CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning

1. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMIncome Tax Planning Session 15Self-Employment Tax & the Alternative Minimum Tax

2. Session Details

3. Self-Employment Tax • Self-employment income—from trade or business as sole proprietorship, general partner or independent contractor, or rental of personalty • Self-employment income reduced by 7.65% prior to computation of self-employment tax • 15.3% up to wage base of $117,000 (2014) • 2.9% Medicare with no ceiling • One-half of the self-employment tax deductible as adjustment to income • Additional Medicare tax of 0.9% on self-employment income over $200,000 for single taxpayers, or $250,000 (combined self-employment income) for joint returns • no adjustment to income for this portion of S/E tax

4. Alternative Minimum Tax • Enacted in 1969 • Parallel tax system • Designed to ensure that “high-income” taxpayers pay at least a minimum amount of taxes • Good news—ATRA indexes exemption and phaseout numbers, and start of 28% bracket

5. Alternative Minimum Tax Items of Tax Preference & Adjustments of the AMT for Noncorporate Taxpayers Accelerated cost recovery deductions • on real property in excess of the straight-line method • on leased property in excess of the straight-line method • for personalty placed in service after 1986 to the extent the deductions exceed the 150% declining-balance method

6. Alternative Minimum Tax Items of Tax Preference & Adjustments of the AMT for Noncorporate Taxpayers • Excess intangible drilling costs (IDC) • Percentage depletion in excess of adjusted basis • The bargain element on the exercise of an incentive stock option • Rapid amortization of a certified pollution control facility in excess of the alternative depreciation method

7. Alternative Minimum Tax Items of Tax Preference & Adjustments of the AMT for Noncorporate Taxpayers • Tax-exempt interest on qualified private-activity municipal bonds (but not for bonds issued in 2009 and 2010) • Passive farm losses are treated as a preference item • A portion (generally 7%) of the gain excluded from sale of some qualified small business stock • Research and experimental costs, circulation expenses, and mining exploration and development costs

8. Alternative Minimum Tax Calculation for Noncorporate Taxpayers

9. Alternative Minimum Tax Calculation for Noncorporate Taxpayers

10. AMT & Itemized Deductions Many itemized deductions disallowed: • state and local income taxes • property taxes • Tier-II miscellaneous itemized deductions Itemized deductions treated differently: • medical expenses exceeding 10% of AGI • qualified housing interest

11. Planning for AMT • Disqualifying disposition of ISO stock • Don’t accelerate common deductions • state estimated income tax • real estate tax • Consider accelerating income into current year (or don’t defer income) • better taxed at AMT rates currently vs. 35% or 39.6% rate in non-AMT year

12. Review Question 1 Sandy McVey has Schedule C net income of $40,000. Sandy also has a general partnership interest from which she received a flow-through of operating income of $5,858. She also has a flow-through from an S corporation of $15,000. What is the amount of self-employment tax that Sandy must pay for the current tax year? • $6,480 • $7,016 • $8,599 • $9,311

13. Review Question 2 Jerry Nelson has Schedule C net income of $150,000. He also has a flow-through from an S corporation of $10,000. What is the amount of self-employment tax that he must pay for the current tax year? • $18,192 • $18,525 • $18,858 • $22,607

14. Review Question 3 Which one of the following is not a step in the calculation of the alternative minimum tax? • Adjusted gross income is decreased by any net operating losses and tax preference and adjustment items. • Adjusted gross income is increased by any net operating losses and tax preference items and increased or decreased by the adjustment items. • The net amount of alternative minimum taxable income is reduced by an appropriate exemption amount to arrive at the AMT base. • The AMT payable is reduced by any refundable credits.

15. Review Question 4 Which one of the following is not an allowable itemized deduction against alternative minimum taxable income? • medical expenses in excess of 10% of adjusted gross income • charitable contributions • qualified housing interest • state and local income taxes

16. Review Question 5 Which one of the following statements is true with regard to self-employment taxes? • A taxpayer is allowed to deduct a portion of his or her self-employment tax liability as an adjustment to income. • The wage base is not adjusted annually for cost of living increases. • Net earnings from self-employment must be calculated under the accrual method of accounting. • Self-employed taxpayers are subject to employer withholding.

17. Review Question 6 All of the following are preference items for purposes of the individual alternative minimum tax except • interest on qualified private-activity municipal bonds issued in 2008. • the bargain element on exercise of an incentive stock option. • the excess of percentage depletion over the property’s adjusted basis. • investment interest in excess of net investment income. • excess intangible drilling costs.

18. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMIncome Tax Planning Session 15End of Slides