Category Archives: Alternative Minimum Tax (AMT)

The Alternative Minimum Tax and You! – Part 2

In my last post (The Alternative Minimum Tax and You! – Part 1), I addressed the Alternative Minimum Tax (AMT) as it applies to individuals. A little known fact is that businesses, like individuals, can be subject to the AMT. Although the purpose is the same (i.e., assure that taxpayers with certain types of income and deduction structures pay at least a minimum amount of tax) the way in arriving at the AMT is slightly different. This post will address the AMT as it applies to tax-paying corporations (C Corporations). It does not apply to pass-through entities such as S Corporations or Partnerships, because the AMT is calculated at the individual level.

Not All Businesses Are Alike:

Unlike individuals, some corporations are exempt from the AMT. A corporation that qualifies as a “small corporation” is exempt from the AMT.
To be classified as a small corporation, the entity must:

  • Be in its first year of existence, (i.e., the current tax year is the year the entity began operations), or
  • The company was treated as a small corporation for all prior tax years beginning after 1997, and
  • The company’s gross receipts did not exceed an average of $7.5 million for the preceding 3 tax years
    ($5 million if the entity has been in existence for 3 years or less)

After determining that the corporation is subject to the AMT, the taxpayer will complete Form 4626 with the Form 1120. Form 4626 is organized similar to Form 6251 for individuals. It begins with the corporation’s taxable income, and then adds back (i.e., takes away) various  adjustments and preferences, such as:

  • Differences in depreciation
  • Differences in gains and losses
  • Depletion
  • Intangible drilling costs
  • Adjusted Current Earnings adjustments (ACE)

After the corporation accounts for these adjustments and preferences, it will arrive at it’s Alternative Minimum Taxable Income (AMTI).
Corporations are afforded an exemption if their income falls in a certain range, typically $40,000. The AMTI is then multiplied by 20% to arrive at the AMT.

Just like individuals, if the AMT exceeds the corporation’s regular tax, then they must pay the higher amount.

Because corporation’s do not receive the same preferential treatment of gains being taxed at a lower rate like individuals, the biggest factor in a corporation’s AMT calculation is depreciation. A corporation needs to be mindful when capitalizing depreciable property that a large difference between the tax and AMT depreciation methods could subject the corporation to a higher tax rate. Some assets, when capitalized using the 200% double-declining method of depreciation can only be depreciated using the 150% MACRS method for AMT purposes. This will cause the AMT depreciation expense to be lower than the tax depreciation, resulting in an addition to taxable income in arriving at AMTI.

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Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

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The Alternative Minimum Tax and You! – Part 1

The Alternative Minimum Tax (AMT) for individuals, enacted by Congress in 1969, is becoming less of an alternative for some taxpayers. The AMT was originally targeted at approximately 150 taxpayers that had high Adjusted Gross Income (AGI), but paid zero tax due to the types of income and structuring of deductions. In effect, under the current structure the AMT almost guarantees that once taxpayers reach a certain level of income, their effective tax rate will be at least 26% or higher.

The IRS Shaking AMT Money From a Taxpayer

The AMT is calculated by both businesses and individuals, but under different circumstances. In this post I will discuss the AMT as it applies to individuals (In the next post I will talk about how the AMT applies to businesses).

Individuals Subject to AMT

Individuals calculate their share of the AMT on Form 6251. That taxpayer begins with their AGI after itemized deductions, and then adds back the following:

  • Medical expenses
  • State and local income, real estate, and property taxes
  • Miscellaneous deductions

The taxpayer must also add back or reduce by the difference between their income tax and AMT amounts for the following:

  • Investment interest expense
  • Depletion
  • Basis in exercised incentive stock options
  • Depreciation expense

Taxpayers may also have to report AMT adjustments passed through on K-1’s from their other activities (partnerships, trusts, or S-corporations).

Once all of these adjustments have been considered, the taxpayer arrives at their Alternative Minimum Taxable Income (AMTI). Taxpayers are allowed an exemption amount, which has been indexed for inflation thanks to acts by Congress at the end of 2012. The exemption amounts for 2015 are $53,600 for Single filers ($53,900 in 2016), $83,400 ($83,800 in 2016) those taxpayers who are Married and File Jointly and $41,700 ($41,900 in 2016) for Married taxpayers who file separately ($23,800 for Estate and Trusts in case you were wondering [$23,900 in 2016]). The exemption amount is subtracted from AMTI, and the resulting amount is multiplied by either 26% or 28% depending on whether the amount is above or below $185,400 ($186,300 in 2016) for Married Filing Jointly or $92,700 ($93,150 in 2016) if Married and filing separately.
If income is above that amount, it is multiplied by 28%, and 26% if not.

Once the AMT is calculated, it is compared to the regular tax calculated on the taxpayer’s Form 1040. This is where the AMT earns the name “Alternative”. Once the taxpayer compares their AMT to their regular tax, the higher amount becomes their income tax.

Why?

Why does the AMT work? Because it attacks two types of tax situations and makes them less beneficial.

First, the AMT trues up the tax rate for taxpayers that have high incomes from sources that are not taxed at regular tax rates, such as long-term capital gains, qualified dividends, and tax-exempt interest. If a taxpayer has $10 million in AGI, but it consists completely of long-term capital gains and qualified dividends, their “regular” tax rate is only 20% (in 2015) as opposed to 39.6% (in 2015). The AMT would require this taxpayer to pay a higher rate due to their high income.

Second, the AMT penalizes taxpayers with certain higher-than-normal deductions. As I mentioned above, one deduction added back for AMT purposes is state and local taxes from Schedule A. For a taxpayer living in an income tax state (a state that has their own income tax, such as New York, New Jersey, or North Carolina but not Florida), a deduction is allowed on their Federal return for state tax payments made during the calendar year. The difference
between paying the state 4th quarter estimated tax payment on December 31 instead of January 15 of the following year is that the payment will be allowed as a deduction Schedule A in the year of payment. However, making that payment before year-end will not matter if the taxpayer will be subject to AMT, because those amounts will be added back.

A Monopoly 'Go to Jail' Card

Can It Be Avoided?

Unfortunately, the AMT is a “Do Not Pass Go, Do Not Collect $200” situation. One simple way to forego the calculation is for the
taxpayer’s income after itemized deductions to stay below the AMT exemption amounts. Also, if the majority of the taxpayer’s income is taxed at regular rates, the AMT will not be a problem because the regular tax will most likely exceed the AMT. If a taxpayer, because of their types of income, will be subject to the AMT, they should try to avoid certain deductions (if possible) in order to minimize their AMTI. Simple planning maneuvers such as paying state taxes on January 15 of the following year and staggering the exercise of incentive stock options can minimize the amount of AMT adjustments in a given year. Taxpayers with depreciable property can elect depreciation methods that do not create large tax to AMT differences.

In all, if you are (or think you are) subject to the AMT, contact us at (845) 344-1040 or visit our web site => SolidTaxSolutions.com (open year-round) and we will help you with the impact the AMT could have on your situation, and what measures can be taken in order to minimize the AMT’s impact.

For those of you who have businesses or are planning to enter the world of entrepreneurship, stay tuned for the next post.

In – The Alternative Minimum Tax and You – Part 2 – I will address the AMT as it pertains to businesses.

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Bruce – Your Host at The Tax Nook

Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).