2. 2
The Big Picture (slide 1 of 2)
• Bob and Carol are unmarried individuals who have
been engaged for four months. They work for the
same employer and
– They earn identical compensation.
– They have the same amount of gross income, including the
same amount of investment income, which consists solely
of interest income.
– They have similar investments in tax-exempt bonds that
produce identical amounts of interest income.
– They also have the same amount of deductions.
• Carol learns that she paid $15,000 more in Federal
income taxes than Bob did for the tax year.
3. 3
The Big Picture (slide 2 of 2)
• The above events raise a number of interesting
questions for Bob and Carol that can be answered
after completing this chapter.
– Why didn’t Bob and Carol have the same tax liability?
– Were both tax returns properly prepared?
– Should Carol consider replacing her tax return preparer Ava
with Adam?
– Is it possible and/or desirable for Carol to file an amended
return?
– Should Bob do anything?
• Read the chapter and formulate your response.
4. 4
Alternative Minimum Tax (AMT)
• AMT is separate from, but parallel to, the
regular income tax system
• The AMT computation reconciles taxable
income, through adjustments and preferences,
with Alternative Minimum Taxable Income
(AMTI)
6. 6
AMT Adjustments And Preferences
(slide 1 of 3)
• Most AMT adjustments relate to timing 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
7. 7
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
8. 8
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
9. 9
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 in 2014 is:
• $52,800 for single
• $82,100 for married, filing jointly
• $41,050 for married, filing separately
– The exemption is phased out at a rate of 25 cents
on the dollar when AMTI exceeds certain amounts
10. 10
Other Components of AMT
(slide 2 of 3)
• For 2014, the exemption and phaseout
amounts are as follows:
11. 11
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 $182,500 ($91,250 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 (0%, 15%, or 20%)
12. 12
Personal Tax Credits
• Beginning in 2012, personal nonrefundable
credits are allowed to offset any AMT liability
as well as any regular tax liability
– e.g., Adoption Credit, Lifetime Learning Credit,
and Retirement Savings Contribution Credit
13. 13
AMT Adjustments
(slide 1 of 15)
• 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
14. 14
Adjustments
(slide 2 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
15. 15
Adjustments
(slide 3 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
16. 16
Adjustments
(slide 4 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
17. 17
Adjustments
(slide 5 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
18. 18
Adjustments
(slide 6 of 15)
• Circulation expenditures
– Amortized over 3 years for AMT
• Expensed in year incurred for regular tax
19. 19
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
20. 20
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
21. 21
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 the
taxable year in which the option is exercised
22. 22
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
23. 23
Adjustments
(slide 11 of 15)
• Passive activity losses - Not deductible in computing
either the regular income tax or the AMT
– Passive losses must still be recomputed for AMT using
AMT provisions
24. 24
Adjustments
(slide 12 of 15)
• Net operating loss (NOL)
– NOL must be recomputed for AMT using AMT
provisions
25. 25
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 since only student loan, qualified
residence, and investment interest are deductible for AMT
26. 26
Adjustments
(slide 14 of 15)
• Itemized deductions not allowed for AMT:
– Taxes and miscellaneous itemized deductions
subject to the 2% AGI limit
• Gross income may include a refund of taxes
deducted in prior years as an itemized
deduction
– A negative AMT adjustment is allowed for such
refunds for AMT purposes
• The 3% cutback of regular income tax
itemized deductions does not apply for AMT
27. 27
Adjustments
(slide 15 of 15)
• Other adjustments
– AMT does not allow the standard deduction and
personal and dependency exemptions
• These adjustments enter the AMTI calculation
indirectly by adjusting the taxable income amount that
begins the AMTI calculation
28. 28
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)
– Thus, preferences reduce the benefits initially
received when computing regular tax
29. 29
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
30. 30
Preferences
(slide 3 of 5)
• Intangible drilling costs
– Deductible currently for regular tax
– The AMT preference is computed as follows:
IDC expensed in the year incurred
Minus: Deduction if IDC were capitalized and amortized
over 10 years
Equals: Excess of IDC expense over amortization
Minus: 65% of net oil and gas and geothermal income
Equals: Tax preference item
31. 31
Preferences
(slide 4 of 5)
• Interest on private activity bonds
– 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
– Interest on private activity bonds issued after
December 31, 2008 and before January 1, 2011 is
not treated as a tax preference
32. 32
Preferences
(slide 5 of 5)
• 50% exclusion of gain on sale of certain small
business stock normally is excludible from
gross income for regular tax
– For 2009 and 2010, the 50% is increased to 75%
– For such stock acquired after September 2, 2010,
and before January 1, 2014, 100% of the gain is
excluded from regular taxable income
– 7% of the excluded amount is a tax preference for
AMT
33. 33
The Big Picture - Example 21
Private Activity Bonds
• Return to the facts of The Big Picture on p. 12-1.
• Bob and Carol both have invested substantial
amounts in private activity bonds all of which
were issued in 2010.
– A tax preference does not result for either Carol or
Bob.
34. 34
AMT Credit
• AMT attributable to timing differences is 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
35. 35
Corporate AMT
(slide 1 of 4)
• Major differences in AMT rules for
corporations
– AMT rate is a flat 20%
– Exemption amount is $40,000
• Reduced by 25% of amount by which AMTI exceeds
$150,000
36. 36
Corporate AMT
(slide 2 of 4)
• Major differences in AMT rules for
corporations (cont’d)
– Adjusted current earnings (ACE) adjustment
• Adjustment = 75% × (ACE - AMTI before ACE)
• ACE employs some earnings and profits concepts but
certain differences exist
• Adjustment can be positive or negative
– The negative adjustment is limited to the aggregate positive
adjustments under ACE for prior years
37. 37
Corporate AMT
(slide 3 of 4)
• AMT is repealed for small corporations for tax years
beginning after 12/31/97
– A corporation is classified as a small corporation if both of
the following apply
• It was treated as a small corporation exempt from the AMT for all
prior years beginning after 1997
• Average gross receipts for the 3 year period ending before its
current tax year did not exceed $7.5 million
– $5 million if the corporation had only one prior tax year
– However, if a corporation ever fails the gross receipts test,
it is ineligible for small corporation classification in future
tax years
38. 38
Corporate AMT
(slide 4 of 4)
• A new corporation is automatically classified
as a small corporation its first tax year of
existence
39. 39
Minimum Tax Credit
• All of a corporation’s 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
40. 40
Refocus On The Big Picture
• Bob contacts Adam, his tax return preparer, and explains in an
excited voice that he believes that he underpaid his Federal
income tax liability for 2014 by $15,000.
– He is worried about the negative effects of an IRS audit.
• Adam examines the two tax returns and discovers that the
difference relates to the treatment of the interest earned on the
tax-exempt bonds.
– Both Bob and Carol own tax-exempt bonds, including private activity
bonds that usually are subject to the AMT.
– However, Carol’s accountant, Ava, apparently overlooked the fact that
interest on private activity bonds is not a tax preference for private
activity bonds issued in 2010.
• So the $15,000 AMT that was reported on Carol’s Form 6251
is in error.
– Bob ‘‘texts’’ the good news to Carol that she is eligible for a Federal
income tax refund.
