1. ©2015, College for Financial Planning, all rights reserved. Session 15 Self-Employment Tax & the Alternative Minimum Tax CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning

2. Session Details Module8 Chapter3 LOs8-5 Identify tax preference items or adjustments for the alternative minimum tax for individual taxpayers. 8-6 Analyze a situation to calculate the alternative minimum tax, or Medicare Contribution tax, for individual taxpayers. 8-7 Analyze a situation to calculate the self- employment tax. 15-2

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 $118,500 (2015) 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 o no adjustment to income for this portion of S/E tax 15-3

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 15-4

5. 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 Alternative Minimum Tax 15-5

6. 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 Alternative Minimum Tax 15-6

7. 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 qualified small business stock Research and experimental costs, circulation expenses, and mining exploration and development costs Alternative Minimum Tax 15-7

8. Increase adjusted gross income (AGI) by any tax preference items and increase or decrease by any adjustments. Reduce the figure determined in Step 1 by the allowable itemized deductions. Reduce the figure determined in Step 2 by the appropriate exemption amount; the resulting figure is the alternative minimum taxable income. Calculation for Noncorporate Taxpayers Alternative Minimum Tax 15-8

9. Apply a tax rate of 26% to the alternative minimum tax base up to $185,400 and apply 28% to the excess over $185,400 to determine the alternative minimum tax amount. Compare the AMT amount to the regular tax. If the regular tax after credits equals or exceeds the AMT amount, then no AMT payment is required. If the regular tax is less than the AMT, then the difference is the AMT payable (i.e., additional tax) required. Reduce the AMT payment by any refundable credits, personal nonrefundable credits, and the low-income housing credit for post-2007 property. Calculation for Noncorporate Taxpayers Alternative Minimum Tax 15-9

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 15-10

11. Planning for AMT Disqualifying disposition of ISO stock Don’t accelerate common deductions o state estimated income tax o real estate tax Consider accelerating income into current year (or don’t defer income) o better taxed at AMT rates currently vs. 35% or 39.6% rate in non-AMT year 15-11

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? a.$6,480 b.$7,016 c.$8,599 d.$9,311 15-12

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? a.$18,712 b.$19,044 c.$19,334 d.$24,480 15-13

14. Review Question 3 Which one of the following is not a step in the calculation of the alternative minimum tax? a.Adjusted gross income is decreased by any net operating losses and tax preference and adjustment items. b.Adjusted gross income is increased by any net operating losses and tax preference items and increased or decreased by the adjustment items. c.The net amount of alternative minimum taxable income is reduced by an appropriate exemption amount to arrive at the AMT base. d.The AMT payable is reduced by any refundable credits. 15-14

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

16. Review Question 5 Which one of the following statements is true with regard to self-employment taxes? a.A taxpayer is allowed to deduct one-half of his or her self-employment tax liability as an adjustment to income. b.The wage base is not adjusted annually for cost of living increases. c.Net earnings from self-employment must be calculated under the accrual method of accounting. d.Self-employed taxpayers are subject to employer withholding. 15-16

17. Review Question 6 All of the following are preference items for purposes of the individual alternative minimum tax except a.interest on qualified private-activity municipal bonds issued in 2008. b.the bargain element on exercise of an incentive stock option. c.the excess of percentage depletion over the property’s adjusted basis. d.investment interest in excess of net investment income. e.excess intangible drilling costs. 15-17

18. ©2015, College for Financial Planning, all rights reserved. Session 15 End of Slides CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning