Chapter 8. Alternative Minimum Tax Howard Godfrey, Ph.D., CPA Professor of Accounting ©Howard Godfrey-2015.

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Presentation transcript:

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

3 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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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 - Caution The 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.

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 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

12 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 2,000 What amount did Mills report as alternative minimum taxable income before the AMT exemption? Answer: $77,000.

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18 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:

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27 T15FChap-08-7-AMT-Worksheet-Class-Problem Has an additional illustrative AMT Problem

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