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CHAPTER 14

CHAPTER 14. Alternative Minimum Tax. Forms. 1040, p2 + Form 6251 - Taxes in addition to regular tax Form, formula, lists 6251 - filled in overall example. Rationale for AMT. no t/p with substantial economic income should be able to avoid significant tax because of public perception

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CHAPTER 14

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  1. CHAPTER 14 Alternative Minimum Tax

  2. Forms • 1040, p2 + Form 6251 - Taxes in addition to regular tax • Form, formula, lists • 6251 - filled in • overall example

  3. Rationale for AMT • no t/p with substantial economic income should be able to avoid significant tax • because of public perception • Blue Book, TRA 1986, n.1. West • “inherently unfair”

  4. Number of Benefits t/p’s could use • accel deprec, 179 • IDC, R&D • completed K (certain t/p’s) • Certain personal expends & deducs • muni int (priv activ bonds) • Significant source potential malpractice + CPA exam

  5. Formula (Figure 14-2) • Overview - TI is starting point • Adjustments - positive + negative (often timing)  adjust TI to get AMTI • Preferences - add (positive only)

  6. Adjustments & Preferences (Examples) • MACRS v. ADS • immediate expense v. amortization • deferrals (e.g. compl’d K v. %) • non-timing (always positive) - itemized deducs, stand deduc, exemptions • Preferences (e.g., private activity bonds)

  7. Adjustments (in depth) (more imp for this course) • Depreciation Post 86 Pers Prop: • ADS 150% DB (+diff lives previously) • v. MACRS 200% DB (7-10 v. 7-2) • Depreciation Post 86 R/E: • ADS 40 yr s/l previously • v. MACRS: 27.5 Residenial, 39 commercial (new 93 law) • 97 Law - effective after 12/31/98: ADS & MACRS lives same

  8. PAL: AMTI v TI may result in different PAL • Adjustment for G or L • AMTI G or L v. TI G or L • may differ bec of basis differences e.g. deprecation

  9. Alternative Tax NOL: • Reg tax NOL reduced by AMT adjustms & Prefs • AMT NOL CB & CF must be used v. AMTI • used up even if no AMT (ex 15) • CB2 & CF20; elect to forego CB must be made for both reg tax & AMT • max 90%

  10. Itemized Deductions & Exemptions: • Taxes and miscellaneous itemized subject to 2% not allowed for AMT • +  if tax refund in inc, take out of AMTI • medical > 10% AGI • Cut back of itemized for wealthy not apply for AMT (neg adjustment)

  11. Qualified housing int v. qualif’d resid int (AMT v. reg) • 2 residences still • but not home equity int unless acquire or improve

  12. Refi prior loan: no adjusm if • Proceeds of prior loan were used to acquire or improve • Interest on prior = qualified housing int • Amount of loan not increased • If amount incr’s excess = adjusm

  13. Invest int: if priv activ tax ex bond int is pref, increase invest int exp for AMT • home equity loan used to purchase investment = investment int for AMT • Standard deduction not allowed • exemptions not allowed

  14. Preferences (Some) • % depletion - preference to extent >AB • Excess IDC • Charitable contribs of apprec’d prop: FMV deduction for regular tax • New Law 93 - Charitable contrib of appreciated property

  15. Tangible pers prop after 6/30/92; other prop after 12/31/92 repealed preference • int on priv activ bonds - include for AMT • deduc exps of private activity bonds (but only as offset v. inc - not creat neg. preference)

  16. Deprec - RE & leased pers prop before 87, pref = accel’d deprec minus S/L; RE after 92, no excess over S/L on pre 87 prop • 50% exclus for certain small bus stk is amt pref (42% = preference - 97 Law) • ISO: spread (FMV exercise - FMV grant) - pref.

  17. Exemption amounts - AMT • New Law (93)JGTRRA (03 & 04) MFJ 45,000 58,000 S 33,750 40,250 MFS 22,500 29,000

  18. AMT exemption – IncreaseEGTRRA `01 • 2001-2002 45000 + 4000 MFJ • 2001-2002 33750 +2000 Single • 2001-2002 22500 + 2000 MFS • Effective Date: ’01 – ’02 • 2005 & later: 45000, 33750, 22500

  19. AMT Exemption – IncreaseEGTRRA `01 • More t/p’s will likely be subject to AMT because of lower reg tax rates. • Per Cal Soc CPA’s CPE (8-01), treasury predicts: 32% t/p’s with 50-70,000 income and 4 exemptions subject to AMT in 2010 (only 1% in 2000)

  20. Credits & AMT EGTRRA `01 • Child Tax Credit • Allowed to full amount v. reg tax & AMT • If refundable, not reduced by AMT • Adoption Credit • Allowed v. AMT (now permanent) • May be other provisions Effective date: after `01

  21. Phaseout starts MFJ 150,000 Single 112,500 Excess X 25% MFS 75,000

  22. AMT Rates (new 93) • Indivs: - tiered: 26% 1st 175,000 AMT BASE; 28% thereafter • Corp: 20%

  23. AMT Credit • Reg tax - may be reduced for prev yrs AMT attributed to timing differences • c/o indefinite • Must recompute AMT (ex) - reflecting only exclusion items & exemptions

  24. Exclusion items: Stand deduc, exemptions, med deduc, itemized not allowed (misc 2%, taxes, int), excess % deplet, priv activ bonds tax ex interest • AMT - AMT (exclus items only) = credit (v. reg tax when reg > AMT, up to excess)

  25. Corporate AMT • ACE Rat: old AMT (86): Large BI (book income) v. TI AMT - should make payment on BI; New AMT: old adjustment too much; influence on BI • ACE adjustment only for corps • 75% X excess of ACE over AMTI b4 ACE (& AMT NOL) • Positive or negative - Neg limited to prior positive

  26. i.e. indirect requirement of conformity financial & tax Accounting • ACE starting point is AMTI b4 ACE & AMT NOL • Adjustments • Exclusions - in E&P, not TI or AMTI (eg tax exempt)

  27. depreciation - ADS S/L • disallowing - not allowed E&P, not allowed ACE (e.g. DRD, NOL) • exceptions - ACE is not E&P & is not book inc

  28. Other adjustments (as with E&P) • Special rules • Fed Inc Tax - deduc’d from E&P, not ACE

  29. Corp Exemption • 40000 — [25% x (AMTI-150000)]

  30. Planning • private bonds - may be avoid • watch elections - circ exps, mining, R&D • avoid bunching - use AMT exemption • rate differential - If in REG tax v. AMT • e.g. gains, charitable deduction • 1997 law: same CG rate as reg

  31. Taxpayer Relief Act of 1997

  32. (1) Chap 14, Chap 7 • ADS – Recovery period are the same as MACRS for AMT • Method may still differ; (EG 150% DB v. 200% DB for personal property) • Effective for property placed in service after 12/31/98

  33. (2) Chapter 14 • AMT for small Corps – repealed • Small Corp: Ave Ann GR <5m; 3 yr period beginning 12/31/94 • When (small Corp) lost; Ave ann GR >7.5; for prec 3 yrs; lost prospectively only • Effective Date: Tax yrs beginning after 12/31/97

  34. (3) Chapter 14 • AMT Preference – 50% excl’d gain on certain small bus stk (1201); Pref now 42% (instead of 50%); Pref 28% (98 Law) holding period start after 00 • Effective: tax yrs ending after 5/6/97

  35. IRS Restructuring & Reform Act of 1998 Tax and Trade Relief Act of 1998

  36. Chapter 14 • Restructuring Act • Small Business AMT Exemption • Clarification • 7.5m GR Test – yrs after 12/31/93 only considered • All corps exempt corp AMT 1st yr of existence regardless of inc level • Effective: yrs beg after 12/31/97

  37. Relief Act • Non refundable personal credits • Can offset reg tax in full • Not just excess of reg over tentative min

  38. Credits = dep care, elderly & disab, adoption, child tax, int on mortgs, HOPE & lifetime lrng, DC homebuyer • 1998 only originally

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