Individual Alternative Minimum Tax:
Planning and Strategies
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1
Individual Alternative Minimum Tax:
Planning and Strategies
John O. Everett, Ph.D., CPA
Cherie J. Hennig, Ph.D., CPA
2
Learning Objectives
Upon completion of this course, you will be able to:
• Define the terms regular tax, tentative minimum tax, and
alternative minimum tax.
• Recognize the most common AMT adjustment items and AMT
preference items.
• Describe the purpose and computation of the AMT credit,
including the importance of differentiating timing and
permanent adjustments & preferences.
• Identify AMT planning opportunities for such business items as
income acceleration and cost recovery deductions.
• Identify AMT planning opportunities for such investment items
as stock option exercises, private activity bond interest, and
investment interest expense.
• Identify AMT planning opportunities for such personal items as
property taxes, unreimbursed expenses, and planning advice.
3
Topic 1
Origins and Format of
the AMT & Case Study
Introduction
Origins of the AMT - 1969
• 1969 Tax Reform Act – This legislation included the
first attempt to impose any type of “minimum tax”
• Rational – Over 100 taxpayers in 1969 had more than
$1 million of income, yet paid no income tax at all
• Characteristics –
 The minimum tax was an “add-on” minimum tax; in
effect, a taxpayer paid a toll charge for the privilege of
using certain tax loopholes (termed “preferences”)
 After totaling all preferences, an exemption of $10,000
was subtracted (later increased to $20,000), and any
excess was subject to a 10% surcharge, yielding a
minimum tax, which was added to the regular tax
5
Origins of the AMT - 1978
• Conversion to a Separate Tax Computation – In an
effort to increase the reach of the AMT, the add-on
minimum tax was converted to a separate, or
“shadow’ tax, with its own sets of rules
• AMT Computation – Since most of the regular tax
(RT) and AMT rules were the same, the AMT was
computed by starting with regular taxable income,
modifying this number with items treated differently
for RT and AMT purposes (preferences and
adjustments), allowing an exemption, and then
computing a tentative minimum tax (TMT) with a
two-bracket rate schedule
• AMT – Simply the excess of the TMT over the RT
6
Origins of the AMT - 1986
• Corporate AMT – Congress later added a corporate
AMT, that basically followed the format of the
individual AMT computation
• AMT Credit – With the reduction in federal tax rates
in 1986, the AMT and regular tax rates were much
closer; as a result, Congress enacted an AMT credit
to provide relief from possible double taxation of
items (once for the AMT, and again later for the
regular tax when certain timing items “reversed”)
• Corporate AMT Threshold – Congress later instituted
a minimum gross receipts threshold ($7,500,000) for
the corporate AMT, exempting small corporations
7
AMT for Individuals – Overview
Basic Individual AMT Format – Can be summarized as
follows:
Regular taxable income (RTI)
+/- Adjustments
+ Preference Items
Exemption
= Alternative Minimum Taxable Income (AMTI)
x AMT Rates (26%/28% & 15% or 20% for LTCG/Div.)
= Tentative Minimum Tax (TMT)
(continued on next page)
8
AMT for Individuals – Overview
(continued)
Tentative Minimum Tax (TMT)
- AMT Tax Credits (FTC and Certain Personal Credits)
= Net Tentative Minimum Tax
- Regular Tax Liability (RT)
= Alternative Minimum Tax (AMT) *
* Added to the regular tax liability; in effect, the individual
taxpayer pays the larger of the TMT or the RT
9
Individual Case Study –
Howard & Martha Jones
• Case Study - Refer to Figure 1 (regular tax, or RT)
and Figure 2 (AMT) of the Word files; facts are also
in Appendix A; a filled-in Form 6251 is a separate file
• Facts of the Case:
– Married taxpayers, filing a joint return, both age 65
– Howard is a salaried employee
– Martha owns and operates a sole proprietorship business
– Taxpayers do not qualify for any credits
– Footnotes to regular tax computation describe several
regular tax items that are treated differently for the AMT
• Procedure – The following review of AMT basics
contains references to the Case Study in red italics;
these illustrate the various components of the AMT
10
Individual Case Study –
Regular Tax Computation
• Figure 1 – Presents the regular tax computation of
Howard and Martha Jones
• Items of Note –
– AGI of $250,000 for the married couple is not high enough to
invoke the special phase-out rules for personal exemptions and
itemized deductions (these begin at $309,900 in 2015)
– Stock options were exercised by Howard in the year, but under
regular tax rules, no gain is recognized until the stock is sold
– Long-term capital gain is taxed at the alternative rate of 15%
– Martha uses both pre-MACRS and MACRS assets in her business
– The deduction for investment interest expense is limited to the
net investment income of the taxpayers (the $15,000 interest
income)
11
Individual Case Study –
Previewing the AMT Computation
• Figure 2 - Presents the AMT computation of Howard &
Martha Jones
• Format – Note the broad outlines of the AMT format
displayed earlier
• Two AMT Computations – Two AMT computations are
needed to determine any AMT credit for carryover
purposes; hence the two columns (discussed later)
• Starting Point – Regular taxable income of the
taxpayers, from Figure 1 (Note – On Form 6251, the
starting point is taxable income before exemptions)
• Case Study – The AMT begins with the RTI of $136,250
12
Topic 2
AMT Adjustments and
Preferences for
Individual Taxpayers
Overview of Adjustments and
Preferences
• Nature of Adjustments and Preferences – These
represent items of income and deduction treated
differently for regular tax and AMT purposes. These
items generally (1) slow down or eliminate
deductions allowed for regular tax purposes, or (2)
speed up recognition of income for AMT purposes or
recognize income that is exempt from regular taxable
income
• Adjustments – May be positive or negative; most
were added to the law in the Tax Reform Act of 1986
• Preferences – May only be positive; most represent
carryover items from the old add-on minimum tax
14
Two “Pre-adjustment”
Adjustments
• Disallowed Itemized Deductions – The AMT does not
provide for a phase-out of itemized deductions;
therefore, any amount disallowed for regular tax
purposes would be allowed as an AMT deduction, and a
negative adjustment would be made for AMT
• State Income Tax Refunds – If the taxpayer received a
state income tax refund and itemized in the prior year,
such amount is includable in regular taxable income in
the current year; however, it is not includable in AMT
income, since the tax deduction is not allowed for AMT
purposes; thus, a negative adjustment is made for AMT
• Case Study – Neither “pre-adjustment“ applies
15
Cost Recovery Adjustments
• MACRS Cost Recovery Deductions – Generally,
extended lives and/or slower recovery rates are
required for AMT purposes for MACRS personalty &
some realty
• Next Slide- Provides a summary comparing the
regular tax MACRS deduction and the AMT deduction
for both personalty and realty
• Adjustment – Difference between MACRS recovery
for RT and AMT recovery – adjustment may be
positive or negative, depending on the age of asset
• Case Study – The excess depreciation on the MACRS
personalty of $5,000 is a positive AMT adjustment
16
MACRS & AMT Cost Recovery
Regular
MACRS
AMT Cost
Recovery
Personalty (3-, 5-, 7-, and
10-year classes)
200% declining-balance over
the MACRS life
150% declining-balance over
the MACRS life (class life, if
placed in service prior to
1999)
Personalty (15- and 20-year
classes)
150% declining-balance over
the MACRS life
150% declining-balance over
the MACRS life (class life, if
placed in service prior to
1999)
Realty
Straight-line recovery over
Straight-line recovery over
MACRS life (27.5 or 39 years) MACRS life (ADS class life of
40 years, if placed in service
prior to 1999)
Asset
17
Other AMT Cost Recovery
Adjustments
• Other AMT Cost Recovery Items – AMT provides for
slower cost recovery for several other items
• Other “Slowdown” Recovery Rules –
– Research & Experimentation Expense (10 years AMT
versus immediate expensing for RT)
– Amortization of Pollution Control Facilities (Straight-line
ADS for AMT versus 5-year amortization for RT)
– Mining Exploration & Development Costs (10 years AMT
versus immediate expensing for RT)
– Circulation Expenditures (3 years AMT versus immediate
expensing for RT)
18
Special Accounting Income
(Acceleration ) Adjustments
• Accounting Methods and the AMT – In some cases,
the AMT modifies the accounting for certain items
of income
• Special Rules – Are provided for:
– Passive Losses (Use AMT rules in making computation)
– Pct. of Completion Method (Completed contract not allowed in
any case; allowed for RT for certain small contractors)
– Net Operating Loss (Use AMT rules in making computation)
19
Adjusted Gain or Loss
Adjustments
• Rationale – Different cost recovery methods for RT
and TMT means different adjusted bases of assets
(unless fully depreciated), and thus differing RT and
TMT gains or losses
• Adjustment – For the difference between the RT gain
or loss and AMT gain or loss (negative, since AMT
cost recovery is slower than RT cost recovery)
• Note – Adjustment will always equal the sum of the
positive AMT cost recovery adjustments in prior years
for the same asset; if the asset is fully depreciated,
there is no adjustment ($0 basis for both RT & AMT)
20
Example – Adjusted Gain (Loss) Adjustment
Facts – Ron Howard purchased a new machine in March, 2013 (7-year MACRS
property) for $100,000. His cost recovery deductions for 2013, 2014, and 2015 for
regular tax and AMT purposes were:
2013
2014
2015
Totals
Regular Tax
AMT
$14,290
$10,714
24,490
19,130
8,745
7,515
$47,525
$37,359
AMT Adjustment
$ 3,576
5,360
1,230
$10,166
If Ron sells the machine in February, 2015 for $60,000, his gain will be:
Amount Realized
Adjusted Basis
Gain (Loss)
Regular Tax
$60,000
(52,475)
$ 7,525
AMT
$60,000
(62,641)
($ 2,641)
AMT Adjustment
_
($10,166)
21
Incentive Stock Options
Exercise Adjustment
• AMT Recognition – Accelerated to date of exercise,
and not date of sale (assuming no restrictions are
placed on the stock once exercised)
• Adjustment – The difference between the fair market
value of the stock on the date of exercise and the
exercise price (i.e., the bargain element)
• Note – This is a “timing” difference, discussed later,
which provides AMT credit for later RT gain at sale
• Later Sale of Stock – AMT basis is increased by AMT
gain on exercise (prevents double taxation)
• Case Study – The $50,000 bargain element of the
stock exercise is a positive AMT adjustment in 2015
22
AMT Expense Adjustments
• Rationale – Some deductions, such as investment
interest expense, are limited in deductibility to a
particular type of income (investment income)
• Other AMT Adjustments – May increase the related
income limitation for AMT purposes (i.e., private activity
bond interest is “investment income” for the AMT)
• Negative Adjustment – Is made for additional
investment interest expense allowable for AMT that was
not allowed for regular tax
• Case Study – Since the private activity bond interest is
taxable for AMT purposes (see below), this increases the
AMT “investment income”, thus allowing the $3,000 of
investment interest deductions disallowed for RT
23
Standard & Itemized
Deduction Adjustments
• Standard Deduction – Is not allowed for AMT, and must be
added back to taxable income if deducted
• Itemized Deductions – Certain itemized deductions allowed for
regular tax are reduced or disallowed for AMT:
– Medical Expenses – 10% floor for AMT (only if 65 or older)
– Interest Expense – No deduction for home equity loan
– State & Local Taxes – No deduction allowed
– Miscellaneous Itemized Deductions – No deduction
• Case Study – Positive adjustments are for excess medical
(10% AMT floor versus 7.5% RT floor), home equity loan
interest, all state & local taxes, and all miscellaneous itemized
24
Personal Exemption Adjustments
Personal Exemptions – Are not deductible for the AMT
(a separate “AMT exemption” is allowed and is
discussed below)
Phase-out Effects – If the taxpayer’s AGI was large
enough to be subject to the phase-out rules, the
adjustment is for only the amount actually deducted
for RT purposes
Case Study – The two exemption deductions totaling
$8,000 are a positive adjustment in computing AMT
AMT Preference Items
• Preference Items – May only be positive (ignore any
negative adjustments, such as pre-87 cost recovery)
• Most Common Preference Items –
– Pre-87 Excess Depreciation – On realty and leased personalty
– Private Activity Bond Interest – Post 8/7/86 issues only
– Excess Percentage Depletion – Only for amounts in excess of
total cost recovery for the natural resource
– Sale of Sec. 1202 Stock – 7% of the excludable gain
(normally 50% of the gain) on the sale of such stock
• Case Study – The $3,000 excess depreciation on the
pre-1987 realty and the $7,000 private activity bond
interest are positive AMT preference items
26
Topic 3
AMT Exemption, Tax
Computation, and the
AMT credit
AMT Exemption
• AMT Exemption – 2015 amounts and phase-outs are:
 Married Filing Jointly - $83,400 – [25% x (AMTI - $158,900)]
 Single - $53,600 – [25% x (AMTI - $119,200)]
 Married Filing Separately - $41,700 – [25% x (AMTI - $79,450)]
• Reduction – Causes AMT to be completely phased out
at $492,500 AMTI (married – filing Jointly), $333,600
(single), and $246,250 (married – filing separately)
• Note – Adding income to AMTI within the phase-out
range will actually increase AMTI 125% of the
additional income—see planning note later
• Case Study – The $61,250 exemption in the “All”
column of Figure 1 is computed as:
Ex = $83,400 – [($247,500 – $158,900) x .25]
28
Computation of the Tentative
Minimum Tax (TMT)
• Tentative Minimum Tax Rates – Two rate brackets
• 26% - On first $185,400 of non-LTCG, non-dividend
alternative minimum taxable income (AMTI)
• 28% - On remaining non-LTCG, non-dividend AMTI
• 15% or 20% - Rate on any long-term gain or dividend
income (same as regular tax)
• Note – If 0% rate applied for regular tax liability, then
the same 0% rate is used for AMT (doubtful to occur)
• Case Study – Note that all AMTI (after subtracting the
long-term capital gain) is less than $185,400, so none
of the AMTI is taxed at the maximum 28% rate.
29
AMT – Defined and Calculated
• AMT – Technically, AMT is the excess of TMT over RT
Excess - This amount is then added to the RT on page 2
of 1040 as an addition to tax; as a result, the taxpayer
pays the larger of TMT or AMT
• If RT > TMT – AMT does not apply in the year; any AMT
credit carryover (discussed later) can be used
• Regular Tax Credits – Congress recently permanently
extended the “AMT patch,” which allows most regular
tax credits for individuals as credits against the AMT; if
not for this change, millions more of individuals would
be subject to the AMT
• Case Study: $46,225 TMT - $23,650 RT = $22,575 AMT
30
AMT Credit: An Overview
• Rationale – Some items of income that are accelerated
for the AMT are taxed once for the TMT (assuming that
the AMT applies), and are then later taxed again for the
RT under RT rules; The same principle applies to
deductions that are slowed down (more income for AMT
now, more income later in RT)
• Double Taxation – The AMT credit is designed to
prevent this problem; any AMT credit theoretically will
offset RT in a future year when the item “turns around”
• Example – Stock option exercise and later sale
• Case Study - The AMT basis for stock becomes $60,000
($10,000 + $50,000 AMT gain adjustment), but RT
basis stays at $10,000 for a later sale (double tax)
31
Computing the AMT Credit
• AMT Credit – For individual taxpayers, the credit must
be generated by “timing differences” (the term
“deferral differences” is used in the Code)
• Computing the Credit – Redetermine the AMT with only
“permanent differences” (the term “exclusion
differences” is used in the Code)
• AMT Credit – The difference between total AMT (first
column of Figure 2) and AMT attributable only to
permanent differences (second column of Figure 2)
• Each Adjustment & Preference – Is labeled as a timing
difference (“T”) or permanent difference (“P”)
• Case Study - $22,575 “All” - $4,700 “Perm” = $17,875
32
Utilizing the AMT Credit
• Carryforward Period – The AMT credit can be carried
forward indefinitely
• Utilization – The AMT credit can only be used in a
future year in which the RT liability exceeds the TMT
liability; the maximum credit allowed is the amount
that reduces the RT down to the TMT.
• Net Effect - The AMT credit cannot offset AMT; any
amount of AMT credit not utilized is carried over
indefinitely to future years
33
Topic 4
Individual AMT Planning:
Business Items
Individual AMT Planning:
General Considerations
• AMT is a Separate Tax System – Care should be taken
not to make the same adjustment twice (e.g., a
depreciation adjustment related to passive activity
property)
• Reducing the AMT may increase the RT – Some
strategies will actually increase RT (e.g., slowing cost
recovery), and this factor must be considered
• Understanding the AMT Credit – The AMT credit may
reduce some strategies to simple time-value of money
issues; it is important to understand exactly what
creates an AMT credit
35
Income Acceleration Issues
• Maximum RT and TMT Rate Differentials – May
suggest accelerating income (or decelerating expenses)
if taxpayer is already in an AMT position for the year
• Rationale – Income taxed at only 28% TMT maximum,
rather than 39.6% RT maximum
• Problem – With AMT credit, such a strategy may
merely accelerate payment of tax (see next two slides,
where $200,000 income is accelerated); taxes are
saved only if permanent differences create the AMT
• Determining Break-Even Additional Income – TMT and
RT equality computed by dividing the AMT by marginal
RT and AMT rates (see slide following computations)
• Case Study – Strategy not applicable (only 25%
marginal RT rate in the Case)
36
AMT Caused by Permanent Adjustments
No Acceleration of
Income
Regular Taxable Income
Timing (Deferral) Adjustments
Permanent (Exclusion) Adjustments
Total AMTI
Tentative Minimum Tax Liability
Regular Tax Liability
Alternative Minimum Tax Liability
Regular Tax Liability
Alternative Minimum Tax Liability
Alternative Minimum Tax Credit
Total Tax Liability
Totals for Years 1 and 2
Acceleration of
Income
Year 1
Year 2
Year 1
Year 2
1,000,000
1,000,000
1,200,000
800,000
0
0
0
0
600,000
0
600,000
0
1,600,000
1,000,000
1,800,000
800,000
444,500
276,500
500,500
220,500
(369,161)
(369,161)
(448,361)
(289,961)
75,339
0
52,139
0
369,161
369,161
448,361
289,961
75,339
0
52,139
0
0
0
0
0
444,500
369,161
500,500
289,961
813,661
790,461
37
AMT Caused by Timing Adjustments
No Acceleration of
Income
Regular Taxable Income
Timing (Deferral) Adjustments
Permanent (Exclusion) Adjustments
Total AMTI
Tentative Minimum Tax Liability
Regular Tax Liability
Alternative Minimum Tax Liability
Regular Tax Liability
Alternative Minimum Tax Liability
Alternative Minimum Tax Credit
Total Tax Liability
Totals for Years 1 and 2
Acceleration of
Income
Year 1
Year 2
Year 1
Year 2
1,000,000
1,000,000
1,200,000
800,000
600,000
0
600,000
0
0
0
0
0
1,600,000
1,000,000
1,800,000
800,000
444,500
276,500
500,500
220,500
(369,161)
(369,161)
(448,361)
(289,961)
75,339
0
52,139
0
369,161
369,161
448,361
289,961
75,339
0
52,139
0
0
(75,339)
0
(52,139)
444,500
293,822
500,500
237,822
738,322
738,322
38
Computation of "Breakeven Additional Income" (BEAI) to
Equate the Regular Tax Liability (RT) and the Tentative
Minimum Tax (TMT) of Previous Example:
BEAI = (TMT - RT) / (Marginal RT Rate - Marginal AMT Rate)
BEAI = (444,500 - 369,161) / (.396 - .28)
BEAI = 649,474
Regular Tax Liability on ($1,000,000 + $649,474) = $626,353
Tentative Minimum Tax Liability on ($1,000,000 + $600,000 +
$649,474) = $626,353
39
Cost Recovery Issues
• Minimizing AMT Effects With Cost Recovery – Three
possible issues to consider:
– Elect Straight-line or ADS Recovery – Such elections
will decelerate the RT recovery and reduce the AMT
adjustment
– Lease Property, Rather Than Own It – Lease (rent)
expense is always deductible for both RT and TMT;
however, lessors know this and probably build this
factor into price
– Positive Benefits of Negative Adjustments – Sales of
properties before fully depreciated create negative
AMT adjustments; selective use may reduce AMT
40
Credits vs. Deductions
• Taxpayer Option – In several cases, a taxpayer may
have the option of foregoing a credit and taking a
deduction instead; an example would be Research &
Experimentation Expenses
• Value of Credit – The credit may be of little value if
the taxpayer is in an AMT situation, and expects to
remain in an AMT situation for the foreseeable future
• Deduction – Is allowed for both RT and TMT
• Another R&E Option – If credit is taken, taxpayer has
option to reduce credit and not reduce basis of
property
41
Net Operating Losses
• Sec. 172 – Requires consistency between RT and TMT
as to the election to forego the 2-year NOL carryback
• Carryback to a Non-AMT Year – AMT NOL carryback
must offset AMTI in carryback year, even if no AMT is
due; this may argue for foregoing the carryback
election
• If No AMT in Prior Years – Foregoing the carryback
would also preserve AMT NOL benefits for future years
42
Topic 5
Individual AMT
Planning: Investment
Items
Private Activity Bond Interest
Private Activity Bond Interest – Is subject to the AMT,
but not the RT, and is a PERMANENT preference
item: no AMT credit is generated
Net Result – AMT reduces effective yield on this interest
Example – Assume that a private activity bond’s interest
income is taxed at a 28% rate in the AMT; thus, if the
bond was a 6% bond, the yield is initially reduced to
4.32% (6% x .72); also, if the taxpayer is in the
phase-out range for the AMT exemption, the effective
tax rate on this “additional income” is actually 35%
(28% x 1.25), reducing the yield to 3.9% (6% x .65)
44
Capital Gain Considerations
• Equal TMT and RT Rates – Does not mean that the
AMT is neutral for capital gains, because:
– Capital Gains and State Income Taxes – Large capital gains
will increase state income taxes, which are NOT deductible
for the AMT
– Sale of a Personal Residence – Problem is exacerbated if
state law does not allow the Sec. 121 exclusion
• Sec. 1202 Stock – The Code requires that 7% of the
50% exclusion available on gain on the sale of Sec.
1202 stock be reported as a tax preference item for
AMT purposes (3.5% of total gain)
45
Incentive Stock Option
Exercise
• ISO Adjustment – Adds to a possible AMT credit, since
the exercise gain is a timing difference; if this is
expected to be a one-time occurrence, the AMT paid
may be largely recouped in the following year
• If AMT is Expected in Years After Exercise – Taxpayer
may want to consider spreading exercises over several
years (it is possible to solve for “breakeven” number of
shares that equate RT and TMT each year)
• Selling Stock in Same Year as Exercise – Removes the
adjustment item from the AMT computation (but does
increase the RT)
46
Capital Gains Election for
Investment Interest
• Definition of “Investment Income” – For purposes of
the investment interest limitations, investment income
does not include long-term capital gains or dividends
taxed at the 15% or 20% rates
• Special Sec. 163(d)(4)(B) Election – Such income may
be treated as investment income if the taxpayer gives
up the lower tax rates applicable to such income
• Advisability of the Election – The election may make
sense in some cases (increased deduction for both RT
and TMT, ordinary rates applicable to gains and
dividends narrows RT-TMT difference)
• Caveat – Consider time value of money & AMT credit
47
Foreign Tax Credit
• Foreign Tax Credit (FTC) – The only RT credit allowed
fully against the TMT (Note – Prior to 2004, the offset
was limited to 90% of the TMT)
• Deduction Option – A taxpayer may always elect to
deduct foreign taxes paid, rather than take a credit
• When the Deduction Option Makes Sense – Some
taxpayers are more or less permanently in AMT
situations, and regular tax FTCs would be virtually
worthless; in this case, a deduction may be preferred,
since it would be allowed against both RT income and
TMT income.
48
Topic 6
Individual AMT
Planning: Personal
Items
Postponing State & Local Tax
Deductions
• State and Local Tax Deductions – Offer no benefit if
the AMT applies; if in an AMT position near the end
of the year, consider postponing payment until the
next year, when hopefully they can be used against
regular taxable income)
• Miscellaneous Itemized Deductions – The same logic
applies to postponing these deductions, since any net
deduction (after the 2% of AGI floor) is not allowed
for AMT purposes
50
Unreimbursed Employee
Expenses
• Regular Tax Reporting – Unreimbursed employee
expenses are miscellaneous itemized deductions,
subject to the 2% floor
• Accountable Reimbursement Plans – If offered by the
employer, any unreimbursed expenses (as well as the
reimbursement income) are omitted from the return;
this is the same result as being fully deductible
• Employee With Part-time Business – Some business
expenses (e.g., dues) may relate to both pursuits;
amounts allocable to the business would be deductible
on Schedule C and not lost as itemized deductions
51
Investment Planning Advice
• Regular Tax – Investment planning advice is a
miscellaneous itemized deduction, subject to 2% AGI floor
• AMT – No miscellaneous itemized deductions are allowed
for the AMT; thus, any amount deductible for regular tax
(after applying the 2% floor) will not be deductible for AMT
• Possible Solution – If investments are made based on the
planning advice, add the cost of the advice to the basis of
the stock or securities purchased. This increases the basis
of the stock or securities, so that the expenses are
eventually recovered when the stock or securities are sold.
• Possible Problem – Treasury is not too keen on this
strategy; opposed in Chief Counsel Memorandum
52
Evaluating Home Equity Loans
• Home Equity Loan Interest – Interest on such loans, up
to $100,000, is deductible for RT purposes, but is not
deductible for TMT
• Resulting Interest Adjustment – Is classified as a
permanent difference, and thus does not generate any
AMT credit
• Constant AMT Position – Would negate the tax value of
a home-equity loan
53
Electing Out of The
Installment Method
• Electing Out - Offers little AMT benefit, as only capital
gain qualifies for the installment method, and this
gain is taxed at a maximum 15% or 20% rate for
both regular tax and AMT purposes (negating any
possible benefits of accelerating income)
• Depreciation Recapture on an Installment Sale – Any
depreciation recapture must be reported in the year
of sale; such recapture does not qualify for the
installment method (one possible benefit – since such
amount is taxed as ordinary income, thus resulting
increased RT may minimize AMT)
54
Questions?
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Or contact:
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55
Appendix A
Facts of the Case Study
Salaries
Long-term Capital Gain (stock investment)
Interest Income (taxable bond)
Private Activity Bond Interest (a)
Incentive Stock Option (ISO) Exercise (b)
Sole Proprietorship Income (c)
Keogh and ½ Self Employment Tax Deductions
Adjusted Gross Income
Personal Exemptions (2 @ 4,00 0) (d)
Itemized Deductions (d):
Medical ($25,000 less 7.5% of AGI – both taxpayers age 65)
Interest – Qual. Acquisition Indebtedness
Interest – Home Equity Indebtedness (e)
Interest – Investment Activities (f)
Taxes – State and Local
Contributions – Cash and FMV of Property
Casualty and Theft ($0 less 10% of AGI)
Miscellaneous ($6,000 less 2% of AGI)
Net Itemized Deductions
Regular Taxable Income – 2015
162,000
20,000
15,000
0
0
58,000
255,000
( 5,000)
250,000
( 8,000)
6,250
7,900
3,000
15,000
31,000
41,600
0
1,000
(105,750)
136,250
=======
Regular Tax Liability (Joint tax return):
Regular tax on ($136,250 - $20,000 L/T capital gain)
Tax on L/T capital gain ($20,000 x .15)
Regular tax liability (RT)
Add: Alternative Minimum Tax (see Page 2)
Self Employment Tax on $58,000 Proprietorship Income
Less: Credits
Prepayments of Tax (Withholdings and Estimated Tax)
Net Tax Liability - 2015
20,650
3,000
23,650
22,575
7,124
(
0)
( 50,000)
3,349
=======
(a) Total received on 2010 private activity bond issue, $7,000
(b) On 2/1/2015, Howard exercised a 2011 incentive stock option, purchasing 1,000
shares of his company’s stock at $10 per share (FMV of $60 per share). No
restrictions were placed on the stock.
(c) Includes the following cost recovery deductions for 2015:
$20,000 MACRS on post 86 property (AMT ADS is $15,000)
$15,000 ACRS on pre 87 realty (straight-line is $12,000)
(d) There is no phase-out of the exemption or itemized deductions, since AGI is less
than $309,900
(e) Loan on personal automobiles secured by personal residence
(f) $18,000 investment interest paid, limit to $15,000 net investment income (interest
income above)
Items (T = timing, P = permanent)
Taxable Income per Return (from page 1)
Less Disallowed Itemized Deductions (below phase-out in 2015)
Taxable Income as Adjusted
AMT Adjustments (may be positive or negative):
[T] Post 86 Depreciation (MACRS ADS)
[T] Res. & Exp. Expenses (Ded. 10 yr. amort.)
[T] Amort. of Pollution Control (5-yr - ADS recovery)
[T] Mining Exploration & Develop (Exp - 10-yr amort.)
[T] Circulation Expenditures (Exp - 3-yr amort.)
[T] Passive Losses (Recompute with AMT rules)
[T] Pct. of Completion Method (PCM Comp. Cont.)
[T] Net Operating Loss Deduction (RT NOL AMT NOL)
[T] Adjusted Gain (Loss) (Regular Tax - AMT Amount)
[T] Incentive Stock Option Exercise (FMV - Ex Price)
[T] Adj. Expenses for AMT (Add'l Invest. Int. Expense)
[P] Disallowed Standard Deduction (if taken)
Disallowed Itemized Deductions:
[P] Medical (7.5% RT ded. 10% AMT ded.)
[P] Interest Expense (Home Equity Disallowed)
[P] State and Local Taxes (none allowed)
[P] Miscellaneous Itemized (none allowed)
[P] Personal Exemption Deductions (none allowed)
Taxable Income as Adjusted
All
136,250
(
0)
136,250
5,000
0
0
0
0
0
0
0
0
50,000
( 3,000)
0
6,250
3,000
31,000
1,000
8,000
237,500
Permanent
136,250
(
0)
136,250
----
-0
6,250
3,000
31,000
1,000
8,000
185,500
Tentative Minimum Tax (TMT):
All [(166,250** x .26) + (0 x .28) + (20,000 x .15)]
Perm [($97,500** x .26) + (0 x .28) + (20,000 x .15)]
Less Regular Income Tax Liability (see Page 1)
Alternative Minimum Tax Liability [AMT] (to page 1)
AMT Credit (“All” – “Permanent Only”)
46,225
( 23,650)
22,575
-22,575
=======
28,350
( 23,650)
4,700
17,875***
23,575
======
* Exemption amounts for 2015 are:
Joint Ret. (M) $83,400, less 25% x (AMTI $158,900) [$492,500 phase-out is complete]
Single (or HH) $53,600, less 25% x (AMTI $119,200) [$333,600 phase-out is complete]
MS $41,700, less 25% x (AMTI $79,450)
[$246,250 phase-out is complete]
** After subtracting the $20,000 L/T capital gain, AMTI is less than $185,400, the beginning of the
28% bracket)
** When considering only permanent adjustments and preferences ("exclusions"), those items that
will not reverse in the future, there would be $4,700 AMT due in 2015. Thus, $17,875 ($22,575
$4,700) of AMT payable in 2015 is due solely to timing ("deferral") items; this $17,875 may be
carried over to 2016 as an AMT credit, reducing 2016 regular tax (but not below the 2016
computed TMT). Thus, if the 2016 regular tax (RT) is $32,000 and the TMT is $27,000, only
$5,000 of the 2015 AMT credit of $17,875 may be used to reduce the 2016 RT to $27,000. The
remaining AMT credit of $12,875 would then be carried forward to 2017.
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61