chapter 8. alternative minimum tax howard godfrey, ph.d., cpa professor of accounting ©howard...
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Chapter 8.Alternative
Minimum Tax Howard Godfrey, Ph.D., CPA
Professor of Accounting ©Howard Godfrey-2015
Alternative Minimum Tax (AMT)• The alternative minimum tax is designed to
impose a minimum amount of tax that a taxpayer must pay.
• Taxpayer must pay at least the minimum amount of tax
• Figured separately from regular income tax• Requires keeping a separate set of records• Not required for small corporations with
average gross receipts of less than $5,000,000
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Alternative Minimum Tax• IF AMT is greater than the regular
tax, taxpayers pay the larger amount
• Rate is 26% on first $185,400 and 28% on excess for individuals
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Taxable income+- Adjustments (timing items, often)+ Preferences= AMTI- Exemption (unless phased out)= AMT tax basex AMT rates: (Corp-20%, Indiv- 26%, 28%)
= Tentative minimum tax- Regular income tax liability= AMT
AMT Formula - Some Steps Omitted
AMT Adjustments• Purpose is to account for effect of special
alternative rates or calculations• Most reverse due to timing differences
– Examples:• Required use of completed contract method• No gain deferral for installment sales• Recalculation of NOL; limited NOL deduction• Depreciation under ADS versus MACRS
– Not all apply to all entities• Corporation must compute Adjusted Current Earnings (ACE)• Individual: limit itemized deductions, no personal exemption,
report income from ISOs (treat as non-qualified option), etc.
AMT Adjustments - CautionThe following slide is presented to serve as a basis for discussing the general concept of different depreciation methods for:
• GAAP• Federal Income Tax• State Income Tax• AMT
The slide does not show the actual adjustment for depreciation for AMT Purposes -- just the concept.
Machine: Cost = $300, Life = 5 years
Begin DDB=40% Ending SL=20% EndingYear Bk.Val. Deprec. Bk.Val. Deprec. Bk.Val.
Year 1 300 120 180 60 240
Year 2 180 72 108 60 180
Year 3 108 22 86 60 120Sell Machine after 3 years for $100
(Tax Law allows DDB, half-year convention)
Percentage of Completed
Dollars: $millions Completion Contract
Total Price $900 $900 Cost to build $600 $600 Total Profit $300 $300
Profit - Year 1 $100 $0 Profit - Year 2 $100 $0 Profit - Year 3 $100 $300
Total Profit $300 $300
Construction Contract
AMT Preferences• Apply to all taxpayers• Always added in the computation of AMTI
– Are permanent differences and do not reverse
• Add back:– Percentage depletion in excess of basis– Limitation of intangible drilling costs
– Tax-exempt interest from private activity bonds– Excess depreciation over straight-line for property acquired
before 1987 – Part of gain exclusion on small business stock– Reserves for bad debts of financial institutions
AMT ExemptionsAMT does not affect taxpayers with
moderate income and small amounts of adjustments and/or preferences
Phased-out at rate of 25 cents for every dollar of AMTI over base
Entity Exemption Start Phase-out
Corporation $40,000 $150,000Married, joint $83,400 $158,900Single & H-of-H $53,600 $119,200Married, separate $41,700 $79,450
AMT Minimum Tax Credit• Calculated each year in which AMT applies• Designed to avoid double jeopardy caused
by timing differences– Deducted from regular tax– Amount is the difference between actual
AMT and what AMT would be without the reversal adjustments
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In 2015, Don Mills, a single taxpayer, had $70,000 in taxable income before personal exemptions. Mills had no tax preferences. His itemized deductions were as follows: State and local income taxes $5,000 Home mortgage interest on loan to acquire residence 6,000 Miscellaneous deductions that exceed 2% of AGI 2,000What amount did Mills report as alternative minimum taxable income before the AMT exemption? Answer: $77,000.
AMT Formula Item-Adj. Amount$70,000
+ Preferences+,- Adjustments
Income Tax 5,000 Home Int.Misc. Ded. 2,000
= $77,000Less: Exemption
= AMTIAMT Tax Rate (26%, 28%)
=
Don Mills -1
Taxable income
Tentative AMTI
Tentative Minimum Tax
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AMT Illustration - Joint - 1 Reg. Tax
Gross Income (Salary) 70,000
Incentive Option - Bargain at Exercise
State Taxes, Misc. Itemized Deduct. (20,000)
Subtotal 50,000
Exemptions (8 at $4,000) (32,000)
Taxable Income 18,000
Regular tax income tax-10% 1,800
AMT Illustration - Joint -2 Reg. Tax AMT
Gross Income (Salary) 70,000 70,000
Incentive Option - Bargain at Exercise 25,000
State Taxes, Misc. Itemized Deduct. (20,000) (20,000)
Subtotal 50,000 75,000
Exemptions (8 at $4,000) (32,000) (32,000)
Taxable Income 18,000 43,000
Regular tax income tax-10% 1,800
Add: Exemptions, State tax, Misc. Ded. 52,000
Alternative Min. Taxable Income 95,000
AMT Exemption (83,400)AMT Tax Base 11,600
AMT Rate 26%
AMT Illustration - Joint - 3 Reg. Tax AMT
Gross Income (Salary) 70,000 70,000 Incentive Option - Bargain at Exercise 25,000 State Taxes, Misc. Itemized Deduct. (20,000) (20,000)
Subtotal 50,000 75,000 Exemptions (8 at $4,000) (32,000) (32,000)
Taxable Income 18,000 43,000 Regular tax income tax-10% 1,800
Add: Exemptions, State tax, Misc. Ded. 52,000
Alternative Min. Taxable Income 95,000 AMT Exemption (83,400)
AMT Tax Base 11,600 AMT Rate 26%
Tentative AMT before credits 3,016 Regular tax before credits (1,800)
Difference (AMT) $1,216
AMT Credit Regular AMT AMT Compute
Year: 2015 Tax Exclusions Deferrals AMTI
Salary 400,000 400,000Incentive Option-Bargain 0 100,000 100,000AGI 400,000 500,000Personal Exemptions -8,000 8,000Charity -10,000 -10,000Primary home acq. interest -10,000 -10,000N.Carolina income tax -40,000 40,000Property taxes -40,000 40,000Total Deductions -108,000Taxable Income 292,000AMTI 88,000 100,000 480,000Ignore phase-out of Exempt. and Ded. Also AMT Exempt. phase-out.AMT Credit : AMT on $480,000, less AMT on $380,000.Basically 28% of $100,000, plus effect of AMT Exemption
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Scott and Sandy had alternative minimum taxable income of $200,000 in 2015, and file a joint return. For purposes of computing the alternative minimum tax, their AMT exemption is:
Exemption Amt. before reduction:Status: Joint 83,400 83,400$ Status: Separate 41,700Status: Other 53,600
AMTI 200,000 Phase- Joint 158,900
Out Separate 79,450Other 119,200
Excess AMTI
Phaseout - 25% of excess
Exemption allowed
Scott and Sandy - AMT Exemption
Exemption Amt. before reduction:Status: Joint 83,400 83,400$ Status: Separate 41,700
Status: Other 53,600
AMTI 200,000 Phase- Joint 158,900 (158,900)
Out Separate 79,450 N/A
Other 119,200 N/A
Excess AMTI 41,100
Phaseout - 25% of excess (10,275)
Exemption allowed 73,125$
Scott and Sandy - AMT Exemption
• Adjusted gross income $90,000Less: Deductions from AGIMedical expenses 9,200Less: 10% x $90,000 (9,000) 200Home mortgage interest 5,300Home equity loan interest 1,200State income taxes 2,325Property taxes 950Charitable contributions (cash) 575Misc. itemized deductions 2,200Less: 2% x $90,000 (1,800) 400 (11,200)Less: Exemptions (2 x $4,000) (8,000)Taxable Income $70,800
Alice and Frank - 1
What are the AMT Adjustments?
• AdjustAdjusted gross income $90,000Less: Deductions from AGIMedical expenses 9,200Less: 10% x $90,000 (9,000) 200Home mortgage interest 5,300Home equity loan interest 1,200 1,200
State income taxes 2,325 2,325
Property taxes 950 950
Charitable contributions (cash) 575Misc. itemized deductions 2,200Less: 2% x $90,000 (1,800) 400 400
Total Itemized Deductions (11,200)
Less: Exemptions (2 x $4,000) (8,000)
Taxable Income $70,800
Adjustments $4,875
Alice and Frank - 2
Adjusted gross income $90,000
Less: Deduct. from AGI (11,200)
Less: Exemptions (8,000)
Taxable Income $70,800Tax Computation:
Tax on base $18,450 $1,845
Excess over base $52,350
Rate 15% 7,853
Regular income Tax 9,698$
Alice and Frank - 3
Taxable income $70,800
AMT Adjustments
Medical expenses 0
Home equity loan interest 1,200
State income taxes 2,325
Property taxes 950
Misc. itemized deductions 400Exemptions 8,000
$12,875
AMTI $83,675
Alice and Frank - 4
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AMTI $83,675
AMT Exemption (limit next slide) (83,400)
NET AMTI Base 275
Tax - 26% of first $175,000 26%
28% of amount over $175,000
Tentative minimum tax 72
Regular income tax 9,698
Excess is AMT -$
Alice and Frank - 5
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AMT Exemption$83,400
AMTI 83,400
Threshold-$150,000, etc. 150,000
AMTI above threshold -
Phaseout - 25%
Exemption disallowed
Exemption allowed $83,400
Exemption, Before reduction
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T15FChap-08-7-AMT-Worksheet-Class-Problem-10-25-2015
Has an additional illustrative AMT Problem
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2015. AMT Information
Adj. gross income (Salary) $100,000 $100,000Private activity bond interest 80,000Less: Ded. from AGI
Medical expenses 12,000 $12,000Less: 10% of AGI (10,000) 2,000
Home mortgage interest 5,300 5,300State income taxes 3,400 3,400Charitable contributions 800 800Misc. itemized deductions 2,400 2,400
Less: 2% x $100,000 (2,000) 400 (11,900)Less: 6 Exemptions ($4,000) 6 4,000 (24,000)
Taxable Income $64,100Tax Computations: Base Rate Tax
Amount below top layer 18,450 1,845 Top layer 45,650 15% 6,848 Totals $64,100 $8,693
Joint tax return. Tax Return - Regular Tax
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Part 1 Amount
1 Regular taxable income - above. (Before NOL) $64,100
2 Addz: exemptions for self, spouse, dependents 24,000
3 Subtotal (This is where you start on Form 6251) 88,100
4 Add stand. deduction (or itemized deductions
not allowed in computing AMT). (See Below) 3,800
5 Adjust taxable income for items-other AMT method.
(Percentage of Completion, Incentive options, etc.)
6 Add AMT preferences (Private act. bond interest, etc.) $80,000
7 Subtract net operating loss allowed for AMT
8 AMTI [Combine amounts in 3-7, to get AMTI] 171,900
Summary of Computations for AMT
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Part 2. Adjustment for Itemized Deductions
17 Enter Adjusted Gross Income $100,000
18 State and local income taxes 3,400
19 Misc. Itemized Deductions (after 2% floor) 400
20 Total Adjust. for Itemized Ded.(line 4 above) 3,800
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Part 3. AMT Exemption21 Amount of Exemption Before Reduction $82,10022 AMTI from 8 above 171,900
23 Threshold (Joint $158,900, etc.) 158,900
24 Excess of AMTI over threshold 13,000
25 Phaseout percentage - 25% 25%
26 Exemption disallowed 3,250
27 Exemption allowed $78,850
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8 AMTI [Combine amounts in 3-7, to get AMTI] 171,900
9 Subtract "AMT Exemption " (Note limit) (78,850)
10 Taxable Excess- Base for AMT Tax Computation 93,050
11 Tax on line 10 Up to: 185,400 26% 93,050 24,193
above: 185,400 28% 0 0
12 Subtract foreign tax credit
13 Subtotal - This is tentative minimum tax 24,193
14 Regular income tax from pg 2 of Form 1040 Top of pg $8,693
15 If Line 13 exceeds Regular tax (Line 14), excess is AMT $15,501
Pt 3 below
End