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)