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Individual Alternative Minimum Tax:

Planning and Strategies• All audio is streamed through your computer speakers. • There will be several attendance verification questions

during the LIVE webinar that must be answered via the online quiz at the conclusion to qualify for CPE.

• Today’s webinar will begin at 2:00pm EDT• Please note: You will not hear any sound until the

webinar begins.

Individual Alternative Minimum

Tax:Planning and Strategies

John O. Everett, Ph.D., CPACherie J. Hennig, Ph.D., CPA

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Learning Objectives Upon completion of this course, you will be able to:•Define the terms regular tax, tentative minimum tax, and alternative minimum tax.•Recognize the most common AMT adjustment items and AMT preference items.•Describe the purpose and computation of the AMT credit, including the importance of differentiating timing and permanent adjustments & preferences.•Identify AMT planning opportunities for such business items as income acceleration and cost recovery deductions.•Identify AMT planning opportunities for such investment items as stock option exercises, private activity bond interest, and investment interest expense.•Identify AMT planning opportunities for such personal items as property taxes, unreimbursed expenses, and planning advice.

Topic 1

Origins and Format of the AMT & Case Study

Introduction

Origins of the AMT - 1969•1969 Tax Reform Act – This legislation included the

first attempt to impose any type of “minimum tax”•Rational – Over 100 taxpayers in 1969 had more

than $1 million of income, yet paid no income tax at all

•Characteristics – The minimum tax was an “add-on” minimum tax; in

effect, a taxpayer paid a toll charge for the privilege of using certain tax loopholes (termed “preferences”)

After totaling all preferences, an exemption of $10,000 was subtracted (later increased to $20,000), and any excess was subject to a 10% surcharge, yielding a minimum tax, which was added to the regular tax 5

Origins of the AMT - 1978

•Conversion to a Separate Tax Computation – In an effort to increase the reach of the AMT, the add-on minimum tax was converted to a separate, or “shadow’ tax, with its own sets of rules

•AMT Computation – Since most of the regular tax (RT) and AMT rules were the same, the AMT was computed by starting with regular taxable income, modifying this number with items treated differently for RT and AMT purposes (preferences and adjustments), allowing an exemption, and then computing a tentative minimum tax (TMT) with a two-bracket rate schedule

•AMT – Simply the excess of the TMT over the RT6

Origins of the AMT - 1986•Corporate AMT – Congress later added a

corporate AMT, that basically followed the format of the individual AMT computation

•AMT Credit – With the reduction in federal tax rates in 1986, the AMT and regular tax rates were much closer; as a result, Congress enacted an AMT credit to provide relief from possible double taxation of items (once for the AMT, and again later for the regular tax when certain timing items “reversed”)

•Corporate AMT Threshold – Congress later instituted a minimum gross receipts threshold ($7,500,000) for the corporate AMT, exempting small corporations

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AMT for Individuals – OverviewBasic Individual AMT Format – Can be summarized

as follows: Regular taxable income (RTI)+/- Adjustments+ Preference Items- Exemption= Alternative Minimum Taxable Income (AMTI)x AMT Rates (26%/28% & 15% or 20% for

LTCG/Div.)= Tentative Minimum Tax (TMT) (continued on next page) 8

AMT for Individuals – Overview(continued)

Tentative Minimum Tax (TMT)- AMT Tax Credits (FTC and Certain Personal

Credits)= Net Tentative Minimum Tax- Regular Tax Liability (RT)= Alternative Minimum Tax (AMT) *

* Added to the regular tax liability; in effect, the individual taxpayer pays the larger of the TMT or the RT 9

Individual Case Study – Howard & Martha Jones

•Case Study - Refer to Figure 1 (regular tax, or RT) and Figure 2 (AMT) of the Word files; facts are also in Appendix A; a filled-in Form 6251 is a separate file

•Facts of the Case:– Married taxpayers, filing a joint return, both age 65– Howard is a salaried employee– Martha owns and operates a sole proprietorship business– Taxpayers do not qualify for any credits– Footnotes to regular tax computation describe several

regular tax items that are treated differently for the AMT•Procedure – The following review of AMT basics

contains references to the Case Study in red italics; these illustrate the various components of the AMT

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Individual Case Study – Regular Tax Computation

•Figure 1 – Presents the regular tax computation of Howard and Martha Jones

• Items of Note – – AGI of $250,000 for the married couple is not high enough to

invoke the special phase-out rules for personal exemptions and itemized deductions (these begin at $309,900 in 2015)

– Stock options were exercised by Howard in the year, but under regular tax rules, no gain is recognized until the stock is sold

– Long-term capital gain is taxed at the alternative rate of 15%– Martha uses both pre-MACRS and MACRS assets in her

business– The deduction for investment interest expense is limited to

the net investment income of the taxpayers (the $15,000 interest income)

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Individual Case Study – Previewing the AMT

Computation •Figure 2 - Presents the AMT computation of Howard

& Martha Jones•Format – Note the broad outlines of the AMT format

displayed earlier•Two AMT Computations – Two AMT computations are

needed to determine any AMT credit for carryover purposes; hence the two columns (discussed later)

•Starting Point – Regular taxable income of the taxpayers, from Figure 1 (Note – On Form 6251, the starting point is taxable income before exemptions)

•Case Study – The AMT begins with the RTI of $136,250 12

Topic 2

AMT Adjustments and Preferences for Individual Taxpayers

Overview of Adjustments and Preferences

•Nature of Adjustments and Preferences – These represent items of income and deduction treated differently for regular tax and AMT purposes. These items generally (1) slow down or eliminate deductions allowed for regular tax purposes, or (2) speed up recognition of income for AMT purposes or recognize income that is exempt from regular taxable income

•Adjustments – May be positive or negative; most were added to the law in the Tax Reform Act of 1986

•Preferences – May only be positive; most represent carryover items from the old add-on minimum tax 14

Two “Pre-adjustment” Adjustments

• Disallowed Itemized Deductions – The AMT does not provide for a phase-out of itemized deductions; therefore, any amount disallowed for regular tax purposes would be allowed as an AMT deduction, and a negative adjustment would be made for AMT

• State Income Tax Refunds – If the taxpayer received a state income tax refund and itemized in the prior year, such amount is includable in regular taxable income in the current year; however, it is not includable in AMT income, since the tax deduction is not allowed for AMT purposes; thus, a negative adjustment is made for AMT

• Case Study – Neither “pre-adjustment“ applies 15

Cost Recovery Adjustments•MACRS Cost Recovery Deductions – Generally,

extended lives and/or slower recovery rates are required for AMT purposes for MACRS personalty & some realty

•Next Slide- Provides a summary comparing the regular tax MACRS deduction and the AMT deduction for both personalty and realty

•Adjustment – Difference between MACRS recovery for RT and AMT recovery – adjustment may be positive or negative, depending on the age of asset

• Case Study – The excess depreciation on the MACRS personalty of $5,000 is a positive AMT adjustment

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MACRS & AMT Cost Recovery

AssetRegularMACRS

AMT Cost Recovery

Personalty (3-, 5-, 7-, and 10-year classes)

200% declining-balance over the MACRS life

150% declining-balance over the MACRS life (class life, if placed in service prior to 1999)

Personalty (15- and 20-year classes)

150% declining-balance over the MACRS life

150% declining-balance over the MACRS life (class life, if placed in service prior to 1999)

Realty Straight-line recovery over MACRS life (27.5 or 39 years)

Straight-line recovery over MACRS life (ADS class life of 40 years, if placed in service prior to 1999)

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Other AMT Cost Recovery Adjustments

•Other AMT Cost Recovery Items – AMT provides for slower cost recovery for several other items

•Other “Slowdown” Recovery Rules – – Research & Experimentation Expense (10 years

AMT versus immediate expensing for RT)– Amortization of Pollution Control Facilities (Straight-

line ADS for AMT versus 5-year amortization for RT)– Mining Exploration & Development Costs (10 years

AMT versus immediate expensing for RT)– Circulation Expenditures (3 years AMT versus

immediate expensing for RT)18

Special Accounting Income (Acceleration ) Adjustments

•Accounting Methods and the AMT – In some cases, the AMT modifies the accounting for certain items of income

•Special Rules – Are provided for:– Passive Losses (Use AMT rules in making computation)– Pct. of Completion Method (Completed contract not

allowed in any case; allowed for RT for certain small contractors)

– Net Operating Loss (Use AMT rules in making computation)

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Adjusted Gain or Loss Adjustments

•Rationale – Different cost recovery methods for RT and TMT means different adjusted bases of assets (unless fully depreciated), and thus differing RT and TMT gains or losses

•Adjustment – For the difference between the RT gain or loss and AMT gain or loss (negative, since AMT cost recovery is slower than RT cost recovery)

•Note – Adjustment will always equal the sum of the positive AMT cost recovery adjustments in prior years for the same asset; if the asset is fully depreciated, there is no adjustment ($0 basis for both RT & AMT)

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Example – Adjusted Gain (Loss) AdjustmentFacts – Ron Howard purchased a new machine in March, 2013 (7-year

MACRS property) for $100,000. His cost recovery deductions for 2013, 2014, and 2015 for regular tax and AMT purposes were:

Regular Tax AMT AMT Adjustment 2013 $14,290 $10,714 $ 3,576 2014 24,490 19,130 5,360 2015 8,745 7,515 1,230 Totals $47,525 $37,359 $10,166

If Ron sells the machine in February, 2015 for $60,000, his gain will be:

Regular Tax AMT AMT Adjustment Amount Realized $60,000 $60,000 Adjusted Basis (52,475) (62,641) _ Gain (Loss) $ 7,525 ($ 2,641) ($10,166)

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Incentive Stock Options Exercise Adjustment

•AMT Recognition – Accelerated to date of exercise, and not date of sale (assuming no restrictions are placed on the stock once exercised)

•Adjustment – The difference between the fair market value of the stock on the date of exercise and the exercise price (i.e., the bargain element)

•Note – This is a “timing” difference, discussed later, which provides AMT credit for later RT gain at sale

•Later Sale of Stock – AMT basis is increased by AMT gain on exercise (prevents double taxation)

•Case Study – The $50,000 bargain element of the stock exercise is a positive AMT adjustment in 2015

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AMT Expense Adjustments• Rationale – Some deductions, such as investment

interest expense, are limited in deductibility to a particular type of income (investment income)

• Other AMT Adjustments – May increase the related income limitation for AMT purposes (i.e., private activity bond interest is “investment income” for the AMT)

• Negative Adjustment – Is made for additional investment interest expense allowable for AMT that was not allowed for regular tax

• Case Study – Since the private activity bond interest is taxable for AMT purposes (see below), this increases the AMT “investment income”, thus allowing the $3,000 of investment interest deductions disallowed for RT 23

Standard & Itemized Deduction Adjustments

• Standard Deduction – Is not allowed for AMT, and must be added back to taxable income if deducted

• Itemized Deductions – Certain itemized deductions allowed for regular tax are reduced or disallowed for AMT:– Medical Expenses – 10% floor for AMT (only if 65 or older)– Interest Expense – No deduction for home equity loan – State & Local Taxes – No deduction allowed– Miscellaneous Itemized Deductions – No deduction

• Case Study – Positive adjustments are for excess medical (10% AMT floor versus 7.5% RT floor), home equity loan interest, all state & local taxes, and all miscellaneous itemized

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Personal Exemption AdjustmentsPersonal Exemptions – Are not deductible for the AMT (a separate “AMT exemption” is allowed and is discussed below)Phase-out Effects – If the taxpayer’s AGI was large enough to be subject to the phase-out rules, the adjustment is for only the amount actually deducted for RT purposesCase Study – The two exemption deductions totaling $8,000 are a positive adjustment in computing AMT

AMT Preference Items•Preference Items – May only be positive (ignore any

negative adjustments, such as pre-87 cost recovery)•Most Common Preference Items –

– Pre-87 Excess Depreciation – On realty and leased personalty

– Private Activity Bond Interest – Post 8/7/86 issues only– Excess Percentage Depletion – Only for amounts in excess

of total cost recovery for the natural resource– Sale of Sec. 1202 Stock – 7% of the excludable gain

(normally 50% of the gain) on the sale of such stock

•Case Study – The $3,000 excess depreciation on the pre-1987 realty and the $7,000 private activity bond interest are positive AMT preference items

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Topic 3

AMT Exemption, Tax Computation, and

the AMT credit

AMT Exemption•AMT Exemption – 2015 amounts and phase-outs are:

Married Filing Jointly - $83,400 – [25% x (AMTI - $158,900)] Single - $53,600 – [25% x (AMTI - $119,200)]Married Filing Separately - $41,700 – [25% x (AMTI - $79,450)]

•Reduction – Causes AMT to be completely phased out at $492,500 AMTI (married – filing Jointly), $333,600 (single), and $246,250 (married – filing separately)

•Note – Adding income to AMTI within the phase-out range will actually increase AMTI 125% of the additional income—see planning note later

•Case Study – The $61,250 exemption in the “All” column of Figure 1 is computed as:

Ex = $83,400 – [($247,500 – $158,900) x .25]

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Computation of the Tentative Minimum Tax

(TMT)•Tentative Minimum Tax Rates – Two rate brackets •26% - On first $185,400 of non-LTCG, non-dividend

alternative minimum taxable income (AMTI)•28% - On remaining non-LTCG, non-dividend AMTI•15% or 20% - Rate on any long-term gain or dividend

income (same as regular tax) •Note – If 0% rate applied for regular tax liability, then

the same 0% rate is used for AMT (doubtful to occur)•Case Study – Note that all AMTI (after subtracting the

long-term capital gain) is less than $185,400, so none of the AMTI is taxed at the maximum 28% rate.

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AMT – Defined and Calculated•AMT – Technically, AMT is the excess of TMT over

RT Excess - This amount is then added to the RT on page 2 of 1040 as an addition to tax; as a result, the taxpayer pays the larger of TMT or AMT

• If RT > TMT – AMT does not apply in the year; any AMT credit carryover (discussed later) can be used

•Regular Tax Credits – Congress recently permanently extended the “AMT patch,” which allows most regular tax credits for individuals as credits against the AMT; if not for this change, millions more of individuals would be subject to the AMT

•Case Study: $46,225 TMT - $23,650 RT = $22,575 AMT 30

AMT Credit: An Overview• Rationale – Some items of income that are

accelerated for the AMT are taxed once for the TMT (assuming that the AMT applies), and are then later taxed again for the RT under RT rules; The same principle applies to deductions that are slowed down (more income for AMT now, more income later in RT)

• Double Taxation – The AMT credit is designed to prevent this problem; any AMT credit theoretically will offset RT in a future year when the item “turns around”

• Example – Stock option exercise and later sale • Case Study - The AMT basis for stock becomes

$60,000 ($10,000 + $50,000 AMT gain adjustment), but RT basis stays at $10,000 for a later sale (double tax) 31

Computing the AMT Credit •AMT Credit – For individual taxpayers, the credit

must be generated by “timing differences” (the term “deferral differences” is used in the Code)

•Computing the Credit – Redetermine the AMT with only “permanent differences” (the term “exclusion differences” is used in the Code)

•AMT Credit – The difference between total AMT (first column of Figure 2) and AMT attributable only to permanent differences (second column of Figure 2)

•Each Adjustment & Preference – Is labeled as a timing difference (“T”) or permanent difference (“P”)

•Case Study - $22,575 “All” - $4,700 “Perm” = $17,875

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Utilizing the AMT Credit

•Carryforward Period – The AMT credit can be carried forward indefinitely

•Utilization – The AMT credit can only be used in a future year in which the RT liability exceeds the TMT liability; the maximum credit allowed is the amount that reduces the RT down to the TMT.

•Net Effect - The AMT credit cannot offset AMT; any amount of AMT credit not utilized is carried over indefinitely to future years

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Topic 4

Individual AMT Planning: Business

Items

Individual AMT Planning: General Considerations

•AMT is a Separate Tax System – Care should be taken not to make the same adjustment twice (e.g., a depreciation adjustment related to passive activity property)

•Reducing the AMT may increase the RT – Some strategies will actually increase RT (e.g., slowing cost recovery), and this factor must be considered

•Understanding the AMT Credit – The AMT credit may reduce some strategies to simple time-value of money issues; it is important to understand exactly what creates an AMT credit 35

Income Acceleration Issues•Maximum RT and TMT Rate Differentials – May

suggest accelerating income (or decelerating expenses) if taxpayer is already in an AMT position for the year

•Rationale – Income taxed at only 28% TMT maximum, rather than 39.6% RT maximum

•Problem – With AMT credit, such a strategy may merely accelerate payment of tax (see next two slides, where $200,000 income is accelerated); taxes are saved only if permanent differences create the AMT

•Determining Break-Even Additional Income – TMT and RT equality computed by dividing the AMT by marginal RT and AMT rates (see slide following computations)

•Case Study – Strategy not applicable (only 25% marginal RT rate in the Case)

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  AMT Caused by Permanent Adjustments

No Acceleration of Income

Acceleration of Income

Year 1 Year 2 Year 1 Year 2

         

Regular Taxable Income 1,000,000 1,000,000 1,200,000 800,000

Timing (Deferral) Adjustments 0 0 0 0

 Permanent (Exclusion) Adjustments 600,000 0 600,000 0

Total AMTI 1,600,000 1,000,000 1,800,000 800,000

         

Tentative Minimum Tax Liability 444,500 276,500 500,500 220,500

Regular Tax Liability (369,161) (369,161) (448,361) (289,961)

Alternative Minimum Tax Liability 75,339 0 52,139 0

         

Regular Tax Liability 369,161 369,161 448,361 289,961

Alternative Minimum Tax Liability 75,339 0 52,139 0

Alternative Minimum Tax Credit 0 0 0 0

Total Tax Liability 444,500 369,161 500,500 289,961

Totals for Years 1 and 2 813,661 790,461

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  AMT Caused by Timing Adjustments

No Acceleration of Income

Acceleration of Income

Year 1 Year 2 Year 1 Year 2

         

Regular Taxable Income 1,000,000 1,000,000 1,200,000 800,000

Timing (Deferral) Adjustments 600,000 0 600,000 0

 Permanent (Exclusion) Adjustments 0 0 0 0

Total AMTI 1,600,000 1,000,000 1,800,000 800,000

         

Tentative Minimum Tax Liability 444,500 276,500 500,500 220,500

Regular Tax Liability (369,161) (369,161) (448,361) (289,961)

Alternative Minimum Tax Liability 75,339 0 52,139 0

         

Regular Tax Liability 369,161 369,161 448,361 289,961

Alternative Minimum Tax Liability 75,339 0 52,139 0

Alternative Minimum Tax Credit 0 (75,339) 0 (52,139)

Total Tax Liability 444,500 293,822 500,500 237,822

Totals for Years 1 and 2 738,322 738,322

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Computation of "Breakeven Additional Income" (BEAI) to Equate the Regular Tax Liability (RT) and the Tentative

Minimum Tax (TMT) of Previous Example: BEAI = (TMT - RT) / (Marginal RT Rate - Marginal AMT Rate)BEAI = (444,500 - 369,161) / (.396 - .28)BEAI = 649,474 Regular Tax Liability on ($1,000,000 + $649,474) = $626,353Tentative Minimum Tax Liability on ($1,000,000 + $600,000 + $649,474) = $626,353

Cost Recovery Issues

•Minimizing AMT Effects With Cost Recovery – Three possible issues to consider:– Elect Straight-line or ADS Recovery – Such

elections will decelerate the RT recovery and reduce the AMT adjustment

– Lease Property, Rather Than Own It – Lease (rent) expense is always deductible for both RT and TMT; however, lessors know this and probably build this factor into price

– Positive Benefits of Negative Adjustments – Sales of properties before fully depreciated create negative AMT adjustments; selective use may reduce AMT 40

Credits vs. Deductions•Taxpayer Option – In several cases, a taxpayer

may have the option of foregoing a credit and taking a deduction instead; an example would be Research & Experimentation Expenses

•Value of Credit – The credit may be of little value if the taxpayer is in an AMT situation, and expects to remain in an AMT situation for the foreseeable future

•Deduction – Is allowed for both RT and TMT•Another R&E Option – If credit is taken,

taxpayer has option to reduce credit and not reduce basis of property

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Net Operating Losses

•Sec. 172 – Requires consistency between RT and TMT as to the election to forego the 2-year NOL carryback

•Carryback to a Non-AMT Year – AMT NOL carryback must offset AMTI in carryback year, even if no AMT is due; this may argue for foregoing the carryback election

• If No AMT in Prior Years – Foregoing the carryback would also preserve AMT NOL benefits for future years

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Topic 5

Individual AMT Planning:

Investment Items

Private Activity Bond InterestPrivate Activity Bond Interest – Is subject to the

AMT, but not the RT, and is a PERMANENT preference item: no AMT credit is generated

Net Result – AMT reduces effective yield on this interest

Example – Assume that a private activity bond’s interest income is taxed at a 28% rate in the AMT; thus, if the bond was a 6% bond, the yield is initially reduced to 4.32% (6% x .72); also, if the taxpayer is in the phase-out range for the AMT exemption, the effective tax rate on this “additional income” is actually 35% (28% x 1.25), reducing the yield to 3.9% (6% x .65) 44

Capital Gain Considerations

•Equal TMT and RT Rates – Does not mean that the AMT is neutral for capital gains, because:– Capital Gains and State Income Taxes – Large

capital gains will increase state income taxes, which are NOT deductible for the AMT

– Sale of a Personal Residence – Problem is exacerbated if state law does not allow the Sec. 121 exclusion

•Sec. 1202 Stock – The Code requires that 7% of the 50% exclusion available on gain on the sale of Sec. 1202 stock be reported as a tax preference item for AMT purposes (3.5% of total gain) 45

Incentive Stock Option Exercise

• ISO Adjustment – Adds to a possible AMT credit, since the exercise gain is a timing difference; if this is expected to be a one-time occurrence, the AMT paid may be largely recouped in the following year

• If AMT is Expected in Years After Exercise – Taxpayer may want to consider spreading exercises over several years (it is possible to solve for “breakeven” number of shares that equate RT and TMT each year)

•Selling Stock in Same Year as Exercise – Removes the adjustment item from the AMT computation (but does increase the RT)

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Capital Gains Election for Investment Interest

•Definition of “Investment Income” – For purposes of the investment interest limitations, investment income does not include long-term capital gains or dividends taxed at the 15% or 20% rates

•Special Sec. 163(d)(4)(B) Election – Such income may be treated as investment income if the taxpayer gives up the lower tax rates applicable to such income

•Advisability of the Election – The election may make sense in some cases (increased deduction for both RT and TMT, ordinary rates applicable to gains and dividends narrows RT-TMT difference)

•Caveat – Consider time value of money & AMT credit

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Foreign Tax Credit

•Foreign Tax Credit (FTC) – The only RT credit allowed fully against the TMT (Note – Prior to 2004, the offset was limited to 90% of the TMT)

•Deduction Option – A taxpayer may always elect to deduct foreign taxes paid, rather than take a credit

•When the Deduction Option Makes Sense – Some taxpayers are more or less permanently in AMT situations, and regular tax FTCs would be virtually worthless; in this case, a deduction may be preferred, since it would be allowed against both RT income and TMT income. 48

Topic 6

Individual AMT Planning: Personal

Items

Postponing State & Local Tax Deductions

•State and Local Tax Deductions – Offer no benefit if the AMT applies; if in an AMT position near the end of the year, consider postponing payment until the next year, when hopefully they can be used against regular taxable income)

•Miscellaneous Itemized Deductions – The same logic applies to postponing these deductions, since any net deduction (after the 2% of AGI floor) is not allowed for AMT purposes

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Unreimbursed Employee Expenses

•Regular Tax Reporting – Unreimbursed employee expenses are miscellaneous itemized deductions, subject to the 2% floor

•Accountable Reimbursement Plans – If offered by the employer, any unreimbursed expenses (as well as the reimbursement income) are omitted from the return; this is the same result as being fully deductible

•Employee With Part-time Business – Some business expenses (e.g., dues) may relate to both pursuits; amounts allocable to the business would be deductible on Schedule C and not lost as itemized deductions 51

Investment Planning Advice• Regular Tax – Investment planning advice is a

miscellaneous itemized deduction, subject to 2% AGI floor

• AMT – No miscellaneous itemized deductions are allowed for the AMT; thus, any amount deductible for regular tax (after applying the 2% floor) will not be deductible for AMT

• Possible Solution – If investments are made based on the planning advice, add the cost of the advice to the basis of the stock or securities purchased. This increases the basis of the stock or securities, so that the expenses are eventually recovered when the stock or securities are sold.

• Possible Problem – Treasury is not too keen on this strategy; opposed in Chief Counsel Memorandum

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Evaluating Home Equity Loans

•Home Equity Loan Interest – Interest on such loans, up to $100,000, is deductible for RT purposes, but is not deductible for TMT

•Resulting Interest Adjustment – Is classified as a permanent difference, and thus does not generate any AMT credit

•Constant AMT Position – Would negate the tax value of a home-equity loan

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Electing Out of The Installment Method

•Electing Out - Offers little AMT benefit, as only capital gain qualifies for the installment method, and this gain is taxed at a maximum 15% or 20% rate for both regular tax and AMT purposes (negating any possible benefits of accelerating income)

•Depreciation Recapture on an Installment Sale – Any depreciation recapture must be reported in the year of sale; such recapture does not qualify for the installment method (one possible benefit – since such amount is taxed as ordinary income, thus resulting increased RT may minimize AMT)

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Questions?

As Time Permits

Or contact:

NSA EA Review Blog

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Appendix A

Facts of the Case Study

Salaries 162,000Long-term Capital Gain (stock investment) 20,000 Interest Income (taxable bond) 15,000Private Activity Bond Interest (a) 0Incentive Stock Option (ISO) Exercise (b) 0Sole Proprietorship Income (c) 58,000 255,000Keogh and ½ Self Employment Tax Deductions ( 5,000) Adjusted Gross Income 250,000Personal Exemptions (2 @ 4,00 0) (d) ( 8,000)Itemized Deductions (d): Medical ($25,000 less 7.5% of AGI – both taxpayers age 65) 6,250 Interest – Qual. Acquisition Indebtedness 7,900 Interest – Home Equity Indebtedness (e) 3,000 Interest – Investment Activities (f) 15,000 Taxes – State and Local 31,000 Contributions – Cash and FMV of Property 41,600 Casualty and Theft ($0 less 10% of AGI) 0 Miscellaneous ($6,000 less 2% of AGI) 1,000 Net Itemized Deductions (105,750)Regular Taxable Income – 2015 136,250 =======

Regular Tax Liability (Joint tax return): Regular tax on ($136,250 - $20,000 L/T capital gain) 20,650

Tax on L/T capital gain ($20,000 x .15) 3,000Regular tax liability (RT) 23,650

Add: Alternative Minimum Tax (see Page 2) 22,575 Self Employment Tax on $58,000 Proprietorship Income 7,124Less: Credits ( 0) Prepayments of Tax (Withholdings and Estimated Tax) ( 50,000)Net Tax Liability - 2015 3,349 =======

(a) Total received on 2010 private activity bond issue, $7,000(b) On 2/1/2015, Howard exercised a 2011 incentive stock option, purchasing 1,000 shares of his company’s stock at $10 per share (FMV of $60 per share). No restrictions were placed on the stock.(c) Includes the following cost recovery deductions for 2015: $20,000 MACRS on post 86 property (AMT ADS is $15,000) $15,000 ACRS on pre 87 realty (straight-line is $12,000)(d)There is no phase-out of the exemption or itemized deductions, since AGI is less than $309,900(e) Loan on personal automobiles secured by personal residence(f) $18,000 investment interest paid, limit to $15,000 net investment income (interest income above)

Items (T = timing, P = permanent) All PermanentTaxable Income per Return (from page 1) 136,250 136,250 Less Disallowed Itemized Deductions (below phase-out in 2015) ( 0) ( 0)Taxable Income as Adjusted 136,250 136,250AMT Adjustments (may be positive or negative): [T] Post 86 Depreciation (MACRS ADS) 5,000 [T] Res. & Exp. Expenses (Ded. 10 yr. amort.) 0 [T] Amort. of Pollution Control (5-yr - ADS recovery) 0 - - [T] Mining Exploration & Develop (Exp - 10-yr amort.) 0 - - [T] Circulation Expenditures (Exp - 3-yr amort.) 0 - - [T] Passive Losses (Recompute with AMT rules) 0 [T] Pct. of Completion Method (PCM Comp. Cont.) 0 [T] Net Operating Loss Deduction (RT NOL AMT NOL) 0 [T] Adjusted Gain (Loss) (Regular Tax - AMT Amount) 0 [T] Incentive Stock Option Exercise (FMV - Ex Price) 50,000 - - [T] Adj. Expenses for AMT (Add'l Invest. Int. Expense) ( 3,000) - [P] Disallowed Standard Deduction (if taken) 0 0 Disallowed Itemized Deductions: [P] Medical (7.5% RT ded. 10% AMT ded.) 6,250 6,250 [P] Interest Expense (Home Equity Disallowed) 3,000 3,000 [P] State and Local Taxes (none allowed) 31,000 31,000 [P] Miscellaneous Itemized (none allowed) 1,000 1,000 [P] Personal Exemption Deductions (none allowed) 8,000 8,000Taxable Income as Adjusted 237,500 185,500

Tentative Minimum Tax (TMT): All [(166,250** x .26) + (0 x .28) + (20,000 x .15)] 46,225Perm [($97,500** x .26) + (0 x .28) + (20,000 x .15)] 28,350Less Regular Income Tax Liability (see Page 1) ( 23,650) ( 23,650)Alternative Minimum Tax Liability [AMT] (to page 1) 22,575 4,700

AMT Credit (“All” – “Permanent Only”) - - 17,875*** 22,575 23,575 ======= ====== * Exemption amounts for 2015 are: Joint Ret. (M) $83,400, less 25% x (AMTI $158,900) [$492,500 phase-out is complete] Single (or HH) $53,600, less 25% x (AMTI $119,200) [$333,600 phase-out is complete] MS $41,700, less 25% x (AMTI $79,450) [$246,250 phase-out is complete]

** After subtracting the $20,000 L/T capital gain, AMTI is less than $185,400, the beginning of the 28% bracket)

** When considering only permanent adjustments and preferences ("exclusions"), those items that will not reverse in the future, there would be $4,700 AMT due in 2015. Thus, $17,875 ($22,575 $4,700) of AMT payable in 2015 is due solely to timing ("deferral") items; this $17,875 may be carried over to 2016 as an AMT credit, reducing 2016 regular tax (but not below the 2016 computed TMT). Thus, if the 2016 regular tax (RT) is $32,000 and the TMT is $27,000, only $5,000 of the 2015 AMT credit of $17,875 may be used to reduce the 2016 RT to $27,000. The remaining AMT credit of $12,875 would then be carried forward to 2017.

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