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Chapter 15 Alternative Minimum Tax
Discussion Questions
1. LO.1 Kelly recently was promoted and received a substantial raise. She talks to her tax adviser about the potential tax ramifications. After making some projections, her adviser “welcomes her to the AMT club.” Kelly believes that it is unfair that she must pay more than the regular income tax, as she is a “HENRY” (high earner not rich yet) with substantial college-related debts. Explain to Kelly the purpose of the AMT and why it applies to her.
2. LO.2 How could the AMT be calculated without using regular taxable income as a starting point? Be specific.
3. LO.2, 3, 4 Identify which of the following regular tax amounts create AMT preferences.
a. Depletion expense.
b. Exclusion to the employee for the employer’s contribution to the employee’s retirement plan.
c. Exercise of incentive stock option.
d. Student loan interest expense.
e. Exclusion for gains on the sales of certain small business stock.
f. Medical expenses.
4. LO.2 An AMT liability results if the tentative minimum tax (TMT) exceeds the regular income tax liability. But what happens if the regular income tax liability exceeds the TMT? Does this create a negative AMT that can be carried to other years? Explain.
5. LO.2 Andrew and Monica, unrelated individuals, use the same Federal income tax filing status (head of household). However, Monica’s AMT exemption amount is $52,800, while Andrew’s is $0. Explain.
6. LO.2 Alfred is single, and his AMTI of $350,000 consists of the following. What tax rates are applicable in calculating Alfred’s TMT?
Ordinary income $250,000
Long-term capital gains 70,000
Qualified dividends 30,000
7. LO.3 Evaluate the validity of the following statement: In a year in which depreciable personal property is sold, the amount of the AMT gain adjustment equals the amount of the current year’s AMT depreciation adjustment.
8. LO.3 Evaluate the validity of the following statements: If the stock received under an incentive stock option (ISO) is sold in the year of exercise, there is no
AMT adjustment. If the stock is sold in a later year, there will be an AMT adjustment then.
9. LO.3 In 1998, Douglas purchased an office building for $500,000 to be used in a business. Douglas sells the building in the current tax year. Explain why the recognized gain or loss for regular income tax purposes is different from any recognized gain or loss for AMT purposes.
10. LO.3, 8 Celine will be subject to the AMT in 2016. She owns an investment building and is considering disposing of it and investing in other realty. Based on an appraisal of the building’s value, the realized gain would be $85,000.
Ed has offered to purchase the building from Celine, with the closing date being
December 29, 2016. Ed wants to close the transaction in 2016 because certain beneficial tax consequences will result only if the transaction is closed prior to the beginning of 2017.
Abby has offered to purchase the building with the closing date being January 2, 2017. The building has a $95,000 greater AMT adjusted basis.
For regular income tax purposes, Celine expects to be in the 25% tax bracket in
2016 and the 28% tax bracket in 2017. What are the relevant income tax issues that
Celine faces in making her decision?
11. LO.3, 4, 8 Matt, who is single, always has elected to itemize deductions rather than take the standard deduction. In prior years, his itemized deductions always exceeded the standard deduction by a substantial amount. As a result of paying off the mortgage on his residence, he projects that his itemized deductions will exceed the standard deduction by only $500. Matt anticipates that the amount of his itemized deductions will remain about the same in the foreseeable future. Matt’s AGI is $150,000. He is investing the amount of his former mortgage payment each month in tax-exempt bonds; the bonds were issued in
2013. A friend recommends that Matt buy a beach house, to increase his itemized deductions with the mortgage interest deduction. What are the relevant tax issues for Matt?
12. LO.3 A friend tells you that she does not worry about the AMT because she does not itemize deductions and, as a result, she does not generate many AMT adjustments. Evaluate your friend’s assertion.
13. LO.3, 4 During the year, Rachel earned $18,000 of interest income on 2011 private activity bonds. She incurred interest expense of $7,000 in connection with amounts borrowed to purchase the bonds. What is the effect of these items on
Rachel’s taxable income? On her AMT? Could there be a related beneficial effect in calculating AMTI? Explain.
14. LO.7 Dart Corporation (a calendar year C corporation) would like to invest some of its excess earnings from retail operations in real estate. Dart is considering a purchase of 10 acres of land in a city whose economic prospects are good and whose population is growing. The company believes that the land will be attractive to a developer in the next five years. Does the AMT adjustment for real estate taxes make this a less attractive investment for Dart? Explain.