Chapter 15 Alternative Minimum Tax

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Problems
22. LO.2 Use the following data to calculate Chiara’s 2016 AMT base. Chiara files as a single taxpayer and itemizes her deductions.
Taxable income $148,000
Positive AMT adjustments (does not include personal exemptions) 73,000
Negative AMT adjustments 55,000
AMT preferences 30,000
23. LO.2 Arthur Wesson, an unmarried individual who is age 68, reports 2015 taxable income of $160,000 and a regular tax liability of $38,000. Arthur itemizes his deductions, and he records AMT positive adjustments of $40,000 and tax preferences of $35,000.
a. What is Arthur’s AMT?
b. What is the total amount of Arthur’s tax liability?
c. Draft a letter to Arthur explaining why he must pay more than the regular income tax liability. Arthur’s address is 100 Colonel’s Way, Conway, SC 29526.
24. LO.3, 4 In the current year, Dylan earned taxable and tax-exempt interest from the following investments.
Investment Interest Income
10-year municipal bond (issued in 2009) $1,300
10-year private activity bond (issued in 2010) 1,600
10-year Treasury bond (issued in 2013) 2,000
10-year private activity bond (issued in 2014) 900
Savings account 1,100
Dylan purchased all of the bonds on their issuance date. In addition, Dylan borrowed funds with which to purchase the 2010 private activity bond and incurred interest expense of $350 on that loan in the current year.
a. How much interest income will Dylan recognize for regular tax purposes in the current year?
b. What is her current-year AMT preference or adjustment for interest income?
25. LO.2 Calculate the 2016 AMT exemption amount for the following cases for a married taxpayer filing jointly, and for a married taxpayer filing separately. In addition, in an Excel formula, express your solution for Case 2 for the taxpayer who is married filing jointly. Place any parameter that could change annually in a separate cell, and incorporate the cell references into the formula.
Case AMTI
1 $150,000
2 300,000
3 800,000
26. LO.2 Lisa holds nonrefundable Federal income tax credits of $65,000. Her regular income tax liability before credits is $190,000, and her tentative minimum tax is $150,000.
a. What is the amount of Lisa’s AMT?
b. What is the amount of Lisa’s regular income tax liability after credits?
27. LO.2, 3, 8 Angela, who is single, incurs circulation expenditures of $153,000 during
2016. She is deciding whether to deduct the entire $153,000 or to capitalize it and elect to deduct it over a three-year period. Angela already knows that she will be subject to the AMT for 2016 at both the 26% and 28% rates.
Angela is in the 28% bracket for regular income tax purposes this year; she records regular taxable income of $153,000 before considering the circulation expenses. Angela expects to be in the 28% regular tax bracket in 2017 and 2018.
Advise Angela on how to treat the expenditures in 2016.
28. LO.2, 3 Vito owns and operates a news agency (as a sole proprietorship). During
2015, he incurred expenses of $600,000 to increase circulation of newspapers and magazines that his agency distributes. For regular income tax purposes, he deducted the $600,000 in 2015. In addition, he incurred $120,000 in circulation expenditures in 2016 and again deducted the full amount. What AMT adjustments are required in 2015 and 2016 for the circulation expenditures?
29. LO.3 Lorenzo owns two apartment buildings. He acquired Forsythia Acres on
February 21, 1998, for $300,000 ($90,000 allocated to the land) and Square
One on November 12, 2016, for $800,000 ($100,000 allocated to the land). Neither apartment complex qualifies as low-income housing. If Lorenzo elects to deduct the cost of each building as quickly as possible, what is the effect of depreciation (cost recovery) on his AMTI for:
a. 1998?
b. 2016?
30. LO.3, 8 Helen Carlton acquired used equipment for her business at a cost of $300,000.
The equipment is five-year class property for regular income tax purposes and for AMT purposes. Helen does not claim any additional first-year depreciation.
a. If Helen depreciates the equipment using the method that will produce the greatest current deduction for regular income tax purposes, what is the amount of the AMT adjustment? Helen does not elect § 179 limited expensing.
b. How can Helen reduce the AMT adjustment to $0? What circumstances would motivate her to do so?
c. Draft a letter to Helen regarding the choice of depreciation methods. Helen’s address is 500 Monticello Avenue, Glendale, AZ 85306.
31. LO.3, 8 Geoff incurred $900,000 of mine and exploration expenditures. He elects to deduct the expenditures as quickly as the tax law allows for regular income tax purposes.
a. How will Geoff’s treatment of these expenditures affect his regular income tax and AMT computations for the year?
b. How can Geoff avoid having AMT adjustments related to the mine and exploration expenditures?
c. What factors should Geoff consider in deciding whether to deduct the expenditures in the year incurred?
32. LO.3 Rust Company is a real estate construction business with average annual gross receipts of $3 million. Rust uses the completed contract method on a particular contract that requires 16 months to complete. The contract is for $500,000, with estimated costs of $300,000.
At the end of 2015, $180,000 of costs had been incurred. The contract is completed in 2016, with the total cost being $295,000. Determine the amount of any
AMT adjustments for 2015 and 2016.
33. LO.3 Burt, the CFO of Amber, Inc., was granted incentive stock options in 2011.
Burt exercised the options in February 2016, when the exercise price was $75,000 and the fair market value of the stock was $90,000. Burt sold the stock in
September 2018 for $150,000. What are the regular income tax and AMT consequences for Burt in:
a. 2011?
b. 2016?
c. 2018?
34. LO.3 In 2016, Liza exercised an incentive stock option that had been granted to her in 2014 by her employer, White Corporation. Liza acquired 100 shares of White stock for the option price of $190 per share. The fair market value of the stock at the date of exercise was $250 per share. Liza sells the stock for $340 per share in 2018.
What is Liza’s AMT adjustment in 2016? What is her 2018 recognized gain on the sale for regular income tax and for AMT purposes?
35. LO.3, 4 Valentina, who is single, itemizes deductions and has no dependents. In the current year, she earned $6,000 of municipal bond interest income, and she paid state income taxes of $5,600, mortgage interest of $8,000, and $3,900 of interest on a home equity loan. Her regular taxable income is $95,000.
a. What is Valentina’s AMTI if she uses the proceeds of the home equity loan to remodel her existing home?
b. What is Valentina’s AMTI if she uses the proceeds of the home equity loan to purchase a new boat to take on vacations?
36. LO.4 Christopher regularly invests in tech company stocks, hoping to become wealthy by making an early investment in the next high-tech phenomenon.
In 2011, Christopher purchased 3,000 shares of FlicksNet, a film rental company, for $15 per share shortly after the company went public. Because Christopher purchased the shares in their initial offering, the shares are qualified small business stock.
In 2017, Christopher sold 800 of the shares (at $325 per share) to reserve a seat on Virgin Galactic’s first space flight. What regular income tax consequences and
AMT consequences arise for Christopher as a result of the sale of these shares?
37. LO.3 Sammy and Monica, both age 67, incur and pay medical expenses in excess of insurance reimbursements during the year as follows.
For Sammy $16,000
For Monica (wife) 4,000
For Chuck (son) 2,500
For Carter (Monica’s father) 5,000
Sammy and Monica’s AGI is $130,000. They file a joint return. Chuck and Carter are
Sammy and Monica’s dependents.
a. What is Sammy and Monica’s medical expense deduction for regular income tax purposes?
b. What is Sammy and Monica’s medical expense deduction for AMT purposes?
c. What is the amount of the AMT adjustment for medical expenses?
38. LO.3 Wolfgang is age 33. His AGI is $125,000. He reports the following itemized deductions for the year.
Medical expenses [$15,000 _ (10% _ $125,000)] $ 2,500
State income taxes 4,200
Charitable contributions 5,000
Home mortgage interest on his personal residence 6,000
Casualty loss (after $100 and 10% reductions) 1,800
Miscellaneous itemized deductions [$3,500 _ (2% _ $125,000)] 1,000 $20,500
a. Calculate Wolfgang’s itemized deductions for AMT purposes.
b. What is the total amount of the taxpayer’s AMT adjustments for these items?
c. Use the solution to part (b) to complete Part I of Form 6251, the AMT form for individuals.
39. LO.3 Walter, who is single, owns a personal residence in the city. He also owns a cabin near a ski resort in the mountains. He uses the cabin as a vacation home. In August, Walter borrowed $60,000 on a home equity loan and used the proceeds to reduce credit card obligations and other debt. This year, he paid the following amounts of interest.
On his personal residence $16,000
On the cabin 7,000
On the home equity loan 2,500
On credit card obligations 1,500
On the purchase of personal-use SUV 1,350
What amount, if any, must Walter recognize as an AMT adjustment?
40. LO.3, 4 During the current year, Yoon earned $10,000 in interest on corporate bonds and incurred $13,000 of investment interest expense related to the bond holdings.
Yoon also earned $5,000 interest on private activity bonds that were issued in
2013 and incurred interest expense of $3,500 in connection with the bonds.
a. How much investment interest expense can Yoon deduct for regular income tax purposes for the year?
b. What AMT adjustments and preferences arise as a result of the private activity bond interest income and expense?
41. LO.3, 4 Gabriel, age 40, and Emma, age 33, are married with two dependents.
They reported AGI of $110,000 for the year, including net investment income of $10,000 and gambling winnings of $2,500.
They incurred the following expenses during the year, all of which resulted in itemized deductions for regular income tax purposes.
Medical expenses (before AGI floor) $13,000
State income taxes 2,800
Personal property tax 900
Real estate tax 9,100
Interest on personal residence 8,600
Interest on home equity loan (proceeds were used to buy a new fishing boat) 1,800
Investment interest expense 2,600
Charitable contribution (cash) 4,200
Unreimbursed employee expenses (before 2%-of-AGI floor) 3,800
a. What is Gabriel and Emma’s AMT adjustment for itemized deductions? Is it positive or negative?
b. Gabriel and Emma also earned interest of $5,000 on private activity bonds that were issued in 2013. They borrowed money to buy these bonds and paid interest of $3,900 on the loan. Determine the effects of these amounts on AMTI.
42. LO.2, 3 Chuck is single and has no dependents. He does not itemize deductions.
In 2016, he claims a $4,050 personal exemption and records taxable income of $120,000. Chuck’s AMT preferences total $51,000. What is Chuck’s AMTI for the year?
43. LO.2, 3, 4 Jane and Robert Brown are married and have eight children, all of whom are eligible to be claimed as the couple’s dependents. Robert earns $94,000 working as an accountant, and Jane earns $35,000 as a teaching aide.
Given their large family, the Browns live in a frugal manner. The Browns maintain a large garden and some fruit trees from which they get most of their produce, and the children take family and consumer science classes so that they can help make the family’s clothing.
The Browns record no gross income other than their salaries (all of their investment income is earned from qualified retirement savings), and their itemized deductions are less than the standard deduction. The Browns report no other AMT adjustments or preferences.
a. What is the couple’s 2016 regular tax liability?
b. What is the couple’s 2016 AMT?
c. Express the calculation of the couple’s AMT for 2016 as an Excel formula. Place any parameter that could change annually in a separate cell, and incorporate the cell references into the formula.
44. LO.2, 3, 4 Pat, who is age 66 and single with no dependents, received a salary of $90,000. She reports interest income of $1,000, dividend income of $5,000, gambling winnings of $4,000, and interest income from 2006 private activity bonds of $40,000. The dividends are not qualified dividends. The following additional information may be relevant. Compute Pat’s tentative minimum tax.
Medical expenses (before AGI floor) $12,000
State income taxes 4,100
Real estate taxes 2,800
Mortgage interest on residence 3,100
Investment interest expense 1,800
Gambling losses 5,100
45. LO.2, 5 Renee and Sanjeev Patel, who are married, report taxable income of $273,000. They computed positive AMT adjustments of $38,000, negative
AMT adjustments of $14,000, and AMT preference items of $67,500. The couple itemizes their deductions.
a. Compute the Patels’ AMTI.
b. Compute their tentative minimum tax.