©2015, College for Financial Planning, all rights reserved.

Session 15Self-Employment Tax & the Alternative Minimum Tax

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMIncome Tax Planning

Session Details

Module 8

Chapter 3

LOs 8-5 Identify tax preference items or adjustments for the alternative minimum tax for individual taxpayers.

8-6 Analyze a situation to calculate the alternative minimum tax, or Medicare Contribution tax, for individual taxpayers.

8-7 Analyze a situation to calculate the self-employment tax.

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Self-Employment Tax• Self-employment income—from trade or business

as sole proprietorship, general partner or independent contractor, or rental of personalty

• Self-employment income reduced by 7.65% prior to computation of self-employment tax

• 15.3% up to wage base of $118,500 (2015)

• 2.9% Medicare with no ceiling

• One-half of the self-employment tax deductible as adjustment to income

• Additional Medicare tax of 0.9% on self-employment income over $200,000 for single taxpayers, or $250,000 (combined self-employment income) for joint returnso no adjustment to income for this portion of S/E

tax 15-3

Alternative Minimum Tax

• Enacted in 1969• Parallel tax system• Designed to ensure that

“high-income” taxpayers pay at least a minimum amount of taxes

• Good news—ATRA indexes exemption and phaseout numbers, and start of 28% bracket

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Items of Tax Preference & Adjustments of

the AMT for Noncorporate Taxpayers

Accelerated cost recovery deductions • on real property in excess of the straight-line

method

• on leased property in excess of the straight-line method

• for personalty placed in service after 1986 to the extent the deductions exceed the 150% declining-balance method

Alternative Minimum Tax

15-5

Items of Tax Preference & Adjustments of

the AMT for Noncorporate Taxpayers• Excess intangible drilling costs (IDC)• Percentage depletion in excess of

adjusted basis• The bargain element on the exercise of

an incentive stock option• Rapid amortization of a certified

pollution control facility in excess of the alternative depreciation method

Alternative Minimum Tax

15-6

Items of Tax Preference & Adjustments ofthe AMT for Noncorporate Taxpayers• Tax-exempt interest on qualified private-

activity municipal bonds (but not for bonds issued in 2009 and 2010)

• Passive farm losses are treated as a preference item

• A portion (generally 7%) of the gain excluded from sale of qualified small business stock

• Research and experimental costs, circulation expenses, and mining exploration and development costs

Alternative Minimum Tax

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Calculation for Noncorporate Taxpayers

Alternative Minimum Tax

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Calculation for Noncorporate Taxpayers

Alternative Minimum Tax

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AMT & Itemized Deductions

Many itemized deductions disallowed:• state and local income taxes• property taxes• Tier-II miscellaneous itemized deductionsItemized deductions treated

differently:• medical expenses

exceeding 10% of AGI• qualified housing interest

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Planning for AMT

• Disqualifying disposition of ISO stock• Don’t accelerate common deductions

o state estimated income taxo real estate tax

• Consider accelerating income into current year (or don’t defer income)o better taxed at AMT rates currently vs.

35% or 39.6% rate in non-AMT year

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Review Question 1

Sandy McVey has Schedule C net income of $40,000. Sandy also has a general partnership interest from which she received a flow-through of operating income of $5,858. She also has a flow-through from an S corporation of $15,000. What is the amount of self-employment tax that Sandy must pay for the current tax year?a. $6,480b. $7,016c. $8,599d. $9,311

15-12

Review Question 2

Jerry Nelson has Schedule C net income of $150,000. He also has a flow-through from an S corporation of $10,000. What is the amount of self-employment tax that he must pay for the current tax year?a. $18,712b. $19,044c. $19,334d. $24,480

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Review Question 3

Which one of the following is not a step in the calculation of the alternative minimum tax?a. Adjusted gross income is decreased by any

net operating losses and tax preference and adjustment items.

b. Adjusted gross income is increased by any net operating losses and tax preference items and increased or decreased by the adjustment items.

c. The net amount of alternative minimum taxable income is reduced by an appropriate exemption amount to arrive at the AMT base.

d. The AMT payable is reduced by any refundable credits.

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Review Question 4

Which one of the following is not an allowable itemized deduction against alternative minimum taxable income?a. medical expenses in excess of 10% of

adjusted gross incomeb. charitable contributionsc. qualified housing interestd. state and local income taxes

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Review Question 5

Which one of the following statements is true with regard to self-employment taxes?a. A taxpayer is allowed to deduct one-half

of his or her self-employment tax liability as an adjustment to income.

b. The wage base is not adjusted annually for cost of living increases.

c. Net earnings from self-employment must be calculated under the accrual method of accounting.

d. Self-employed taxpayers are subject to employer withholding.

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Review Question 6

All of the following are preference items for purposes of the individual alternative minimum tax excepta. interest on qualified private-activity

municipal bonds issued in 2008.b. the bargain element on exercise of an

incentive stock option.c. the excess of percentage depletion

over the property’s adjusted basis.d. investment interest in excess of net

investment income.e. excess intangible drilling costs.

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©2015, College for Financial Planning, all rights reserved.

Session 15End of Slides

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMIncome Tax Planning