Sunday, December 23, 2012

Alternative Minimum Tax Calculations

Alternative Minimum Tax

This is a tax at a flat rate lower than the highest regular rate that applies to an expanded tax income base.  It is compromised out of the AMTI,AMTI is adjusted to eliminate the benefits of many allowances allowed.  AMT was designed to prevent people from taking advantage of the tax system. Congress relies heavily on interest groups that are attached to particular exclusions Moral is important in the tax system because the system relies on voluntary compliance. If people feel that other people are not paying taxes,  then people won’t pay.Taxpayers calculate regular liability and tentative AMT, then pay the bigger one.

Alternative Minimum Tax- Taxable Income if Adjusted For:

1. Depreciation schedules for AMT purposes are different, 168 schedules do not apply. Use less generous depreciation methods. Preferences for investors with minerals

2. Tax exempt bonds. Private activity bonds. If the activity is not government but public enough, then the income is tax exempt. Airports, sewage facilities, certain housing Public/Private project. For AMT, this income is not exempt

3. Installment sales. For AMT, if the installment sale is to a customer, the taxpayer has to take full price under the contract into income for AMT purposes. The generous installment rules don't apply to stuff sold.

3. Misc. Itemized Deductions. Investment Expenses. Not deductible at all for AMT purposese.   

4. Disallows certain expenses that we could deduct immediately For example, 174 – research costs For AMT, these all must be amortized, capitalize

5. NOLs- under AMT, they are different.

6. Incentive Stock Options- When you exercise option, you pay income that you include in AMT.   Income = excess of the FMV over the option price

7. Medical Expenses. For AMT, it changes to 10% of AGI

8. Under §1202 – Sale of Small Business Stock. You can exclude half gain. For AMT, you can exclude 7%

9. Home mortgage interest. Acquisition debt, used to acquire or rebuild a residence. Don't get this deduction under Alternative Minimum Tax.

10. Personal and dependency exception. No standard deduction. No exemptions

Members of congress all want to do something about the AMT. the problem keeps growing and more and more people get pulled in. Widespread sentiment that it is wrong and change is needed. People like the idea of the AMT. Warren Buffet said that people with income over 1 million should pay some set fixed amount that a middle taxpayer pays. Big AMT with Big Exemption. Variety of options, lots of plans for a permanent fix. The next most likely thing is index the whole framework for inflation. Allow dependency exemptions for the purpose of AMT. Not fair to subject large families to AMT. Change the exemption for medical expenses or just repeal the Alternative Minimum Tax all together.


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