2015 Alternative Minimum Tax Presented by Jaimee Hammer, EA

 Identify AMT adjustment and preference items  Distinguish between temporary and permanent AMT adjustments  Determine the tax consequences for regular tax and AMT when incentive stock options (ISOs) are exercised and sold  Calculate the different depreciation amounts for regular tax and AMT  Complete Form 6251, Alternative Minimum Tax – Individuals  Complete Form 8801, Credit for Prior Year Minimum Tax – Individuals, Estates and Trusts Objectives

 Part I – adjustments and preferences  Part II – calculate AMT  Part III – capital gains rates Form

 Adjustments  Timing differences  Increase or decrease AMTI  Preferences  Deductions allowed for regular tax but not AMT  Always increase AMTI Adjustments and Preferences 6

Illustration: Personal Exemption Preference 7-10

ItemAMT RuleAdjustment on 6251 Medical expenses Deduct medical expenses exceeding 10% of AGI. Line 2—For those who get to use 7.5% on Schedule A, add back the lesser of 2.5% of AGI or the medical expenses allowed on Schedule A. Schedule A taxesNot deductible. Line 3—Add back all taxes deducted on Schedule A, except any generation- skipping transfer taxes on income distributions. Home mortgage interest Deduct interest on debt used to buy, build or improve a qualified main home or second home. Line 4—Add back the disallowed interest. Miscellaneous itemized deductions subject to 2% Not deductible.Line 5—Add back the entire amount. Tax refund from Form 1040, Line 10 or Line 21 Not taxable. Line 7—Subtract tax refund included in gross income for regular tax purposes. Investment interest expense Investment interest and investment income could be different for AMT purposes. Line 8—Complete second Form 4952 for AMT purposes. Itemized Deductions 11-17

A tax refund is not included in AMTI Subtract the tax refund in computing AMTI if the refund was taxable for regular tax purposes Recalculation of both regular and AMT may be needed to determine tax benefit (income for regular tax purposes) and corresponding deduction for AMT Tax Refund 15

Investment Interest Expense  Investment interest expense is deductible to the extent of net investment income  Investment income – investment expenses = net investment income  Recalculate using Form 4952 with AMT income and expenses 16-17

Illustration: Miscellaneous Itemized Deductions 18-35

 Net operating loss for regular tax added back in full  Most software will automatically add back  ATNOL deducted instead (limited to 90% of AMTI)  Often requires manual entry ATNOL 36-37

 If exercised and sold in same year – no AMT adjustment  If exercised and sold in different year – AMT adjustment  FMV of stock minus cost to exercise  Form 3921 ISOs 38-39

 Calculate basis and gain or loss on sale for AMT and regular tax for the following:  Gain or loss reported on Form 4797  Casualty gain or loss on Form 4684  Ordinary income from disposition of property  Capital gain or loss reported on Form 8949  Difference is AMT adjustment Disposition of Property 40-41

Post-1986 depreciation refigured for AMT if: Property placed in service after 1998 and depreciated using 200% declining balance method, unless claimed bonus depreciation Section 1250 property placed in service after 1998 that is not depreciated using straight-line Tangible property placed in service after 1986 and before 1999 Post-1986 Depreciation 42-44

Type of Property Property Placed in Service Before 1999 THEN use the... Property Placed in Service After 1998 THEN use the… §1250 property Straight-line method over 40 years Straight-line method over the same life; 27.5 years for residential rental and 39 years for nonresidential rental Tangible property (other than §1250 property) depreciated using straight line for regular tax Straight-line method over the property’s AMT class life Straight-line method over the same life Any other tangible property or property for which an election is in effect under §168(k)(2)(D)(iii) to elect out of the bonus depreciation 150% declining balance method, switching to straight line the first tax year it gives a larger deduction, over the property’s AMT class life 150% declining balance method over the same life, switching to straight line the first tax year it gives a larger deduction Bonus depreciation property that is qualified property under §168(k) (property eligible for the special depreciation allowance) Did not exist prior to 1999 The special allowance is deductible for AMT; there also is no adjustment required for any depreciation figured on the remaining basis of the qualified property Post-1986 Depreciation 43

 Depreciation is not refigured for property placed in service after 1998 if it is:  Residential rental property  Nonresidential real property with class life of 27.5 years or more depreciated using straight-line  Tangible personal property depreciated using 150% declining balance method  Qualified property eligible for bonus depreciation  Property expensed under §179  Etc. Post-1986 Depreciation 44

 Passive activity gains and losses  Use a second Form 8582  Adjustment is negative if:  AMT loss is more than the regular tax loss  AMT gain is less than the regular tax gain  Taxpayer has an AMT loss and a regular tax gain  A positive adjustment is not required to the extent taxpayer is insolvent Passive Activities 44-46

 Loss limitations  Circulation costs  No adjustment if 3-year write-off elected  Long-term contracts  Mining costs  No adjustment if 10-year write-off elected  Research and experimental costs  No adjustment if 10-year write-off elected Remaining Adjustments and Preferences 46-48

 Installment sales (rare)  Intangible drilling costs  No adjustment if 60-month write-off elected  Other adjustments  MFS taxpayers have to increase AMTI if Line 28 is more than $246,250 Remaining Adjustments and Preferences 48-51

 AMT exemptions for 2015 Computing AMT 52 Filing StatusExemption Amount Single or Head of Household$53,600 Married Filing Jointly or Qualifying Widow(er) $83,400 Married Filing Separately$41,700 Child subject to kiddie tax Lesser of: $53,600, or earned income plus $7,400

Illustration: AMT on Child’s Tax Return 53-59

 AMT exemptions phase-out for 2015 Computing AMT 60 Filing StatusAMTI Phase-Out Single or Head of Household$119,200 – $333,600 Married Filing Jointly or Qualifying Widow(er) $158,900 – $492,500 Married Filing Separately$79,450 – $246,250 For a child subject to kiddie tax$119,200 – $333,600

 26% if AMTI minus exemption is ≤ $185,400 ($92,700 if MFS)  28% if AMTI minus exemption is > $185,400  If filed Form 2555 or 2555-EZ, complete worksheet  If capital gain distributions, qualified dividends or gain on Schedule D, complete Part III of Form 6251 AMT 2015 Rates 61

Review Questions 62-67

Standard deduction Personal exemptions Itemized deductions disallowed for AMT Excess depletion Tax-exempt interest from private activity bonds AMT adjustment for §1202 exclusion of gain from sale of qualified small business stock Not allowed for exclusion items (permanent differences) including: Minimum Tax Credit (MTC) 69-70

 MTC = actual AMT less AMT if only exclusion items were taken into consideration  Calculated on Form 8801  Part I calculates net minimum tax on exclusion items  Part II calculates the current year MTC and carryforward to next year  Part III is a computation using maximum capital gain rates Calculation 70-76

 MTC cannot reduce the taxpayer’s regular tax below the TMT for that year  For 2007–2012, MTC was refundable  Unused MTC carries forward indefinitely  There is no carryback provision MTC Limitation 76

Illustration: Exercise of Incentive Stock Options 76-89

Review Questions 91-94

Thank you!