14 Alternative Minimum Tax

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Transcript of 14 Alternative Minimum Tax

  • NATP National Conference & Expo 2013JW Marriott Desert Ridge Resort & Spa Phoenix, AZ



    14Alternative Minimum Tax Presented by: Kathryn M. Keane, EA

  • Alternative Minimum Tax Overview/Objectives It was 1969 when the government realized that 155 high income individuals legally paid very little or no tax, thanks to the use of permitted tax deductions. Since then, Alternative Minimum Tax has haunted taxpayers and their returns. In 1997, approximately 618,000 taxpayers filed Form 6251, up from 132,000 in the tax year 1990. According to IRS 2010 Fall Statistics on Income Bulletin1, over 3.9 million taxpayers were impacted by AMT in tax year 2008. For the tax year 2011, the taxpolicycenter.org estimated 4.3 million taxpayers were impacted by the AMT and $ 39.1 billion in revenue was received either directly or indirectly due to the AMT. After this session, attendees will be able to:

    Calculate common adjustments for AMT Be aware of less common AMT adjustments Calculate AMT using Form 6251 with a comprehensive problem Offer ideas and options to clients impacted by AMT

    What is Alternative Minimum Tax (AMT)? Created in 1969 in response to news of high-income taxpayers avoiding federal income tax, the AMT is in essence a parallel tax system which adjusts or invalidates certain tax positions and deductions once perceived as preferential. Back in 1969, the AMT triggers were only seen on high income taxpayers. Since the AMT has never been truly adjusted for inflation, the average professional taxpayer comes dangerously close to AMT liability. The New Years Day Tax Bill did bring indexing for inflation to the AMT exemption amount which ends the Annual AMT Patch Dance. Calculating Alternative Minimum Taxable Income (AMTI) Form 1040 filers begin with income after itemized deductions. Standard Deduction filers begin with their income after Adjustments but before applying the Standard Deduction. Adjustments are made to entries on Form 1040 to conform to AMT rules.


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  • The function of Form 6251, Alternative Minimum Tax, is to bridge the regular tax laws and the allowed deductions and income differences under AMT rules. Entries on Form 6251 are actually the adjustments between both tax worlds. AMT Adjustments Medical expenses are limited by 10% of Adjusted Gross Income for the AMT calculation. This exclusion adjustment is the lesser of the Schedule A deduction or 2.5% of the AGI. This adjustment should be handled by tax software. As the Health Care Reform comes into effect, this deduction will be obsolete in 2013 (for taxpayers under 65 years of age) as the floor for the medical expenses on Schedule A will move to 10% of AGI.

    Example: Iggys AGI is $ 79,000. His medical expenses are $ 6,400. For regular tax, his medical expense deduction is $ 475 (Medical Expenses of $ 6,400 reduced by 7.5% of her AGI ). For AMT, Iggys adjustment is the lesser of the deduction ($ 475) or 2.5% of his AGI ($ 1,975). Therefore, Iggy would enter $ 475 on the appropriate line of his Form 6251.

    When taxpayers fall into AMT and have medical expenses in excess of the AGI floor, they should review the potential of Flexible Spending Accounts or other pre-tax health plans. Taxes deducted from Schedule A include all taxes deducted on Schedule A. When taxpayers face AMT, they may benefit from adjusting withholding to avoid over-withholding as well as different timing of other taxes such as real estate taxes. Other strategies may include:

    Real estate taxes on unproductive and unimproved land may be capitalized. By electing to capitalize the real estate tax and not deducting it, the real estate tax is added to the basis of the property. (see Reg 1.266-1(b)(1)(i) and Reg 1.266-2(i)

    Revisit allocations of taxes deducted on income schedules, such as Schedule E or Form 8829. Business use percentages or square footage usage may change over time and not necessarily be uncovered in tax interviews.

    Home mortgage interest deduction must be adjusted for any home equity loans or refinancing that resulted in new money. For AMT, only acquisition debt is allowed.

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  • Acquisition debt is debt, secured by the home, to buy, to build, and/or to improve. When a taxpayer refinances a qualified home mortgage and does not increase the face of the mortgage, no adjustment is required. It is essential when classifying home mortgage interest that the tax definitions are used.

    Example: Iggy paid $ 2,995 in mortgage interest to Bank A. The Form 1098 reports it as Line of Credit. After discussion, the preparer discovers that Iggy used the Line of Credit to cover the cost of supplies directly linked to the installation of a bowling alley in his basement/Man Cave. Because the mortgage interest, secured by the residence, was directly linked to an improvement/addition to his home, no AMT adjustment is required.

    Example: Iggy also paid $ 3,995 in mortgage interest to Bank B. The Form 1098 reports it as Line of Credit. After discussion, the preparer discovers that Iggy used the Line of Credit to cover the cost of a trip to Bali. Because the mortgage interest, secured by the residence, was not used to buy, to build nor to improve his home, an AMT adjustment is required

    When a taxpayer refinances and the refinance results in additional debt, the mortgage interest expense must be allocated among the acquisition portion and home equity portion.

    Example: Clyde obtains a $ 100,000 mortgage on his residence using the banks Home Equity Loan Program. He used $ 80,000 to add a room to his home and $ 20,000 to pay down his credit card debt. Regardless of what the bank may call the loan product, for tax purposes, the loan is a mixed use mortgage. $ 80,000 of the debt is acquisition debt as it is used to build, to buy and/or to improve his home. The remaining $ 20,000 is home equity debt. Using the ratio of the home equity debt over the total debt ($ 20,000/$ 100,000), 20% of the mortgage interest is not permitted for AMT.

    Miscellaneous Deductions are not permitted on Form 6251. While this adjustment should be handled easily by tax software, some tax planning may help impacted taxpayers. Some strategies to explore may include:

    Encourage clients to negotiate for better reimbursement plans, especially accountable plans.

    Revisit allocation of tax preparation fees for clients filing income schedules such as Schedule C, E or F. The portion of the tax preparation fee directly linked to

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  • the activity and not the return in full can be deducted as a business (or rental) expense.

    Tax refunds reported on Form 1040 are not income for AMT and therefore subtracted. Investment Interest Expense is limited in ordinary tax by the net investment income reportable on page one of Form 1040. Since AMT includes other forms of income (i.e. Private Activity Bonds), recalculate the investment interest expense deduction for AMT. Prepare a second Form 4952, Investment Interest Expense Deduction, using AMT rules and clearly labeling the form as AMT Purposes Only. Other adjustments to the AMT Form 4952 may include:

    Differences in gain/loss due to differences in basis between AMT and regular (or ordinary) tax

    Investment Expenses as AMT disallows Miscellaneous Deductions claimed on Schedule A, the usual place to deduct such expenses. Therefore, no adjustment for Investment Expenses is required for AMT.

    Example: Iggy had $1000 in regular bank interest and $ 295 in Private Activity Bonds which are subject to AMT. He also paid $ 1,350 in investment interest as well as $1,350 in investment expenses of which $ 320 were deductible on his Schedule A. (See end of module for Iggys 1040, Sch A, 6251.) Below is his 4952 for Regular tax and his AMT 4952.

    Iggys Regular 4952

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  • Iggys Form 4952 for AMT Purposes

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  • Iggys adjustment for Form 6251 is computed as follows: Regular 4952 $ 680 less the AMT allowable deduction of $ 1295 = Form 6251 adjustment of ($615), which Is entered on the appropriate line.

    Software Alert! Does your software compute the AMT version of Form 4952 correctly? Many require manual adjustments for the investment expense, addition of the PAB Interest. Be alert!

    Depletion must be recalculated to conform to AMT rules, using only income and deductions allowed. Adjust the AMT basis of the activity for the AMT depletion. Enter on Form 6251, Alternative Minimum Tax-Individuals, the difference between the depletion claimed and AMT allowable depletion.

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  • Net Operating Losses must be recalculated entirely for AMT, using only income and deductions allowed for AMT. The regular tax NOL is added back on one line while the permitted NOL deducted (ATNOLD) is entered on another line. For AMT, use whatever carry-back/carry-forward option utilized for regular tax. Because the makeup of the original NOL will differ for AMT, the application will be different as well. The Members Only section of the NATP website (www.natptax.com) contains an extraordinary worksheet for calculating the ATNOLD. Copies of these worksheets can be found at the end of this module. Interest from Private Activity Bonds are less elusive as they once were with the advent of the revised Form 1099 INT. Generally, these bonds were issued between August 7, 1986 and before 2009 and were not included in gross income for regular tax. The interest income from these bonds is included for AMT.

    Example: Iggy, our on-going AMT victim, had $ 295 in Private Activity Bond (affectionately known