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TCP CPA Practice Questions Explained: AMTI (Alternative Minimum Taxable Income)

AMTI (Alternative Minimum Taxable Income)

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In this video, we walk through 5 TCP practice questions teaching about AMTI (Alternative Minimum Taxable Income). These questions are from TCP content area 1 on the AICPA CPA exam blueprints: Tax Compliance and Planning for Individuals and Personal Financial Planning.

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AMTI (Alternative Minimum Taxable Income)

The Alternative Minimum Tax (AMT) is a parallel tax system designed to ensure that individuals who benefit from certain tax benefits pay at least a minimum amount of tax. , as well as how to calculate TMT and AMT.

Determining AMTI

To compute the Alternative Minimum Taxable Income (AMTI), several adjustments and preference items need to be added back to the Adjusted Gross Income (AGI). Below, we detail the key items included in the determination and computation of AMTI.

1. State and Local Tax Deductions (SALT)

Under regular tax rules, taxpayers can deduct state and local taxes paid. However, for AMT purposes, these deductions are added back to the taxable income.

  • Regular Tax: Jane pays $15,000 in state income taxes and deducts this amount on her tax return.
  • AMT: This $15,000 deduction is added back to her income when calculating AMTI.

2. Standard Deduction

The standard deduction claimed on a regular tax return is not permitted for AMT calculations and must be added back.

  • Regular Tax: John claims a standard deduction of $12,400.
  • AMT: This $12,400 is added back to John’s income when calculating his AMTI.

3. Miscellaneous Itemized Deductions

Miscellaneous deductions not subject to the 2% floor (including unreimbursed employee expenses, tax preparation fees, and investment expenses) are disallowed under the AMT and must be added back.

  • Regular Tax: Emily deducts $3,000 for tax preparation fees.
  • AMT: This $3,000 is added back to Emily’s income when calculating her AMTI.

4. Medical Expenses

For AMT, medical expenses are deductible only to the extent that they exceed 10% of AGI, unlike the regular tax allowance of 7.5% for certain years.

  • Regular Tax: Bob has AGI of $100,000 and medical expenses of $10,000. He deducts $2,500 ($10,000 – 7.5% of AGI).
  • AMT: Bob can only deduct $1,000 ($10,000 – 10% of AGI), so $1,500 is added back for AMT purposes.

5. Interest on Home Equity Loans

Interest deductions on home equity loans not used to buy, build, or substantially improve the taxpayer’s home are disallowed under AMT.

  • Regular Tax: Susan deducts interest of $4,000 on a home equity loan used for personal expenses.
  • AMT: This $4,000 is added back to Susan’s income for AMT purposes.

6. Incentive Stock Options (ISOs)

The difference between the stock price at the time of exercise and the exercise price of ISOs must be added to AMTI if the stock is not sold in the same year.

  • Regular Tax: No income is reported when Mark exercises ISOs with a bargain element (market value minus exercise price) of $20,000.
  • AMT: Mark must add this $20,000 to his income for AMT purposes.

7. Depreciation Adjustments

Differences in depreciation methods (e.g., using different lives or methods under MACRS for regular tax purposes) can result in adjustments for AMT.

  • Regular Tax: A machine is depreciated over five years using double-declining balance.
  • AMT: For AMT, the machine must be depreciated over a longer life using the straight-line method. The difference in depreciation expense calculated is added back to AMTI.

Calculating Tentative Minimum Tax (TMT)

Calculating the Tentative Minimum Tax (TMT) and the Alternative Minimum Tax (AMT) involves a series of steps that adjust the taxpayer’s income to ensure a minimum level of tax is paid. Here’s a detailed explanation of how to calculate both TMT and AMT:

Step 1: Determine the Alternative Minimum Taxable Income (AMTI) To calculate the AMTI, start with the taxpayer’s Adjusted Gross Income (AGI), then make the necessary adjustments by adding back various preference items that are deductible under regular tax rules but disallowed for AMT (such as state and local taxes, home equity loan interest not used for home improvement, and standard deductions). Also add any tax preference items like the bargain element of incentive stock options (ISOs).

Example:

  • AGI: $150,000
  • Add: State and local taxes: $10,000
  • Add: Interest on home equity loan (not used for home improvement): $5,000
  • Add: Standard deduction: $12,400
  • Add: Bargain element from exercised ISOs: $20,000
  • AMTI = $150,000 + $10,000 + $5,000 + $12,400 + $20,000 = $197,400

Step 2: Apply Exemptions Subtract the AMT exemption amount from the AMTI, but note that this exemption phases out at higher income levels.

Example:

  • AMTI: $197,400
  • AMT Exemption for a single filer (for example purposes): $73,900
  • Adjusted AMTI after exemption = $197,400 – $73,900 = $123,500

Step 3: Calculate the Tentative Minimum Tax Apply the AMT tax rates to the adjusted AMTI. The AMT rates are typically 26% on the first portion of AMTI and 28% on amounts above a certain threshold.

Example:

  • If the first threshold is up to $197,900 at 26%, and the AMTI is $123,500:
  • TMT = $123,500 x 26% = $32,110

Calculating Alternative Minimum Tax (AMT)

Step 1: Compare TMT with Regular Tax The AMT is the difference between the TMT and the regular tax liability, but only if the TMT is greater.

Example:

  • Regular Tax Liability: $35,000
  • TMT: $32,110
  • Since the TMT is less than the Regular Tax, the AMT is $0.

Step 2: Calculate AMT If the TMT were higher than the Regular Tax, the AMT would be the difference.

Example where TMT is higher:

  • Regular Tax Liability: $28,000
  • TMT: $32,110
  • AMT = TMT – Regular Tax = $32,110 – $28,000 = $4,110

Thus, in this example, if the TMT exceeds the Regular Tax, the taxpayer would need to pay an additional $4,110 as AMT.

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