Chapter 15 Alternative Minimum Tax

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46. LO.2, 3, 4, 5 Farr, who is single, has no dependents and does not itemize her deductions. She shows the following items relative to her currentyear tax return.
Bargain element from the exercise of an ISO (no restrictions apply to the stock) $ 45,000
MACRS depreciation on shopping mall building acquired five years ago 49,000
Percentage depletion in excess of property’s adjusted basis 50,000
Taxable income for regular income tax purposes 121,000
Regular tax liability 26,452
a. Determine Farr’s AMT adjustments and preferences.
b. Calculate Farr’s AMT (if any).
47. LO.2, 3, 4, 5 Lynn, age 45, is single and has no dependents. Her income and expenses for the current year are reported as follows.
Income
Salary $33,000
Taxable interest on corporate bonds 3,700
Business income 64,000
Expenditures
Medical expenses $12,000
State income taxes 6,000
Real estate taxes 8,500
Mortgage (qualified housing) interest 9,200
Investment interest 5,500
Cash contributions to various charities 2,900
The $64,000 business income is from Apex Office Supplies Company, a sole proprietorship that Lynn owns and operates. Apex claimed MACRS depreciation of $3,175 on real and personal property used in the business. AMT depreciation on the property would have been $2,500.
Lynn received interest of $30,000 on 2011 City of Pensacola private activity bonds.
Based on the information presented above, compute Lynn’s AMT liability.
48. LO.5, 6 Bonnie, who is single, reports a zero taxable income in 2016. Bonnie itemizes her deductions and takes the personal exemption. She reports positive
AMT timing adjustments of $200,000 and other AMT positive adjustments of $100,000 for the year. What is Bonnie’s AMT credit that will carry over to 2017?
49. LO.7 In the current year, Redland Corporation’s regular tax liability was $28,000, and its AMTI was $232,000. Redland is not a small corporation, and this is not its first year of operations.
a. Compute Redland’s current-year AMT.
b. How would your answer to part (a) change if Redland’s regular tax liability was $88,000 in the current year?
50. LO.7 Brown Inc., a calendar year taxpayer, reported the following transactions.
Brown is not a small corporation for AMT purposes.
Taxable income $2,600,000
Depreciation for regular income tax purposes on realty (placed in service in 2007) 550,000
Excess amortization of certified pollutions control facilities 450,000
Tax-exempt interest on private activity bonds (issued in 2013) 1,030,000
Percentage depletion in excess of the property’s adjusted basis 60,000
ACE adjustment 0
a. Calculate Brown’s regular income tax liability.
b. Calculate Brown’s TMT.
c. Calculate Brown’s AMT.
Cumulative Problems
51. Robert A. Kliesh, age 41, is single and has no dependents. Robert’s Social Security number is 111-11-1112. His address is 201 Front Street, Missoula, MT 59812. He does not contribute to the Presidential Election Campaign fund through the Form 1040.
Robert is independently wealthy as a result of having inherited sizable holdings in real estate and corporate stocks and bonds.
Robert is a minister at First Presbyterian Church, but he accepts no salary from the church. However, he does reside in the church’s parsonage free of charge. The
Tax Return Problem fair rental value of the parsonage is $3,000 a month. The church also provides him with a cash grocery allowance of $200 a week.
Examination of Robert’s financial records provides the following information.
a. On January 16, 2015, Robert sold 1,000 shares of stock for a loss of $12,000.
The stock was acquired 14 months ago for $17,000 and sold for $5,000. On February
15, 2015, he sold 400 shares of stock for a gain of $13,100. That stock was acquired in 2009 for $6,000 and sold for $19,100.
b. He received $30,000 of interest on private activity bonds that he had purchased in 2013, as part of the original issuance. He also received $40,000 of interest on tax-exempt bonds that are not private activity bonds.
c. Robert received gross rent income of $190,000 from an apartment complex he owns. He qualifies as an active participant in the activity.
d. Expenses related to the apartment complex, which he acquired in 2007, were $225,000.
e. Robert’s interest income (on CDs) totaled $23,000. Robert invests only in growth stocks, so he earns no dividend income.
f. He won $60,000 in the Montana lottery.
g. Robert was the beneficiary of an $800,000 life insurance policy on the life of his
Uncle Jake. He received the proceeds in October.
h. He contributed $5,500 to his traditional IRA.
i. Robert reported the following potential itemized deductions.
• $5,200 fair market value of stock contributed to First Presbyterian (basis $3,000). He had owned the stock for two years.
• $4,200 interest on consumer purchases.
• $3,900 state and local income tax.
• $15,000 of medical expenses that he paid on behalf of a parishioner who died.
• $300 for a safe deposit box that is used to store investments and related legal documents.
• $750 contribution to the campaign of a candidate for governor.
• $5,000 paid for lottery tickets associated with playing the state lottery. Robert contributed $5,000 of his net winnings to the church.
• Robert lives in Montana, so he paid no sales tax.
j. Robert made $7,500 of estimated Federal income tax payments for the year.
k. Robert was covered by health insurance for the entire tax year.
Use Forms 1040 and 6251 and Schedules A, B, D, and E to compute Robert Kliesh’s
2015 Federal income tax liability (including AMT, if any). Omit Forms 8283, 8582, and 8949. Suggested software: H&R BLOCK Tax Software.
52. Jacob, age 42, and Jane Brewster, age 37, are married and file a joint return in 2016.
The Brewsters have two dependent children, Ellen and Sean, 10-year-old twins.
Jacob is a factory supervisor; he earned $95,000 in 2016. Jane is a computer systems analyst and earned $103,000. In addition to their salaries, the Brewsters reported the following income items.
Interest income (Carmel Sanitation District Bonds) $22,000 (a)
Interest income (Carmel National Bank) 8,500
Qualified dividend income (Able Computer Corporation) 12,000
Gambling winnings 6,500
Gift from Uncle Raymond to Jacob 27,000 “Citizen of the Year” award (Jane) 7,500 (b)
Gain on land sale 14,000 (c)
a. The Carmel Sanitation District Bonds are private activity bonds that were originally issued in April 2013.
b. Jane was selected “Citizen of the Year” by the Carmel City Council. She used the award proceeds to pay down the family’s credit card debt.
c. Jacob sold 5 acres of land to a real estate developer on October 12, 2016, for $100,000. He had acquired the land on May 15, 2009, for $86,000.
On April 1, 2016, Jacob exercised an incentive stock option granted by his employer. At the date of exercise, the fair market value of the stock was $18 per share and the exercise price was $10 per share. Jacob purchased 500 shares with the ISO exercise. As of December 31, 2016, the stock’s fair market value had declined to $13 per share.
The Brewsters incurred the following expenses during 2016.
Medical expenses (doctor and hospital bills) $28,000
Charitable contributions (cash) 9,500 (d)
Real property tax on personal residence 8,100
Mortgage interest—personal residence (reported on Form 1098) 8,600
Mortgage interest—home equity loan 1,800 (e)
Investment interest expense 3,500
Gambling losses 6,800
d. In addition to their cash charitable contributions, the Brewsters contributed stock in Ace Corporation, which they acquired on February 9, 2006, at a cost of $6,500, to the Carmel Salvation Army, a qualifying charity. The fair market value of the stock was $11,000 on November 1, 2016, the date of the contribution.
e. The home equity loan was used to purchase the family’s new minivan.
Taking into consideration the above amounts, for 2016, the Brewster’s AGI is $246,500. The following table presents a first draft of the Brewsters’ 2016 AMTI calculation.
Regular taxable income $177,950
Adjustments and preferences
Citizen of the Year award (7,500)
Reduction in medical expenses (10% of AGI for AMT) 6,163
Real property taxes (8,100)
Mortgage interest 10,400
Charitable contribution of stock (difference between basis and FMV) 4,500
Incentive stock option exercise 1,000
Gambling loss disallowed for regular tax purposes (300)
AMTI $184,113
Exemption amount (83,800)
AMTI base $100,313
Review the AMTI calculation, and prepare a list, including explanations, of any errors in the calculation. An error could include a missing amount or an amount that should not have been included, an amount that enters the calculation in the wrong direction, or an amount that is computed incorrectly. You can presume that the Brewsters’ AGI and taxable income amounts for the year are calculated correctly.