustment is included on the line for tax shelter farm activities. Passive activities. This adjustment is taken into account on the line for passive activities. An activity for which the corporation is not at risk, or income or loss from a partnership interest, or stock in an S corporation if the basis limitations apply. This adjustment is included on the line for loss limitations. What depreciation adjustment must be refigured for AMT? Generally, the corporation must refigure depreciation for the AMT, including depreciation allocable to inventory costs, for the following. TheTaxReview Alternative Minimum Tax (AMT) Chapter 4 59

65 NOTES Property placed in service after 1998 depreciated for regular tax using the 200% declining balance method [generally 3-, 5-, 7-, or 10-year property under the modified accelerated cost recovery system (MACRS)], except for qualified property eligible for the special depreciation allowance. Section 1250 property placed in service after 1998 that is not depreciated for regular tax using the straight line method. Tangible property place in service after 1986 and before What depreciation is not refigured for AMT? Do not refigure AMT for the following. Residential rental property placed in service after Nonresidential real property with a class life of 27.5 years or more (generally a building and its components) placed in service after 1998 that is depreciated for the regular tax using the straight line method. Other section 1250 property placed in service after 1998 that is depreciated for the regular tax using the straight line method. Property (other than section 1250 property) placed in service after 1998 that is depreciated for the regular tax u sing the 150% declining balance method or the straight line method. Property for which the corporation elected to use the alternative depreciation system (ADS) for the regular tax. Any qualified property eligible for a special depreciation allowance if the depreciable basis of the property for AMT is the same as for the regular tax. In addition, no adjustment is required for any depreciation figured on the remaining basis of the qualified property. However, if an election is in effect to not have the special allowance apply, the corporation must refigure depreciation for AMT. Any part of the cost of any property that the corporation elected to expense under Section 179. The reduction to the depreciable basis of Section 179 property by the amount of the Section 179 expense deduction is the same for the regular tax and AMT. Certain public utility property (if a normalization method of accounting is not used), motion picture films and video tape, sound recording, and property that the corporation elects to exclude from MACRS by using a depreciation method that is not based on a term of years, such as the units-of-production method. Any qualified Indian reservation property. Any natural gas gather line placed in service after April 11, 2005, the original use of which begins with the corporation after April 11, 2005, and which is not under self-construction or subject to a binding contract in existence before April 12, How is depreciation refigured for AMT? For property placed in service after 1998: Use the same convention and recovery period used for the regular tax. Use the straight line method for section 1250 property. For property other than section 1250 property, use the 150% declining balance method, switching to the straight line method the first tax year it gives a larger deduction. 60 Chapter 4 TheTaxReview Alternative Minimum Tax (AMT)

66 For property placed in service before 1999: Refigure depreciation for AMT using ADS, with the same convention for the regular tax. If the property is section 1250 property, use the straight line method over 40 years. If the property is tangible property (other than section 1250 property) depreciated using the straight line method for regular tax, use the straight line method over the property s AMT class life. If the property is any other tangible property, use the 150% declining balance method switching to the straight line method the first tax year it gives a larger deduction, over the property s AMT class life. How is the AMT class life determined? For property placed in service before 1999, the class life used for AMT is not necessarily the same as the recovery period used for regular tax. The class lives are listed in Revenue Procedures , , and in Pub. 946, How to Depreciate Property. How is the line 2a, Form 4626, adjustment figured? Subtract the AMT deduction for depreciation from the regular tax deduction and enter the result in line 2a, Form If the AMT deduction is more than the regular tax deduction, enter the difference as a negative amount. In addition to the AMT adjustment to the deduction for depreciation, also adjust the amount of depreciation that was capitalized, if any, to account for the difference between the rules for the regular tax and AMT. Include on this line the current year adjustment to taxable income, is any, resulting from the difference. Amortization of certified pollution control facilities. For facilities placed in service before 1999, refigure the amortization deduction for AMT using ADS (that is, the straight line method over the facility s class life). For facilities placed in service after 1998, figure the amortization deduction for AMT under MACRS using the straight line method. Figure the AMT deduction using 100% of the asset s amortizable basis. Do not reduce the corporation s AMT basis by the 20% IRC section 291 adjustment that applied for regular tax. Enter the difference between the AMT deduction and the regular tax deduction on line 2b, Form If the AMT deduction is more than the regular tax deduction, enter the difference as a negative amount. Amortization of mining exploration and development costs. Do not make this adjustment for costs for which the corporation elected the optional 10-year write-off for regular tax. For AMT, the regular tax deductions are not allowed. Instead, capitalize these costs and amortize them ratably over a 10-year period beginning with the tax year in which the corporation paid or incurred them. The 10-year amortization applies to 100% of the mining development and exploration costs paid or incurred during the tax year. Do not reduce the corporation s AMT basis by the 30% IRC section 291 adjustment that applied for regular tax. NOTES TheTaxReview Alternative Minimum Tax (AMT) Chapter 4 61

67 NOTES The property s adjusted basis for AMT is its cost minus all applicable depreciation or amortization deductions allowed for AMT during the current tax year and previous tax years. If the corporation had a loss on property for which mining exploration and development costs have not been fully amortized for AMT, the AMT deduction is the smaller of (a) the loss allowable for the costs had they remained capitalized or (b) the remaining costs to be amortized for AMT. Subtract the AMT deduction and the regular tax deduction. Enter the result on line 2c, Form If the AMT deduction is more than the regular tax deduction, enter the difference as a negative amount. Key Fact Amortization of circulation expenditures. Complete this line only if the corporation is a personal holding company. Do not make this adjustment for expenditures of a personal holding company for which the company elected the optional 3-year write-off for regular tax. For regular tax, circulation expenditures may be deducted in full when paid or incurred. For AMT, these expenditures must be capitalized and amortized over three years beginning with the tax year in which the expenditures were made. If the corporation had a loss on property for which circulation expenditures have not been fully amortized for the AMT, the AMT deduction is the smaller of (a) the loss allowable for the expenditures had they remained capitalized or (b) the remaining expenditures to be amortized for AMT. Subtract the AMT deduction from the regular tax deduction. Enter the result on line 2d, Form If the AMT deduction is more than the regular tax deduction, enter the difference as a negative amount. Adjusted gain or loss. If, during the tax year, the corporation disposed of property for which it is making (or previously made) any of the adjustments described on lines 2a through 2d above, refigure the property s adjusted basis for AMT. Then refigure the gain or loss on the disposition. The property s adjusted basis for AMT is its cost minus all applicable depreciation or amortization deductions allowed for AMT during the current tax year and previous tax years. Subtract this AMT basis from the sales price to get the AMT gain or loss. Dispositions for which tax shelter farm activities, passive activities, and loss limitation adjustments are made. The corporation may also have gains or losses from tax shelter farm activities, passive activities, and loss limitations that must be considered. For example, if for regular tax the corporation reports a loss from the disposition of an asset used in a passive activity, include the loss in the computations for line 2j, Form 4626 to determine if any passive activity loss is limited for AMT. Then, include the AMT passive activity loss allowed that relates to the disposition of the asset on line 2e, Form 4626 in determining the corporation s AMT basis adjustment. It may be helpful to refigure the following for the AMT: Form 8810, Corporate Passive Activity Loss and Credit Limitations, and related worksheets, Schedule D (Form 1120), Capital Gains and Losses, Section B of Form 4684, Casualties and Thefts, or Form 4797, Sale of Business Property. 62 Chapter 4 TheTaxReview Alternative Minimum Tax (AMT)

68 Enter on line 2e, Form 4626, the difference between the regular tax gain or loss and the AMT gain or loss. Enter the difference as a negative amount if any of the following apply. The AMT gain is less than the regular tax gain. The AMT loss exceeds the regular tax loss. The corporation has an AMT loss and a regular tax gain. Long-term contracts. For AMT, the corporation generally must use the percentage-of-completion method to determine the taxable income from any long-term contract. However, this rule does not apply to any home construction contract. For contracts excepted from the percentage-of-completion method for regular tax, determine the percentage of completion using the simplified procedures for allocating costs. Subtract the regular tax income from AMT income. Enter the difference on line 2f, Form If AMT income is less than the regular tax income, enter the difference as a negative amount. Merchant marine capital construction funds. Amounts deposited in these funds are not deductible for AMT. Earnings on these funds must be included in gross income for AMT. If the corporation deducted these amounts or excluded them from income for the regular tax, add them back on line 2g, Form IRC section 833(b) deduction. The IRC Section 833(b) deduction for Blue Cross and Blue Shield organizations is not allowed for AMT. If the corporation took this deduction for regular tax, add it back on line 2h, Form Tax shelter farm activities. Complete this line only if the corporation is a personal service corporation and it has a gain or loss from a tax shelter farm activity that is not a passive activity. If the tax shelter farm activity is a passive activity, include the gain or loss in the computations for passive activities. Refigure all gains and losses reported for regular tax from tax shelter farm activities by taking into account any AMT adjustments and preferences. Determine the AMT gain or loss using the rules for regular tax with the following modifications. No loss is allowed except to the extent the personal service corporation is insolvent. Do not use a loss in the current tax year to offset gains from other tax shelter farm activities. Instead, suspend any loss and carry it forward indefinitely until the corporation has a gain in a subsequent tax year from that same tax shelter farm activity or it disposes of the activity. Enter on line 2i, Form 4626 the difference between the AMT gain or loss and the regular tax gain or loss. Enter the difference as a negative amount if the corporation had: An AMT loss and a regular tax gain, An AMT loss that exceeds the regular tax loss, or A regular tax gain that exceeds the AMT gain. NOTES TheTaxReview Alternative Minimum Tax (AMT) Chapter 4 63

69 NOTES Determine the corporation s AMT passive activity gain or loss using the same rules used for regular tax. Generally, no loss is allowed. Key Fact Passive activities. This adjustment applies only to closely held corporations and personal service corporations. Refigure all passive activity gains and losses reported for regular tax by taking into account the corporation s AMT adjustments and preferences and AMT prior year unallowed losses that apply to that activity. Determine the corporation s AMT passive activity gain or loss using the same rules used for regular tax. Generally, no loss is allowed. However, if the corporation is insolvent, special rules apply. Disallowed losses of a personal service corporation are suspended until the corporation has income from that (or any other) passive activity or until the passive activity is disposed of (that is, its passive losses cannot offset net active income ). Disallowed losses of a closely held corporation that is not a personal service corporation are treated the same except that, in addition, they may be used to offset net active income. Enter on line 2j, Form 4626 the difference between the AMT gain or loss and the regular tax gain or loss. Enter the difference as a negative amount if the corporation had: An AMT loss and a regular tax gain, An AMT loss that exceeds the regular tax loss, or A regular tax gain that exceeds the AMT gain. Tax shelter farm activities that are passive activities. Refigure all gains and losses reported for regular tax by taking into account the corporation s AMT adjustments and preferences and AMT prior year unallowed losses. Use the same rules as outlined above for other passive activities, with the following modifications. AMT gains from tax shelter farm activities that are passive activities may be used to offset AMT losses from other passive activities. AMT losses from tax shelter farm activities that are passive activities may not be used to offset AMT gains from other passive activities. These losses must be suspended and carried forward indefinitely until the corporation has a gain in a subsequent year from that same activity or it disposes of the activity. Loss limitations. Refigure gains and losses reported for regular tax from atrisk activities and the corporation s share of distributive items from partnerships by taking into account the corporation s AMT adjustments and preferences. If the corporation has recomputed losses that must be limited for the AMT by at-risk or partnership loss limitation rules or the corporation reported losses for regular tax from at-risk activities or distributive shares of partnership losses that were limited, figure the difference between the loss limited for AMT and the loss limited for regular tax for each applicable at-risk activity or distributive share of partnership loss. Loss limited means the amount of loss that is not allowable for the year because of the limitations above. 64 Chapter 4 TheTaxReview Alternative Minimum Tax (AMT)

70 Enter on line 2k, Form 4626 the excess of the loss limited for the AMT over the loss limited for the regular tax. If the loss limited for the regular tax is more than the loss limited for the AMT, enter the difference as a negative amount. Depletion. Refigure depletion using only income and deductions allowed for AMT when refiguring the limit based on taxable income from the property under percentage depletion rules and the limit based on taxable income, with certain adjustments. Also, the depletion deduction for mines, wells, and other natural deposits is limited to the property s adjusted basis at the end of the year, as refigured for AMT, unless the corporation is an independent producer or royalty owner claiming percentage depletion for oil and gas wells. Figure this limit separately for each property. When refiguring the property s adjusted basis, take into account any AMT adjustments the corporation made this year or in previous years that affect basis (other than the current year s depletion). Do not include in the property s adjusted basis any unrecovered costs of depreciable tangible property used to exploit the deposits (for example, machinery, tools, pipes, etc.). For iron ore and coal (including lignite), apply the IRC section 291 adjustment before figuring this preference. Enter on line 2l, Form 4626 the difference between the regular tax and AMT deduction. If the AMT deduction is more than the regular tax deduction, enter the difference as a negative amount. Tax-exempt interest income from specified private activity bonds. Enter on line 2m, Form 4626 interest income from specified private activity bonds, reduced by any deduction that would have been allowable if the interest were includible in gross income for the regular tax. Generally, a specified private activity bond is any private activity bond issued after August 7, 1986, on which the interest is not includible in gross income for the regular tax. Specified private activity bonds do not include: Qualified 501(c)(3) bonds, Certain housing bonds issued after July 30, 2008, and Bonds issued in 2009 and Do not include interest on qualified Gulf Opportunity Zone bonds or qualified Midwestern disaster area bonds. Intangible drilling costs. Do not make this adjustment for costs for which the corporation elected the optional 60-month write-off for the regular tax. Intangible drilling costs (IDCs) from oil, gas, and geothermal properties are a preference to the extent excess IDCs exceed 65% of the net income from the properties. Figure the preference for all geothermal deposits separately from the preference for all oil and gas properties that are not geothermal deposits. Excess IDCs. Excess IDCs are the excess of: The amount of IDCs the corporation paid or incurred for oil, gas, or geothermal properties that it elected to expense for the regular tax (not including any IDCs paid or incurred for nonproductive wells) reduced by the IRC section 291(b)(1) adjustment for integrated oil companies and increased by any IDCs allowed to be amortized under IRC section 291(b)(2) over, NOTES TheTaxReview Alternative Minimum Tax (AMT) Chapter 4 65

71 NOTES The amount that would have been allowed if the corporation had amortized that amount over a 120-month period starting with the month the well was placed in production or, alternatively, had elected any method that is permissible in determining cost depletion. Net income from oil, gas and geothermal properties. Net income is the gross income the corporation received or accrued from all oil, gas, and geothermal wells minus the deductions allocable to these properties (reduced by the excess IDCs). When refiguring net income, use only income and deductions allowed for AMT. Exception: The preference for IDCs from oil and gas wells does not apply to corporations that are independent producers (that is, not integrated oil companies as defined in IRC section 291(b)(4)). However, this benefit may be limited. First, figure the IDC preference as if this exception did not apply. Then, for purposes of this exception, complete a second Form 4626 through line 5, including the IDC preference. If the amount of the IDC preference exceeds 40% of the amount figured for line 5, enter the excess on line 2n (the benefit of this exception is limited). If the amount of the IDC preference is equal to or less than 40% of the amount figured for line 5, do not include an amount on line 2n for oil and gas wells (the benefit of this exception is not limited). Other adjustments and preferences. Income eligible for the American Samoa economic development credit. If this income was included in the corporation s taxable income for regular tax, include this amount on line 2o, Form 4626, as a negative amount. Income as the beneficiary of an estate or trust. If the corporation is the beneficiary of an estate or trust, include on line 20, Form 4626, the AMT adjustment from Schedule K-1 (Form 1041), Part III, box 12. Net AMT adjustment from an electing large partnership. If the corporation is a partner in an electing large partnership, include on line 20, Form 4626, the amount from Schedule K-1 (Form 1065-B), box 6. Also include on line 2o, Form 4626, any amount from Schedule K-1 (Form 1065-B), box 5, unless the corporation is a closely held or personal service corporation. Closely held and personal service corporations should take any amount from box 5 into account when figuring the amount to enter on line 2j, Form Patron s AMT adjustment. Distributions the corporation received from a cooperative may be includible in income. Unless the distributions are nontaxable, include on line 2o, Form 4626, the total AMT patronage dividend adjustment reported to the corporation from the cooperative. Cooperative s AMT adjustment. If the corporation is a cooperative, refigure the cooperative s deduction for patronage dividends by taking into account the cooperative s AMT adjustments and preferences. Subtract the cooperative s AMT deduction for patronage dividends from its regular tax deduction for patronage dividends and include the result on line 2o, Form If the AMT deduction is more than the regular tax deduction, include the result as a negative amount. 66 Chapter 4 TheTaxReview Alternative Minimum Tax (AMT)

72 Domestic production activities deduction. For the AMT, figure the corporation s domestic production activities deduction without taking into account any AMT adjustments and preferences. The deduction for the corporation s AMT is 9% of the smaller of (a) the qualified production activities income or (b) the alternative minimum taxable income (AMTI), determined without taking into account the domestic production activities deduction. Subtract the corporation s AMT domestic production activities deduction from its regular tax domestic production activities deduction and include the result on line 2o, Form If the AMT deduction is more than the regular tax deduction, include the result as a negative amount. Installment sales. The installment method does not apply for the AMT to any nondealer disposition of property that occurred after August 16, 1986, but before the first day of the corporation s tax year that began in 1987, if an installment obligation to which the proportionate disallowance rule applied arose from the disposition. Include as a negative adjustment on line 2o, Form 4626 the amount of installment sale income reported for the regular tax. Accelerated depreciation of real property and certain leased personal property (pre-1987). Refigure depreciation for AMT using the straight line method for real property for which accelerated depreciation was determined for the regular tax using pre-1987 rules. Use a recovery period of 19 years for 19-year real property and 15 years for low-income housing property. Figure the excess of the regular tax depreciation over the AMT depreciation separately for each property and include only positive adjustments on line 2o, Form 4626.The adjustment for leased personal property only applies to personal holding companies. For leased personal property other than recovery property, enter the excess of the depreciation claimed for the property for the regular tax using pre-1987 rules over the depreciation allowable for AMT as refigured using the straight line method. For leased 10-year recovery property and leased 15-year public utility property, enter the excess of the regular tax depreciation over the depreciation allowable using the straight line method with a half-year convention, no salvage value, and a recovery period of 15 years (22 years for 15-year public utility property). Figure this amount separately for each property and include only positive adjustments on line 2o, Form Related adjustments. AMT adjustments and preferences may affect deductions that are based on an income limit (for example, charitable contributions). Refigure these deductions using the income limit as modified for the AMT. Include on line 2o, Form 4626, an adjustment for the difference between the regular tax and AMT amounts for all such deductions. If the AMT deduction is more than the regular tax deduction, include the difference as a negative amount. NOTES Refigure depreciation for AMT using the straight line method for real property for which accelerated depreciation was determined for the regular tax using pre-1987 rules. AMT adjustments and preferences may affect deductions that are based on an income limit (for example, charitable contributions). Refigure these deductions using the income limit as modified for the AMT. TheTaxReview Alternative Minimum Tax (AMT) Chapter 4 67

73 NOTES Learning Objective 4-B Compute the adjusted current earnings (ACE) adjustment. Corporations are required to make an adjustment based on adjusted current earnings (ACE). The calculation of ACE starts with AMTI and is further adjusted for certain items. Adjusted Current Earnings (ACE) Adjustment Corporations are required to make an adjustment based on adjusted current earnings (ACE). The calculation of ACE starts with AMTI and is further adjusted for certain items. The ACE adjustment increases or decreases AMTI for 75% of the difference between ACE and AMTI. 75% ACE adjustment. A potential negative ACE adjustment (that is, a negative amount on line 4b, Form 4626, multiplied by 75%) is allowed as a negative ACE adjustment on line 4e, Form 4626, only if the corporation s total increases in AMTI from prior year ACE adjustments exceed its total reductions in AMTI from prior year ACE adjustments (line 4d). The purpose of line 4d, Form 4626, is to provide a running balance of this limitation amount. As such, the corporation must keep adequate records (for example, a copy of Form 4626 completed at least through line 5) from year to year (even in years in which it does not owe any AMT). Key Fact Any potential negative ACE adjustment that is not allowed as a negative ACE adjustment in a tax year because of the line 4d limitation cannot be used to reduce a positive ACE adjustment in any other tax year. Combine lines 4d and 4e of the previous year s Form 4626 and enter the result on line 4d of the current year form, but do not enter less than zero. Example Green Corporation, a calendar-year corporation, was incorporated January 1, Its ACE and pre-adjustment AMTI for 2010 through 2014 were as follows. ACE Pre-adjustment AMTI Year line 4a, Form 4626 line 3, Form $ 700,000...$ 800, $ 900,000...$ 600, $ 400,000...$ 500, $ (100,000)...$ 300, $ 250,000...$ 100,000 Green Corporation subtracts its pre-adjustment AMTI from its ACE in each of the years and then multiplies the result by 75% to get the following potential ACE adjustment for 2010 through ACE minus Potential pre-adjustment AMTI ACE adjustment Year line 4b, Form 4626 line 4c, Form $ (100,000)... $ (75,000) $ 300,000...$ 225, $ (100,000)... $ (75,000) $ (400,000)... $ (300,000) $ 150,000...$ 112,500 continued on next page 68 Chapter 4 TheTaxReview Alternative Minimum Tax (AMT)

74 Example continued Under these facts, Green Corporation has the following increases or reductions in AMTI for 2010 through Increase or (reduction) in AMTI from Year ACE adjustment line 4e, Form $ $ 225, $ (75,000) $ (150,000) $ 112,500 In 2010, Green Corporation was not allowed to reduce its AMTI by any part of the potential negative ACE adjustment because it had no increases in AMTI from prior year ACE adjustments. In 2011, Green Corporation had to increase its AMTI by the full amount of its potential ACE adjustment. It was not allowed to use any part of its 2010 unallowed potential negative ACE adjustment of $75,000 to reduce its 2011 positive ACE adjustment of $225,000. In 2012, Green Corporation was allowed to reduce its AMTI by the full amount of its potential negative ACE adjustment because that amount is less than its line 4d, Form 4626, limit of $225,000. In 2013, Green Corporation was allowed to reduce its AMTI by only $150,000. Its potential negative ACE adjustment of $300,000 was limited to its 2011 increase in AMTI of $225,000 minus its 2012 reduction of $75,000. In 2014, Green Corporation must increase its AMTI by the full amount of its potential ACE adjustment. It cannot use any part of its 2013 unallowed potential negative ACE adjustment of $150,000 to reduce its 2014 positive ACE adjustment of $112,500. Green Corporation would complete the relevant portion of its 2014 Form 4626 as follows. Line Amount 4a...$ 250,000 4b...$ 150,000 4c...$ 112,500 4d...$ 0 4e...$ 112,500 NOTES ACE adjustments. The following items are considered when computing a corporation s ACE adjustment. ACE depreciation. Generally ACE depreciation is the same as AMT depreciation. Depreciation for ACE purposes is computed as follows. Post-1993 property. For property placed in service after 1993, ACE depreciation is the same as AMT depreciation. Post-1989, pre-1994 property. For property placed in service in a tax year that began after 1989 and before 1994, use the ADS method of depreciation. Exceptions apply. Pre-1990 MACRS property. For MACRS property generally placed in service after 1986 and in a tax year that began before 1990, figure depreciation by using the property s AMT adjusted basis as of the close of the last tax year TheTaxReview Alternative Minimum Tax (AMT) Chapter 4 69

75 NOTES beginning before 1990 and by using the straight line method over the remainder of the recovery period for the property under ADS. Pre-1990 original ACRS property. For ACRS property generally placed in service in a tax year that began after 1980 and before 1987, figure depreciation by using the property s regular tax adjusted basis as of the close of the last tax year beginning before 1990 and by using the straight line method over the remainder of the recovery period for the property under ADS. Other property. Use the regular tax depreciation for (a) property placed in service before 1981 and (b) property placed in service after 1980, in a tax year that began before 1990, that is excluded from MACRS. Inclusion in ACE of items included in earnings and profits (E&P). In general, any income item that is not taken into account (see below) in determining the corporation s pre-adjustment AMTI but that is taken into account in determining its E&P must be included in ACE. Any such income item can be reduced by all items related to that income item and that would be deductible when figuring pre-adjustment AMTI if the income items to which they relate were included in the corporation s pre-adjustment AMTI for the tax year. Examples of these income items and the adjustments that relate to them include: Interest income from tax-exempt obligations excluded from income minus any costs incurred in carrying these tax-exempt obligations and Proceeds of life insurance contracts excluded from income minus the basis in the contract for purposes of ACE. Income on life insurance contracts for the tax year minus the part of any premium attributable to the coverage. Key Fact An income item is considered taken into account without regard to the timing of its inclusion in a corporation s pre-adjustment AMTI or its E&P. Only income items that are permanently excluded from pre-adjustment AMTI are included in ACE. An income item will not be considered taken into account merely because the proceeds from that item might eventually be reflected in the preadjustment AMTI of another taxpayer (for example, that of a shareholder) on the liquidation or disposal of a business. Exceptions: Do not make an adjustment for the following. Any income from discharge of indebtedness excluded from gross income under IRC section 108 (or the corresponding provision of prior law). Any extraterritorial income excluded from gross income under repealed IRC section 114. For an insurance company taxed under IRC section 831(b), any amount not included in gross investment income [as defined in section IRC 834(b)]. Any special subsidy payment for prescription drug plans excluded from gross income under IRC section 139A. Any qualified shipping income excluded under IRC section Tax-exempt interest on certain housing bonds issued after July 30, 2008, excluded under IRC section 57(a)(5)(C)(iii). Tax-exempt interest on certain private activity bonds issued in 2009 and Special rules apply to refunding bonds. 70 Chapter 4 TheTaxReview Alternative Minimum Tax (AMT)

76 Do not include any adjustment related to the E&P effects of any charitable contribution. Disallowance of items not deductible from E&P. Generally, no deduction is allowed when figuring ACE for items not taken into account (see below) in figuring E&P for the tax year. These amounts increase ACE if they are deductible in figuring pre-adjustment AMTI (that is, they would be positive adjustments). Addback items include: Certain dividends received. Dividends paid on certain preferred stock of public utilities that are deductible. Nonpatronage dividends that are paid and deductible. However, exceptions do apply. An item is considered taken into account without regard to the timing of its deductibility in figuring pre-adjustment AMTI or E&P. Therefore, only deduction items that are permanently disallowed in figuring E&P are disallowed in figuring ACE. Items for which no adjustment is necessary. Generally, no deduction is allowed for an item in figuring ACE if the item is not deductible in figuring preadjustment AMTI (even if the item is deductible in figuring E&P). Deductions that are not allowed in figuring ACE include: Capital losses that exceed capital gains. Bribes, fines, and penalties. Charitable contributions that exceed limitations. Meals and entertainment expenses. Federal taxes. Golden parachute payments that exceed limitations. Other ACE adjustments. In figuring ACE, the following items must also be adjusted for. Intangible drilling costs. Circulation expenditures. LIFO inventory adjustments. Installment sales. Loss on the exchange of debt pools. Acquisition expenses of life insurance companies for qualified foreign contracts. Depletion. Basis adjustments in determining gain or loss from sale or exchange of pre 1994 property. NOTES TheTaxReview Alternative Minimum Tax (AMT) Chapter 4 71

77 NOTES Learning Objective 4-C Calculate the corporate alternative minimum tax and the minimum tax credit. The ATNOLD is generally limited to 90% of AMTI determined without regard to the ATNOLD and any domestic production activities deduction. AMT and Minimum Tax Credit Alternative tax net operating loss deduction (ATNOLD). The ATNOLD is the sum of the alternative tax net operating loss (ATNOL) carrybacks and carryforwards to the tax year, subject to limitations. ATNOL. The ATNOL for a loss year is the excess of the deductions allowed in figuring AMTI (excluding the ATNOLD) over the income included in AMTI. ATNOLD. The ATNOLD is generally limited to 90% of AMTI determined without regard to the ATNOLD and any domestic production activities deduction. To figure AMTI without regard to the ATNOLD, use a second Form 4626 as a worksheet. Complete the second Form 4626 through line 5, but when figuring lines 2l and 2o, treat line 6 as if it were zero. The amount figured on line 5 of the second Form 4626 is the corporation s AMTI determined without regard to the ATNOLD. Add any domestic production activities deduction to this tentative total. The ATNOLD limitation is 90% of this amount. Exceptions to this limitation apply. Alternative minimum taxable income (AMTI). AMTI is the sum of the corporation s: Taxable income or (loss) before NOL, Adjustments and preferences, ACE adjustment, and Alternative tax net operating loss deduction. Exemption. If the corporation s AMTI is $150,000 or less, a $40,000 exemption is available to offset AMTI. The $40,000 exemption is phased out when AMTI is between $150,000 and $310,000 resulting in no exemption when AMTI is $310,000 or greater. Alternative minimum tax. To compute the alternative minimum tax, complete the following steps. 1) Subtract the exemption allowed, if any, from AMTI. 2) Multiply the result by 20%. 3) Compute the corporation s alternative minimum tax foreign tax credit (AMTFTC) by completing a separate AMT Form 1118, Foreign Tax Credit Corporations. 4) Subtract the AMTFTC from the result obtained in (2) above. This is the corporation s tentative minimum tax. 5) Enter the regular tax liability before applying all credits except the foreign tax credit. 6) Subtract the regular tax entered in (5) above from the tentative minimum tax. If zero or less enter zero. This is the corporation s AMT. 72 Chapter 4 TheTaxReview Alternative Minimum Tax (AMT)

78 Example WAC Corporation had the following transactions in Gross receipts...$8,000,000 Taxable income...150,000 Regular depreciation using MACRS...45,000 Depreciation using 150%DB method...30,000 Tax-exempt interest on private activity bonds...25,000 Other tax-exempt interest...50,000 Undistributed inside buildup of life insurance contracts...10,000 Regular tax liability...41,750 Assume WAC Corporation is not a small corporation and the corporation s total increases and decreases in AMTI from prior year ACE adjustments is zero. 1) Taxable income...$ 150,000 2) Adjustments and preferences 2a) Depreciation of post-86 property ($ 45,000 $ 30,000)...$ 15,000 2b) Tax-exempt interest on private activity bonds...$ 25,000 3) Pre-adjustment alternative minimum taxable income (AMTI)...$ 190,000 4) ACE Pre-adjustment AMTI... $ 190,000 Other tax-exempt interest... $ 50,000 Undistributed inside buildup of life insurance contracts... $ 10,000 4a) Adjusted current earnings... $ 250,000 4b) Subtract pre-adjustment AMTI from ACE... $ 60,000 4c) Multiply line 4b by $ 45,000 4d) Excess of prior year ACE adjustments... $ 0 4e) ACE adjustment...$ 45,000 5) Combine lines 3 and 4e...$ 235,500 6) ATNOLD...$ 0 7) Alternative minimum taxable income...$ 235,500 8) Exemption phase-out a) Subtract $ 150,000 from line 7... $ 85,500 b) Multiply line 8a by 25%... $ 21,375 c) Exemption (subtract line 8b from $ 40,000)...$ 18,625 9) Subtract line 8c from line 7...$ 216,875 10) Multiply line 9 by 20%...$ 43,375 11) Alternative minimum tax foreign tax credit...$ 0 12) Tentative minimum tax...$ 43,375 13) Regular tax liability before credits...$ 41,750 14) Alternative minimum tax... $ 1,625 WAC Corporation has a regular tax liability of $41,750 but its tentative minimum tax is $43,375. The corporation is liable for $1,625 of AMT. NOTES TheTaxReview Alternative Minimum Tax (AMT) Chapter 4 73

79 NOTES The credit is limited by the amount that the regular tax exceeds the tentative minimum tax for the year. Any unused credit is carried forward indefinitely. Credit for prior year minimum tax corporations. Corporations are allowed a tax credit against regular tax for some or all of its AMT paid in previous years. Corporations use Form 8827, Credit for Prior Year Minimum Tax Corporations, to figure the minimum tax credit, if any, for AMT incurred in prior tax years and to figure any minimum tax credit carryforward. The credit is limited by the amount that the regular tax exceeds the tentative minimum tax for the year. Any unused credit is carried forward indefinitely. Key Fact Unlike the individual minimum tax credit, any AMT paid by the corporation qualifies as a credit. The credit is not limited to timing differences. Who should file? Form 8827 should be filed by corporations that had: An AMT liability in the prior tax year, A minimum tax credit carryforward from the prior tax year, or A qualified electric vehicle credit not allowed in the prior year solely because of tentative minimum tax limitations. Example In 2013, Fireworks Inc. has a regular tax liability of $75,000 and tentative minimum tax (TMT) of $89,000. As a result, Fireworks Inc. has $14,000 of AMT and a total tax liability of $89,000 ($75,000 + $14,000). The 2013 AMT of $14,000 is carried forward to 2014 as a minimum tax credit which can offset the regular tax liability greater than TMT in that year. If the 2014 regular tax liability is $85,000 and the TMT is $76,000, a total of $9,000 of the minimum tax credit ($85,000 $76,000) may be used to offset the 2014 regular tax resulting in $76,000 tax due ($85,000 $9,000). The remaining $5,000 ($14,000 $9,000) is carried forward to Example Assume the same facts as the example above, except that the 2014 regular tax liability was $70,000. Since the 2014 TMT of $76,000 exceeds the regular tax, no minimum tax credit is allowed in The entire 2013 minimum tax credit of $14,000 is carried forward to Chapter 4 TheTaxReview Alternative Minimum Tax (AMT)

80 Chapter 4 Self-Quiz NOTES Instructions Test your knowledge and comprehension of information presented in Chapter 4. 1) For which of the following items must a corporation make an AMT adjustment? a) Intangible drilling costs amortized over 60 months. b) Mining exploration and development costs amortized over 10 years. c) Circulation expenditures amortized over three years by personal holding companies. d) Section 1245 property placed in service after 1998 depreciated using the 200% declining balance method. 2) Which of the following must a corporation make an adjustment when calculating ACE? a) Capital losses that exceed capital gains. b) Federal taxes. c) Meals and entertainment expenses. d) Tax-exempt interest income. 3) Nano Inc. is completing Form 4626 to determine if AMT applies. The corporation s AMTI is $250,000. How much is the corporation s exemption? a) $0 b) $15,000 c) $20,000 d) $40,000 TheTaxReview Alternative Minimum Tax (AMT) Chapter 4 75

81 NOTES Chapter 4 Self-Quiz Answers 1) For which of the following items must a corporation make an AMT adjustment? a) Intangible drilling costs amortized over 60 months. Incorrect. For regular tax purposes, the corporation may elect to amortize intangible drilling costs over 60 months. If the optional 60-month write off is elected, there is not an AMT adjustment. b) Mining exploration and development costs amortized over 10 years. Incorrect. If the corporation elects the optional 10-year write off for mining exploration and development costs for regular tax purposes, there is no AMT adjustment. c) Circulation expenditures amortized over three years by personal holding companies. Incorrect. For regular tax purposes, circulation expenditures may be deducted in full when paid or incurred. If the corporation elects, for regular tax purposes, to amortize the expenditures over three years, there is no AMT adjustment. d) Section 1245 property placed in service after 1998 depreciated using the 200% declining balance method. Correct. For AMT purposes, section 1245 property is depreciated using the 150% declining balance method, switching to the straight line method the first year it gives a larger deduction. 2) Which of the following must a corporation make an adjustment when calculating ACE? a) Capital losses that exceed capital gains. Incorrect. Capital losses that exceed capital gains are not deductible in determining pre-adjustment AMTI and not allowed in figuring ACE. b) Federal taxes. Incorrect. Federal taxes are allowed in computing E&P but are not allowed in figuring ACE. c) Meals and entertainment expenses. Incorrect. Meals and entertainment expenses are not deductible in determining pre-adjustment AMTI and not allowed in figuring ACE. d) Tax-exempt interest income. Correct. Tax-exempt interest income is not taken into account when determining pre-adjustment AMTI but is taken into account in determining E&P and must be included in the ACE adjustment. 76 Chapter 4 TheTaxReview Alternative Minimum Tax (AMT)

82 3) Nano Inc. is completing Form 4626 to determine if AMT applies. The corporation s AMTI is $250,000. How much is the corporation s exemption? a) $0 Incorrect. The corporation s AMTI is $250,000. While the exemption is phased out when AMTI is between $150,000 and $310,000, the exemption is not fully phased out at $250,000. NOTES b) $15,000 Correct. The exemption is phased out at 25 cents for each dollar of AMTI exceeding $150,000. The calculation for Nano Inc. is $40,000 (($250,000 $150,000) 25%) = $15,000. c) $20,000 Incorrect. A corporation with AMTI of $250,000 will have an exemption of $15,000, or $40,000 less 25% of ($250,000 $150,000). d) $40,000 Incorrect. The $40,000 exemption is phased out when AMTI is between $150,000 and $310,000. TheTaxReview Alternative Minimum Tax (AMT) Chapter 4 77

83 78 Chapter 4 TheTaxReview Alternative Minimum Tax (AMT)

84 Final Exam Go to and click on Login to Education Center to take the Final Exam. Do not mail. CPE/CE Circle the correct answer. 1) The AMT is a separate tax system that: a) Has the same definition of income and expenses as the regular tax system. b) Generates AMT liability taxpayers must always pay even if the regular tax liability is higher than the AMT computation. c) Generates AMT liability by applying different rates to a broader base of income than the regular tax system. d) Allows the use of all tax credits available under the regular tax system. 2) For 2014, a child who is subject to Kiddie Tax has an AMT exemption of: a) $1,000 plus the child s earned income. b) $2,000 plus the child s earned income. c) $3,950 plus the child s earned income. d) $7,250 plus the child s earned income. 3) The following is an adjustment or preference item for purposes of the individual AMT. a) Medical expenses allowed that exceed 10% of AGI. b) Taxable refunds of state and local taxes. c) Mortgage interest on refinancing used to improve home. d) Long-term capital gains. 4) In 2012, Ben purchased equipment for use in his business for $20,000. He depreciated the asset using the 200DB method with half-year convention over five years for regular taxes. For purposes of making the adjustment for AMT, Ben uses the 150DB method over five years. In 2014 he sells the equipment for $10,000. The following chart shows the yearly depreciation. Regular Tax 200DB AMT 150DB $4,000...$3, $6,400...$5, $1,920...$1,850 Total... $12,320...$10,050 What is Ben s adjustment on his 2014 Form 6251 for the gain or (loss) on the sale of the equipment? a) $(50) b) $70 c) $2,320 d) $(2,370) DO NOT MAIL Go to and click on Login to Education Center to take the Final Exam. TheTaxReview Alternative Minimum Tax (AMT) Final Exam 79

85 5) The following is an example of an adjustment that is a deferral item for purposes of AMT. a) Miscellaneous itemized deductions from Schedule A. b) Tax-exempt interest reported on Form c) Bargain element associated with the exercise of an incentive stock option (ISO). d) Taxes claimed as an itemized deduction. DO NOT MAIL Go to and click on Login to Education Center to take the Final Exam. 6) The following items can create an AMT credit. a) Excess personal exemptions. b) Deferral items. c) Excess capital losses. d) Taxes paid. 7) For how long can potential AMT credits carry forward? a) Two years. b) Five years. c) Seven years. d) AMT credits can carry forward indefinitely. 8) Nanny s minimum tax credit carryforward from 2013 is $5,000. In 2014, his regular tax is $15,000 and tentative minimum tax $13,000. What is Nanny s minimum tax credit carryforward to 2015? a) $0 b) $2,000 c) $3,000 d) $5,000 9) As illustrated by Alachew vs. Commisioner, what is an example of recordkeeping that can be done by the taxpayer to preserve AMT credits? a) File Form 8801 each year even if the credit is not available for that tax year. b) File Form 8801 only in the year the credit is generated or allowed. c) Ask a settlement office whether AMT paid can offset tax liabilities. d) File Form 6251 to show that the tentative minimum tax for the year is less than regular tax. 10) In Alachew vs. Commissioner, since the taxpayer had inquired about potential AMT credits during a collection hearing, the court made the following concession to allow the taxpayer to claim the credit. a) The court filed an amended return on behalf of the taxpayer. b) The court recognized the claim to allow the time for the statute of limitations to stop running. c) The court computed the AMT credit and found in favor of the taxpayer. d) The court did not consider the inquiry a claim for credit. 80 Final Exam TheTaxReview Alternative Minimum Tax (AMT)

86 11) As demonstrated by Birts vs. Commissioner, in which of the following situations might a taxpayer be subject to AMT? a) The taxpayer has a large amount of long-term capital gains. b) The taxpayer has a large number of exemptions. c) The taxpayer uses the standard deduction. d) The taxpayer has a large mortgage interest deduction. 12) As illustrated by Marcus vs. Commisioner, an AMT loss on the sale of stock received through the exercise of ISOs can create? a) An alternative tax net operating loss. b) A regular tax net operating loss. c) An alternative tax capital loss. d) A regular tax capital loss. 13) Alternative minimum tax applies only to the following individual taxpayers. a) Wealthy taxpayers. b) Taxpayers with preference items. c) Taxpayers who itemize deductions. d) All taxpayers. 14) For purposes of AMT, qualified housing interest includes the following interest paid on a refinance. a) Home mortgage interest is not deductible for AMT purposes. b) Interest paid on debt incurred used to acquire a principle residence. c) All home mortgage interest is deductible for purposes of computing AMT. d) 50% of mortgage interest claimed for regular tax purposes is allowed for AMT. 15) The maximum number of times a mortgage may be refinanced in order for the interest to be considered qualified housing interest is: a) One time. b) Two times. c) Three times. d) There is no maximum number of times a mortgage can be refinanced. 16) A corporation is subject to AMT if: a) The current year is the corporation s first tax year. b) The corporation is not a small corporation. c) The corporation claims a foreign tax credit. d) The corporation s average gross receipts for the prior three years is $4.5 million and it has always been a small corporation. 17) Which of the following is an adjustment or preference item for corporate AMT? a) Depreciation on residential rental property placed in service after b) The cost of property that the corporation elected to expense under Section 179. c) Intangible drilling costs that the corporation is amortizing over 60-months. d) Tax-exempt interest from specified private activity bonds. DO NOT MAIL Go to and click on Login to Education Center to take the Final Exam. TheTaxReview Alternative Minimum Tax (AMT) Final Exam 81

87 18) The adjusted current earnings (ACE) adjustment is the difference between ACE and AMTI multiplied by what percent? a) 20% b) 28% c) 75% d) 90% DO NOT MAIL Go to and click on Login to Education Center to take the Final Exam. 19) Which of the following is a step in computing the corporate alternative minimum tax? a) Multiply AMTI less the exemption allowed by 20%. b) Subtract 100% of the corporation s ATNOLD to arrive at AMTI. c) Subtract the regular tax liability after all credits from the tentative minimum tax. d) If AMTI before the exemption is $315,000 use $5,000 as the exemption deduction. 20) One Inc. has 2014 regular tax liability of $50,000 and tentative minimum tax of $65,000. In 2015, the corporation has regular tax liability of $60,000 and tentative minimum tax of $53,000. Which of the following statements is correct? a) One Inc. can use $7,000 of the minimum tax credit in b) One Inc. can use $15,000 of the minimum tax credit in c) One Inc. can use $8,000 of the minimum tax credit in d) One Inc. has a minimum tax credit carry forward of $8,000 to INSTRUCTIONS Final Examination Instructions Expiration Date Reminder: The Final Exam must be completed online within one year from your date of purchase or shipment. CPE/CE credits are not available more than one year after your date of purchase or shipment. All Final Exams are administered online at It is recommended that you review the Final Exam at the end of the course before taking it online. Final Exams mailed in will not be graded. Follow the instructions below: 1) Go to 2) Click on Login to Education Center, where you will find a location to log in to the Final Exam. 3) Enter your User Name in the self-study CPE/CE login location. The address associated with your account at Tax Materials, Inc. is your User Name. If you do not have an address, or have not provided one, please call our toll-free number at to be assigned a User Name. 4) Enter your Password. The zip code associated with your account is your password. If you are having difficulty logging onto the Final Exam, please call our toll-free number at ) Select the Alternative Minimum Tax (AMT) Exam and click the Take Exam button. 6) You will be taken to the Final Exam. First confirm your First Name and Last Name are correct. This is how your name will appear on your Certificate of Completion should you achieve a score of 70% or higher. Take the Final Exam. Read the questions carefully and answer them to the best of your ability. At the bottom of the exam, click on Submit Answers when finished. You will instantly know if you have passed the test. If you failed, you are able to retake the test. If you passed, the Certificate of Completion will be available for you to print. 82 Final Exam TheTaxReview Alternative Minimum Tax (AMT)

88 Index CPE/CE Symbols 1250 property, 18 A ACE, 68 Adjusted current earnings, 68 Adjusted gain or loss, 62 Adjustments, 1, 7, 59 AGI, 11 Alachew vs. Commissioner, 33 Alternative tax net operating loss, 72 Alternative tax net operating loss deduction, 30, 72 AMT basis, 43 AMT class life, 18 AMT computation, 3 AMT credit, 27 AMT exemption, 3 AMT exemption phaseout, 1 AMT triggers, 3 ATNOL, 72 ATNOLD, 30, 72 At-risk adjustment, 19 B Bargain element, 27 Basis, 43 Birts vs. Commissioner, 43 C Carryovers, 27 Chapter 1 basics of the alternative minimum tax (AMT), 1 Chapter 1 self-quiz, 23 Chapter 2 credit for prior year AMT, 27 Chapter 2 self-quiz, 38 Chapter 3 credit for prior year AMT, 27 Chapter 3 self-quiz, 51 Chapter 4 specific AMT items examined, 43 Chapter 4 self-quiz, 75 Children, 4 Circulation costs, 30 Circulation expenditures, 62 Class lives, 18 Corporations, 57 Course completion instructions, ii Course overview, i CPE/CE credit hours, i Credit AMT, 27 D Deferral items, 7, 28 Deferrals, 1 Depreciation, 16, 28 Disposition of property, 19, 28 E Employee business expenses, 18 Estates, 33 Examination instructions, ii Exclusion items, 7 Exclusions, 1 Exemption amount, 3 Exemptions, 1, 3 Exercise, 14 Exercise of incentive stock options (ISOs), 13 Expiration date, i F Final exam, 79 Final examination instructions, ii, 82 Form 4626, 58 Form 4952, 20 Form 6251, 4, 8 Form 8801, 33 Form 8827, 74 G Grant, 13 Gross receipts, 58 I Incentive stock options, 27 Installment sales, 30 Intangible drilling costs, 30 Investment interest, 20 ISOs, 13 L Long-term contracts, 30 Loss limitations, 64 M Marcus vs. Commissioner, 46 Medical expenses, 10 Minimum tax credit, 32, 72 Mining costs, 30 Mining exploration and development costs, 61 Miscellaneous itemized deductions, 14 Mortgage interest, 48 N NASBA, i National Association of State Boards of Accountancy, i Nonrefundable AMT credit, 32 O Optional write-off for certain expenditures, 59 Overview, i P Partnerships, 19 Passing grade, i Passive activities, 19, 29 Preferences, 1, 7, 59 Prerequisites, i Program content, i Publication date, i Q Qualified housing interest, 43 Qualified residence, 43 R Recommended participants, i Recordkeeping, 59 Record retention, i Regular basis, 43 Research and experimental costs, 30 S S corporations, 19 Section 179 property, 18 Section 1250 property, 18 Short period return, 59 Small corporations, 57 Special depreciation, 18 Standard deduction, 3, 12 T Taxable income, 11 Tax rate, 4 Tax-shelter farm activities, 19 Trusts, 33 U Unused AMT credit, 35 TheTaxReview Alternative Minimum Tax (AMT) Index 83

89 84 Index TheTaxReview Alternative Minimum Tax (AMT)

90 Course Evaluation 2014 Alternative Minimum Tax (AMT) Self-Study CPE/CE CPE/CE Please comment on all the following evaluation points for this program and assign a number grade, using a 1 5 scale, with 5 as the highest. Grade (1 5) 1) Were the stated learning objectives met? Comments: 2) Were the prerequisite requirements appropriate? Comments: 3) Were program materials accurate? Comments: 4) Were program materials relevant? Comments: 5) Did the program materials contribute to the achievement of the learning objectives? Comments: 6) Was the time allotted to the learning activity appropriate? Comments: 7) Was the use of the online test-taking satisfactory? Comments: 8) Did the online grading system work well? Comments: 9) Was the study guide appropriate and complete with regard to assisting with learning the material? Comments: 10) Did the layout and overall visual presentation make the study guide easy to read and understand? Comments: Other feedback or suggestions: Please mail to: Tax Materials, Inc Minnetonka Ind. Rd., Ste 221, Minnetonka, MN Thank you for helping us improve our CPE/CE course offerings! TheTaxReview Alternative Minimum Tax (AMT) Course Evaluation 85