Alternative Minimum Tax

1
Chapter 15

• Alternative Minimum Tax

Individual Income Taxes
2
Alternative Minimum Tax (AMT)

• AMT is separate from, but parallel to, the
  regular income tax system. GOALincrease taxable
  income. How? Adjust certain deductions so that
  income is higher
• The AMT computation reconciles taxable income,
  through adjustments and preferences, with
  Alternative Minimum Taxable Income (AMTI).
  Regardless of the tax you come up with, if it is
  lower than the AMTI, you have to pay the AMTI.
  The AMTI is across the board (individual,
  business, etc.) Have to pay tax on the higher
  number.

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Computation of AMT

• AMT formula
• Taxable income
• Adjustments
• Preferences
• AMTI
• Exemption
• AMT base
• AMT rate(s)
• Tentative minimum tax
• Foreign tax credit
• Regular tax
• Equals AMT

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AMT Adjustments And Preferences (slide 1 of 3)

• Most AMT adjustments relate to timing (will say
  temporary on the return) differences
• Timing differences eventually reverse
• Positive adjustments will be offset by negative
  adjustments in the future, and vice versa
• Example - circulation expenditures
• For regular income tax purposes, circulation
  expenditures can be deducted in the year incurred
• For AMT purposes, however, circulation
  expenditures must be deducted over a three-year
  period
• Certain AMT adjustments do not relate to timing
  differences
• These adjustments result in a permanent
  difference between taxable income and AMTI
• e.g., Itemized deductions

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AMT Adjustments And Preferences (slide 2 of 3)

• AMT Preferences
• Designed to take back all or part of the tax
  benefits obtained by certain items in the
  computation of taxable income for regular income
  tax purposes
• Taxable income is increased by tax preference
  items effectively disallowing those tax benefits
  for AMT purposes

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AMT Adjustments And Preferences (slide 3 of 3)

• Tax preferences include
• Percentage depletion in excess of basis
• Excess intangible drilling costs
• Interest on certain private activity bonds
• Excess of accelerated over straight-line
  depreciation on real leased personal property
  placed in service before 1987
• Excess of amortization allowance over
  depreciation on pre-1987 certified pollution
  control facilities
• 7 of the exclusion from gross income of gains on
  the sale of certain small business stock

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Other Components of AMT(slide 1 of 3)

• Exemption amount
• The exemption reduces AMTI to arrive at the base
  on which AMT is computed
• The initial exemption amount is
• 42,500 for single
• 62,550 for married, filing jointly
• 31,225 for married, filing separately

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Other Components of AMT(slide 2 of 3)

• Exemption amount
• Exemption amount is reduced by 25 of AMTI in
  excess of
• 112,500 for single
• 150,000 for married, filing jointly
• 75,000 for married, filing separately

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Other Components of AMT(slide 3 of 3)

• AMT rates
• A progressive rate structure is applied to the
  tax base (AMTI less exemption amount)
• 26 on first 175,000 (87,500 for married,
  filing separately) of tax base
• 28 on remaining amount of tax base
• Net capital gain and qualified dividend income
  included in AMT base are taxed at favorable
  alternative tax rates (15 or 5)

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Personal Tax Credits

• For tax years after 2006
• Only certain nonrefundable personal tax credits
  can offset both the regular income tax (less any
  foreign tax credit) and the AMT in full,
  including
• Child tax credit
• Adoption expenses credit, and
• Credit for elective deferrals and IRA
  contributions

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Adjustments (slide 1 of 15)

• Since adjustments tend to arise from timing
  differences between regular tax and AMT
• Adjustments can be positive or negative, and will
  generally reverse in later years

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Adjustments (slide 2 of 15)

• Circulation expenditures
• Amortized over 3 years for AMT
• Expensed in year incurred for regular tax

13
Adjustments (slide 3 of 15)

• The AMT depreciation adjustment for real property
  applies only to real property placed in service
  before January 1, 1999
• For real property placed in service after
  December 31, 1998, MACRS recovery periods apply
  for AMT
• Thus, the AMT adjustment is effectively eliminated

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Adjustments (slide 4 of 15)

• For real property placed in service after 1986
  (MACRS property) and before January 1, 1999
• AMT depreciation is computed under the
  alternative depreciation system (ADS)
• Uses the straight-line method over a 40-year life
• Regular tax MACRS lives are 27.5, 31.5, and 39
  years

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Adjustments (5 of 15)

• Depreciation of post-1986 personal property
• AMT method is 150 DB over ADS life
• Regular tax is generally MACRS method based on
  200 DB over shorter lives
• Effective for personalty placed in service after
  12/31/98, MACRS recovery periods are to be used
  for AMT
• If 150 DB is elected for this property, there is
  no AMT adjustment

16
Adjustments (slide 6 of 15)

• Pollution control facilities
• Depreciate under the ADS over appropriate class
  life for AMT
• Amortize over 60 months for regular tax purposes
• Effective for pollution control facilities placed
  in service after 12/31/98, MACRS recovery periods
  are to be used for AMT

17
Adjustments (slide 7 of 15)

• Mining exploration/development costs and
  research/experimental expenditures
• Amortized over 10 years for AMT
• Expensed in year incurred for regular tax
  purposes
• Taxpayer may elect to capitalize and amortize
  over 10 years for regular tax purposes and thus
  avoid the AMT adjustment

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Adjustments (slide 8 of 15)

• Completed contract method
• AMT requires the use of percentage of completion
  method for long-term contracts rather than
  completed contract method

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Adjustments (slide 9 of 15)

• Incentive stock options (ISOs)
• The exercise of an ISO can cause income for AMT
  purposes that is not currently taxable for
  regular tax purposes
• Excess of FMV over exercise price is adjustment
  in year stock is freely transferable or not
  subject to substantial risk of forfeiture

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Adjustments (slide 10 of 15)

• Adjusted gain or loss
• Since the adjusted basis of an asset can be
  different for regular tax and AMT, gain or loss
  recognized upon the disposition of an asset may
  vary for the two tax systems
• Difference between regular tax gain (loss) and
  AMT gain (loss) is adjustment

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Adjustments (slide 11 of 15)

• Passive activity losses
• Passive losses must be recomputed for AMT using
  AMT provisions
• AMT will decrease losses to increase taxable
  income.
• Passive income is investment income for instance.

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Adjustments (slide 12 of 15)

• Net operating loss (NOL)
• NOL must be recomputed for AMT using AMT
  provisions

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Adjustments (slide 13 of 15)

• Itemized deductions allowed for AMT purposes
  include
• Casualty losses
• Gambling losses
• Charitable contributions
• Medical expenses in excess of 10 of AGI
• Estate tax attributable to IRD
• Qualified interest
• May differ from regular tax allowed qualified
  residence and investment interest. AMT redefines
  what a qualified residence is.

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Adjustments (slide 14 of 15)

• Itemized deductions not allowed for AMT
• Taxes and miscellaneous itemized deductions
  subject to the 2 AGI limit
• Itemized deduction cutback does not apply for AMT
• Regular tax cutback amount reduces AMTI

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Adjustments (slide 15 of 15)

• Other adjustments
• AMT does not allow the standard deduction and
  personal and dependency exemptions

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Preferences (slide 1 of 5)

• Preferences tend to arise because of deductions
  or exclusions that provide substantial tax
  benefits
• Unlike adjustments, preferences can only be
  positive (i.e., increase AMTI). Preference for
  the IRS.
• Thus, preferences reduce the benefits initially
  received when computing regular tax

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Preferences (slide 2 of 5)

• Percentage depletion
• Preference is the amount of percentage depletion
  taken for regular tax which is in excess of the
  adjusted basis of the property at the end of the
  year

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Preferences (slide 3 of 5)

• Intangible drilling costs
• AMT requires 10 year amortization deductible
  currently for regular tax
• Preference is excess of regular tax deduction
  over AMT amortization plus (65 net oil gas
  income)

29
Preferences (slide 4 of 5)

• Interest on private activity bonds (affects
  original exclusions).
• This interest is not taxable for regular tax
  purposes but is included in income for AMT
  purposes
• Expenses incurred in carrying these bonds are not
  deductible for regular tax purposes, but offset
  the interest income in computing the AMT
  preference

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Preferences (slide 5 of 5)

• 50 exclusion of gain on sale of certain small
  business stock (Section 1244) is excludible from
  gross income for regular tax
• 7 of the excluded amount is a tax preference for
  AMT. 7 of that excluded amount is added back.

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AMT Credit

• AMT attributable to timing differences is called
  an AMT Credit.
• Excess of AMT over AMT computed without timing
  differences
• AMT credit can be carried forward (indefinitely)
  to be used to offset regular income tax liability
• Cannot carryback or use against AMT liability

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Corporate AMT(slide 1 of 4)

• Major differences in AMT rules for corporations
• AMT rate is a flat 20 for corporate.
• Exemption amount is 40,000
• Reduced by 25 of amount by which AMTI exceeds
  150,000

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Corporate AMT(slide 2 of 4)

• Major differences in AMT rules for corporations
  (contd)
• Adjusted current earnings (ACE) adjustment
• Adjustment 75 (ACE AMTI before ACE)
• ACE employs earnings and profits concepts but
  certain differences exist
• Adjustment can be positive or negative

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Corporate AMT(slide 3 of 4)

• AMT is repealed for small corporations for tax
  years beginning after 12/31/97
• Small corporation has average annual gross
  receipts of not more than 5 million for the 3
  year period beginning after December 1993
• Retains classification if average gross receipts
  for the 3 year period preceding the current year
  do not exceed 7.5 million

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Corporate AMT(slide 4 of 4)

• A new corporation is automatically classified as
  a small corporation its first tax year of
  existence

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Minimum Tax Credit

• All of a corporations AMT is available for
  carryover as a minimum tax credit
• Does not matter whether the adjustments and
  preferences originate from timing differences or
  AMT exclusions