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Chapter 45

Chapter 45. The Alternative Minimum Tax. Alternative Minimum Tax (AMT). Some provisions of the Code are tax preferences that can be utilized disproportionately by high income persons

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Chapter 45

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  1. Chapter 45

    The Alternative Minimum Tax
  2. Alternative Minimum Tax(AMT) Some provisions of the Code are tax preferences that can be utilized disproportionately by high income persons “…it is inherently unfair for high-income taxpayers to pay little or no tax due to their ability to utilize tax preferences…”
  3. Alternative Minimum Tax AMT is a tax based on an alternative more inclusivetax base than regular taxable income. Meant to ensure that taxpayers are paying some minimum level of tax. Who is most likely to pay it and why? High state taxes Multiple children Capital gains Increases AMTI, reduces exemption amount, and exposes more income to AMT. 7-3
  4. Alternative Minimum Tax Formula 7-4
  5. Specific AMT Adjustments Most related to timing differences Eventually reverse Others result in a permanent difference between taxable income and AMTI
  6. Itemized Deductions(slide 1 of 2) Itemized deductions allowed for AMT Casualty losses Gambling losses Charitable contributions Medical expenses in excess of 10% of AGI Estate tax attributable to IRD Qualified interest
  7. Itemized Deductions(slide 2 of 2) Itemized deductions not allowed for AMT: Taxes and miscellaneous itemized deductions subject to the 2% AGI limit Itemized deduction cutback does not apply for AMT Regular tax cutback amount reduces AMTI
  8. Property Transactions(slide 1 of 7) AMT depreciation adjustment for real property – placed in service before 1/1/99 Real property placed in service after 12/31/98 – use MACRS recovery periods for AMT (no adjustment needed)
  9. Property Transactions(slide 2 of 7) Real property placed in service after 1986 (MACRS property) and before 1/1/99 AMT depreciation is computed under ADS Uses the straight-line method over a 40-year life Regular tax MACRS lives are 27.5, 31.5 and 39 years
  10. Property Transactions(slide 3 of 7) 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
  11. Property Transactions(slide 4 of 7) Basis Adjusted basis can differ for AMT, so gain or loss may also differ Difference between regular tax gain (loss) and AMT gain (loss) is adjustment
  12. Property Transactions(slide 5 of 7) Percentage depletion Preference is the amt of percentage depletion taken for regular tax which is in excess of the adjusted basis of the property at year end
  13. Property Transactions(slide 6 of 7) Intangible drilling costs AMT requires 10 year amortization; deductible currently for regular tax Preference is excess of regular tax deduction over [AMT amortization plus (65% x net oil and gas income)]
  14. Property Transactions(slide 7 of 7) 50% of the exclusion of gain on sale of certain small business stock is excludible from gross income for regular tax 7% of the excluded amount is a tax preference for AMT
  15. Treatment of Losses Passive activity losses Passive losses must be recomputed for AMT using AMT provisions Net operating loss (NOL) NOL must be recomputed for AMT using AMT provisions
  16. Private Activity Bond Interest Interest on private activity bonds 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
  17. Other AMT Adjustments Other AMT Adjustments Circulation expenditures Pollution control facilities Mining/exploration/development costs and research/experimental expenditures Completed contract method Incentive stock options
  18. Alternative Minimum Tax Exemption phased out 25 cents for each dollar over threshold $150,000 AMTI for Married filing jointly $75,000 for Married filing separately $112,500 for Head of household and Single 7-18
  19. 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
  20. Alternative Minimum Tax Why is it becoming so prevalent? Exemption amount and phase-out threshold not indexed for inflation Individual tax rates have been decreasing. There has been no corresponding decrease in AMT rates. AMT rates 26% or 28% vs. individual ordinary rates 10%, 15%, 25%, 28%, 33%, 35% 7-20
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