Advanced Individual Income Tax

Accounting 811: Spring, 1998

Week 15: Alternative Minimum Tax

Directions in Tax practice

 Outline (c) 1997-98 Robert H. Daniels

Control Panel

The Alternative Minimum Tax

Policy background

1969 study: about 400 Tp’s over $200K AGI no tax liability

less than meets the eye: casualty, investment interest, foreign tax credit

various approaches in 1970’s.

the "minimum tax" didn’t work, so created the "Alt" min tax in 1982

greatly broadened and expended in 1986

goal: to shut loopholes, and also a short term revenue fix

Mechanics

Section 55: calculate alt tax on alt income:

pay the difference as AMT if total is higher

Individuals: AMTI * 26% 1st 175K, 28% excess

AMTI = redefined Y less 45K joint, 33.750 single

AMT exemption phaseout

Tricky trap: lose ¼ when AMTI over 150K/112.5K

Effect: Y up 100, exempt down 25. 1.25x 26% = effective 32.5% rate

Tax Credits limited

Only get the "alternate minimum foreign tax credit"
Other credits are deferred or lost

How income is redefined

Change in 1997 to keep 10%/20%/28% cap gains rate

tho cap gains can still hurt on the phaseout

Don’t allow certain deductions: "exclusion preferences"

  • State taxes (what about state tax refunds. Income?

  • Misc itemized deductions
  • Medical under 10% (not 7.5%) AGI
  • Home mortgage only primary residence
  • no home equity debt unless taken out before 1982
  • Investment interest limit: recompute investment Y
  • Oil Depletion
  • No exclusion for "private activity" muni bonds

Change the timing of other items

  • MADS depreciation: so gain on sale of property differs

  • Uniform Capitalization: depr as an inventory factor
  • Alternative operating loss carryover calculations
  • ISO’s: the bargain taxed on option exercise
  • various other amortization differences

Tax planning and AMT

Who pays it?

1996: 453,000 individual returns, $2.4 bb

High income (because of 33K exclusion, tend to be over $100K

pattern of deductions that are preferences - eg. State tax

ISO recipients w/o a *lot* of tax planning

example:

mfj wages 160K, CA tax 15K, Misc itemized 40K
regular taxbl Y roughly 100K for 23K tax
AMTI is 160 - 42.5 (phaseout) * 26% = 30K

Soon will be a much bigger problem: 2 reasons

the AMT exemptions and breakpoints aren’t indexed

A lot of credits reduce regular tax, but not below AMT

eg. 1998 child cr, care cr. Wages 160, CA 15, MID 15K
regular tax now 30.5K
suppose 2 ch, $400 ea and $960 care cr.

How to plan: the concept of "crossover"

(graph distributed in class)

Tax planning aims for crossover

if AMT > regular tax, deductions are wasted

Rocket science: the AMT credit

Sec. 53: a recursive definition

"the minimum tax credit for any taxable year is the excess (if any) of--

(1) the adjusted net minimum tax imposed for all prior taxable years beginning after 1986, over

(2) the amount allowable as a credit under subsection (a) for such prior taxable years."

"Adjusted net minimum tax" means AMT - (AMT due to preference items alone)

Policy: so Tp won’t be hurt as timing items reverse

So: "AMT created by timing items in year 1, to the extent exceeding regular tax, can reduce regular tax in year 2, but not below (the greater of) year 2’s AMT or year 2’s AMT due to preference items alone.

  

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