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A few closely related topics & pages From Bob Parrish CPA PC:
Client
Letter - What this idea is about From Bob Parrish CPA PC
| Poor old Sue Started a set of books anew without reading these lines few and now Sue is in a Stew |
Description / Scope / Skill Level Pre-requisite Knowledge
Type in this area an introduction to this topic. State what it is about, state whether this is an introduction, beginner level, imd or advanced. State whether any special knowledge is required - for example, law, mathematical, management, knowledge of a specific industry, etc.
Topic - Objective - Purpose Why This Is Important: Usefulness General Benefits 7 Objectives:
Text
Time Estimate: Who
Materials - Equipment-Tools - Library Resources: Who
Who This Applies to:
WhoWhen to Perform:
WhenSpecial Circumstances: Warnings & Special Circumstances
TOP
Engagement Status Letter From Bob Parrish
CPA PCYou have not engaged Bob Parrish CPA PC, Bob Parrish CPA, pro1040, Consulting on line, any related parties, or the ISP to perform any services for you or offer you advice. This entire site is for educational or informational purposes only. You are not to use the forms, concepts, strategies, or knowledge without assistance from a professional. The author, the corporation, the ISP, Bob Parrish CPA, Bob Parrish CPA, P.C. or other parties related to those or this site do not guarantee or warrantee in any manner the suitability, usefulness, accuracy, timeliness, or results of any portions of this site, nor the links contained in this site which link to other areas. At times, information is taken from other sources and is believed to be accurate, but no verification or confirmation is performed. Furthermore, if any federal or state law invalidates a portion of this disclaimer, the other portions still apply. In addition, any allegations or actions are restricted to arbitration only and must be arbitrated by the Better Business Bureau in Sarasota Florida. Reading of these pages constitutes complete acceptance and agreement with all disclaimer provisions on all pages of this site. ....... Thursday, February 22, 2007 11:45 AM
Learning
Objectives (What You Asked) From Bob Parrish CPA PCObjective one
What You Will Need From
Bob Parrish CPA PC
Plain English Analysis What it does, Why it works - The Answer, Alternatives From
Bob Parrish CPA PCWhat it does:
Why it works:
Alternatives
Cost v. Benefit Analysis
Other
Reserved
Alternative Minimum Tax
The alternative minimum tax (or AMT) is an extra tax some people have to pay on top of the regular income tax. The original idea behind this tax was to prevent people with very high incomes from using special tax benefits to pay little or no tax. But for various reasons the AMT reaches more people each year, including some people who don't have very high income and some people who don't have lots of special tax benefits. Congress is studying ways to correct this problem, but until it does, almost anyone is a potential target for this tax.
The name comes from the way the tax works. The AMT provides an alternative set of rules for calculating your income tax. In theory these rules determine minimum amount of tax that someone with your income should be required to pay. If you're already paying at least that much because of the "regular" income tax, you don't have to pay AMT. But if your regular tax falls below this minimum, you have to make up the difference by paying alternative minimum tax.
If you are not liable for alternative minimum tax this year, but you paid alternative minimum tax in one or more previous years, you may be eligible to take a special minimum tax credit against your regular tax this year. If eligible, you should report this credit on line 47 of Form 1040 and check Box C. Also, use form 8801, Credit for Prior Year Minimum Tax - Individuals, Estates and Trusts.
| Q: | How do I know if I have to worry about the AMT? |
| A: | Unfortunately,
there's no good answer to this common question — which is one of the big problems
with the AMT. You can have AMT liability because of one big item on your tax return, or
because of a combination of many small items. Some things that can contribute to AMT
liability are very mundane items that appear on many tax returns, such as a deduction for
state income tax or interest on a second mortgage, or even your personal and dependency
exemptions.
|
There are two essential pieces to the AMT. First, you need to understand how your AMT liability is calculated for a year when you pay AMT. And second, you need to know how the AMT credit can reduce our taxes in years after the year you paid alternative minimum tax.
CHECKLIST OF AMT ADJUSTMENTS AND TAX PREFERENCE ITEMS
AMT adjustments applicable to all taxpayers include:
___ MACRS depreciation of property placed in service after 1986
___ Mining exploration and development costs
___ Long term contracts
___ Net operating losses (i.e., ATNOLs)
___ Certified pollution control facilities
___ Installment sales of certain property
___ Passive (business and farming) activity losses
AMT adjustments applicable to individuals:
___ Limits on deductions (i.e., standard deduction, personal
exemptions and certain itemized deductions, e.g., medical
expenses)
___ Circulation and research and experimental expenditures
___ Incentive stock options
Tax Preference Items:
___ Tax exempt interest from certain private activity bonds
___ Accelerated depreciation of certain property placed in service
before 1987
___ Exclusion for gain on the sale of certain small business stock
The best way to understand alternative minimum tax liability is to see how it's calculated. Here's the big picture.
First, you figure the amount of tax you would owe under a different set of rules. What's different about these rules? Broadly speaking, three things:
The result of this calculation is the amount of income tax you would owe under this "alternative" system of tax.
Compare with the Regular Tax
Then you compare this tax with your regular tax. If the regular tax is higher, you
don't owe any AMT. But if the regular tax is lower, the difference between the two taxes
is the amount of AMT you have to pay.
Example 1: Your regular income tax is $47,000. When you calculate your tax using the AMT rules, you come up with $39,000. That's lower than the regular tax, so you don't pay any AMT.
Example 2: Your regular income tax is $47,000. When you calculate your tax using the AMT rules, you come up with $58,000. You have to pay $11,000 of AMT on top of the $47,000 of regular income tax.
If you're paying attention, you've probably noticed that the total amount of tax you pay in Example 2 is equal to the tax calculated under the AMT: $58,000. But it's important to note that you actually pay $47,000 of regular tax plus $11,000 of AMT, as we'll see below.
Reporting: To calculate and report your AMT liability you need to fill out form 6251.
Estimated tax: You're required to take your AMT liability into account in determining how much estimated tax you pay.
Here's good news: a portion of your AMT liability — perhaps all — may reduce the tax you pay on future tax returns. Working with this AMT credit is a two-step process. First you find out how much credit is available, then you find out how much of the credit you can use.
Find the Available Credit
The first part of your task is to find out how much of the AMT liability from a prior
year is eligible for the credit. This involves calculating the alternative minimum tax
under a different set of rules — sort of an alternative AMT. What you're
doing here is finding out how much of your alternative minimum tax liability came from timing
items: items that allow you to delay reporting income, as opposed to items that
actually reduce the amount of income or tax you report. If you're lucky, your entire AMT
will be available as a credit in future years. But some people find that only a small
portion, or none at all, is available for use as a credit.
Determine How Much AMT Credit You Can Use
If you have some AMT credit available from a prior year, you have to determine how much of
the credit you can use in the current year. You can only use the AMT credit in a year when
you're not paying alternative minimum tax.
The amount of credit you can use is based on the difference between
your regular tax and the tax calculated under the AMT rules.
Example: Suppose you have $8,000 of AMT credit available from 1997. In 1998 your regular tax is $37,000. Your tax calculated under the AMT rules is $32,000. You don't have to pay AMT because your regular tax is higher than the tax calculated under the AMT rules. Better still, you're allowed to claim $5,000 of AMT credit, reducing your regular tax to $32,000.
In this example, you would still have $3,000 of AMT credit you haven't used. That
amount will be available in 1999. In tax lingo, it's carried forward.
Of course, you can't claim more than the amount of the available
credit. In the example, if the AMT credit available from 1997 was $2,700, then you would
use the full amount of the credit in 1998. You would reduce your regular tax to $34,300
— not all the way to $32,000.
This page provides a list of items that can cause (or contribute to) liability under the alternative minimum tax. The list isn't complete — there are other items that can contribute to AMT liability. Based on our experience, the items described below are likely to affect more people than other items.
Believe it or not, exemptions contribute to AMT liability. The exemptions you claim for yourself, your spouse and your dependents are not allowed when calculating alternative minimum tax. We've never seen a tax return where someone had to pay AMT solely because of their exemptions, but the more exemptions you claim, the more likely it is that you'll have AMT liability when all is said and done.
Some 70% of American taxpayers claim the standard deduction (rather than itemizing). The standard deduction isn't allowed under the AMT. Usually this isn't a problem because the AMT generally hits people with higher incomes, and these people are more likely to claim itemized deductions. Yet it's worth noting that a deduction that's so widely used can contribute to AMT liability.
If you itemize, there's a good chance you claim a deduction for state and local tax, including property tax and state income tax. These deductions are not allowed under the AMT. If you live in a place where state and local taxes are high, you're more likely to be subject to the alternative minimum tax.
The AMT allows a deduction for interest on mortgage borrowings used to buy, build or improve your home. If you borrowed against your home for some other purpose, the interest deduction isn't allowed under the alternative minimum tax.
The AMT allows a medical expense deduction, but it's more limited than the deduction under the regular income tax. If you claim an itemized deduction for medical expenses, part or all of it will be disallowed when you calculate your alternative minimum tax.
Certain itemized deductions are available if your total in this general category is more than 2% of your adjusted gross income. Among the items here are unreimbursed employee expenses, tax preparation fees, and many investment expenses. You can't deduct these items under the AMT, though. If you claim a large number in this area, you could end up paying alternative minimum tax.
Many of the credits that are allowed when you calculate your regular income tax aren't allowed when you calculate your AMT. The more credits you claim, the more likely it is that you'll end up paying alternative minimum tax. Fortunately, Congress has recently extended relief from the "personal credits" through the year 2000.
Generally you don't report anything on your regular income tax at the time you exercise an incentive stock option. But you have to report income for purposes of the AMT. Exercising a large incentive stock option is almost certain to cause you to pay alternative minimum tax.
Long-Term Capital GainsLong-term capital gains receive the same preferential rate under the AMT as they do under the regular income tax. In theory, they shouldn't cause you to pay alternative minimum tax. In practice, it's possible to be stuck with AMT liability because of a large capital gain. The reasons are a little complicated, but mainly have to do with the fact that a large capital gain reduces or eliminates the AMT exemption amount, which is designed to protect low-income taxpayers from having to pay alternative minimum tax. Tax-Exempt InterestInterest that's exempt from the regular income tax may or may not be exempt from the
AMT. It depends on complicated rules that are fully understood only by bond lawyers. Bonds
that aren't exempt from AMT pay a slightly higher rate of interest to compensate for the
fact that they aren't fully tax-exempt. If you invest in bonds that aren't exempt under
the alternative minimum tax, you're a candidate for AMT liability. Tax SheltersThe Tax Reform Act of 1986 severely curtailed the ability to reduce income tax through tax shelters. Yet there are still some legitimate ways of reducing tax liability through investments in certain types of partnership or limited liability company arrangements involving such activities as oil and gas drilling. The AMT provides reduced tax benefits for these activities. You should always explore the alternative minimum tax consequences (among other things) before investing in a tax shelter.
AMT and Long-Term Capital Gain |
|
Congress didn't intend for the alternative minimum tax to apply merely because you have a long-term capital gain. When Congress reduced the capital gain rates in 1997, it provided that the lower rates would apply under the AMT, too. But the way it works out, you may still pay AMT because of a large long-term capital gain. The AMT ExemptionA major reason for paying AMT in the year of a large capital gain is the AMT exemption. This is a special deduction that's designed to prevent the alternative minimum tax from applying at lower income levels. The problem is that the AMT exemption is phased out when your income goes above a certain level. Capital gain is income, so it can reduce or eliminate your AMT exemption. For example, if you're single and your income under the AMT rules is $112,500 or less, you're allowed an AMT exemption of $33,750. Normally that's enough to prevent you from paying AMT unless you're able to claim special tax benefits that reduce your regular tax. But suppose your income is around that level before you add a $150,000 capital gain (sale of a real estate investment, or stock, or perhaps sale of a business you built up). Your tax on the capital gain is 20% under both the regular tax and the AMT: $30,000. But under the AMT, the added income wiped out your AMT exemption. How big is the effect? At this level, your AMT rate is 26%. The $33,750 exemption reduces the tax under the AMT calculation by $8,775. In these facts, the regular tax on this gain is $30,000 and the AMT is $38,775, which comes partly from tax on the capital gain and partly from phasing out the AMT exemption. That doesn't necessarily mean you pay $8,775 of AMT in this situation. Most people have at least a little bit of a cushion between the amount of regular tax they pay and the level where they would have to start paying alternative minimum tax. (The size of your cushion depends on various items. Furthermore, the capital gain can cause some tax benefits to phase out under the regular tax, too. But there's a good chance that someone in this situation would pay several thousand dollars of AMT. More Bad NewsThere's more bad news. People who get caught by the AMT because of a large long-term capital gain usually don't qualify for the AMT credit in later years. The AMT is being caused by items that aren't considered timing items. Possibly you have some timing items in addition to the large capital gain, and in that case at least part of your AMT would be available as a credit in later years. Typically this added tax is just a dead loss. What to DoIn many cases there isn't a heck of a lot you can do about this added tax. But if you're aware of the issue, you may be able to take measures to reduce the impact. Timing Your Capital Gains Timing Other ItemsAnother way to plan for the AMT is to see if you can change the timing of other items that are affected by the tax. For example, if you make estimated payments of state income tax, you may try to schedule your payments so they don't fall in the same year as your large capital gain. Of course you have to take any potential penalties into account with the tax savings if you take this approach.
It's important to realize that you can end up owning assets that have an AMT basis that's different from the basis you use for regular tax purposes. If you miss this detail you may end up throwing tax dollars away.
Dual Basis Assets |
|
What Causes Dual BasisOrdinarily, your basis for an asset is simply the amount you paid for it plus any costs
of acquisition (such as brokerage fees). But various events can cause an adjustment in the
basis of an asset. For example, if you claim a deduction for depreciation of an asset, you
reduce your basis in that asset by the amount of the deduction.
Incentive Stock OptionsOne very important circumstance where you can have dual basis in an asset is when you exercise an incentive stock option. You have to report an adjustment for AMT purposes when you exercise an incentive stock option. As a result you may end up paying alternative minimum tax. But another result is that your AMT basis in the stock is increased by the amount of the adjustment.
Sale of a Dual Basis AssetWhen you sell a dual basis asset, you report the difference between the regular tax basis and the AMT basis as an adjustment. If your AMT basis is higher (as is usually the case), you report this item as a negative adjustment. The result may be to reduce the amount of AMT you pay or increase the amount of AMT credit you can use.
RECORD-KEEPING AND REPORTING REQUIREMENTSTaxpayers must use Form 6251, Alternative Minimum Tax -- Individuals, to compute their AMT liability. Generally, the form requires a taxpayer to add back AMT adjustments and tax preferences to his regular taxable income to determine alternative minimum taxable income (AMTI). The taxpayer also applies the AMT exemption amount based on filing status and the phase-out rule for the exemption. After reducing AMTI by the allowable exemption, the taxpayer applies the applicable AMT rate. Finally, taxpayers report their AMT liability, less any AMT foreign tax credit, as an additional tax on Form 1040, but only to the extent it exceeds their regular tax, minus any regular foreign tax credit. COMPLIANCE TIP: As discussed throughout this chapter, certain items of income, deductions, etc., receive different tax treatment for AMT purposes than they do for regular tax purposes. Therefore, taxpayers will need to recalculate items for the AMT that they calculated for regular tax purposes. In some cases, a taxpayer may wish to do this by completing the applicable tax form a second time. Taxpayers must maintain permanent records for property generating AMT adjustments and preferences, including depreciable property, stock options, and mineral property on which depletion is taken. Reg. Section 1.57-5(a). The information must include: (1) Manner of acquisition of the property; (2) dates of acquisition and, if applicable, when the property was placed in service; (3) basis of the property upon acquisition and how the basis was determined if a carryover basis was used; (4) method used for calculating depreciation (i.e., recovery period or class life); and (5) basis adjustment information, including the amount and date of each adjustment. Taxpayers also must keep permanent records for the first tax year for which a portion of a net operating loss (NOL) deduction is attributable to an adjustment or preference, and all later years in which there is an NOL or NOL carryover that is so attributable. These records must include all the facts necessary to determine with reasonable accuracy the amount of the NOL in each tax year in which there are items of tax preference in excess of the minimum tax exemption, the amount of the items of tax preference for each such taxable year, the amount by which each NOL reduces taxable income in any tax year, and the amount by which each such NOL is reduced in any tax year. Reg. Section 1.57-5(b). |
Start of Plain English Section
Technical Analysis & Citations What It does, Why
it works - From Bob Parrish CPA PC
Law (commentary and citation)
Regs (commentary and citation)
Cases (commentary and citation)
Rev Procs
Start of Revenue Procedures Section
Tax
Killers 
From Bob Parrish CPA PC
This is about Activity Based Taxplanning - maximizing deductions, minimizing cash outlay and maximizing the amount of cash retained and the net worth. Activity Based Taxplanning (ABT) is a methodology developed by Bob Parrish CPA, that assists people with the tax issues by focusing on the activity (or actions - events) that are being undertaken or contemplated (or have already taken place). The, research is compiled from the myriad of sources to help you complete the activity with the least tax cost, while maintaining compliance the tax laws, other laws and regulations and place yourself in a position to protect your objectives.
Tax is a subject that many view in order to cut costs. Taxes are a cost just as any other cost. It happens this cost is somewhat intangible and is defined by legislation without a tangible item to view and control. The money is spent and the control of the expenditure is more appropriately administered by someone trained in the law.
Cost
Killers 
From Bob Parrish CPA PC
This is about Activity Based Costing - methods to cut costs, management accounting, management information systems, decision support systems - in general about being a manager.
Preparing for your CPA, attorney, or preparing to start
your own What to gather - From Bob Parrish CPA PC
Entrance Interview
Exit Interview
From Banking Records
From Customer Records
From Signed Documents
From Your Other Business, or Financial Records
From Corporation or Organization Records (meetings, etc.)
What to do
Start of Preparing For You CPA Section
Forms - checklists, time-line to do, etc. Assistance - What
To Do - From Bob Parrish CPA PCAssistance - What to do
Forms - Checklists - Etc.
Spreadsheets & Computations From Bob
Parrish CPA PC 
Spreadsheet #1
Contracts, Trusts, etc. From Bob Parrish CPA PCAgreement #1
Reports
Required From Bob Parrish CPA PCReport #1
Checklists for Deployment From Bob Parrish CPA PCChecklist #1
Checklist for Monitoring From Bob Parrish CPA PC| CHECKLIST OF AMT ADJUSTMENTS AND TAX PREFERENCE ITEMS |
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AMT adjustments applicable to all taxpayers include: ___ MACRS depreciation of property placed in service after 1986 ___ Mining exploration and development costs ___ Long term contracts ___ Net operating losses (i.e., ATNOLs) ___ Certified pollution control facilities ___ Installment sales of certain property ___ Passive (business and farming) activity losses AMT adjustments applicable to individuals: ___ Limits on deductions (i.e., standard deduction, personal exemptions and certain itemized deductions, e.g., medical expenses) ___ Circulation and research and experimental expenditures ___ Incentive stock options Tax Preference Items: ___ Tax exempt interest from certain private activity bonds ___ Accelerated depreciation of certain property placed in service before 1987 ___ Exclusion for gain on the sale of certain small business stock
|
Financial Accounting: Bookkeeping & Financials From
Bob Parrish CPA PCFinancial Statement Presentation
Notes to Financial Statements
How to Make Entries
What Kind of Records to Keep
Bookkeeping Methods - Cash, Accrual and Other
How the Business Entity Affects the Recording
Sole Proprietor
Corporation - C & S
Partnerships - General, Limited, Limited Liability Company, Registered Limited Liability Partnership or Company
Trusts
Tax Exempt
Compliance - what is required for protection, defense, etc.
From Bob Parrish CPA PCCompliance Checklist
Alerts
& Dangers - Risks, Asset Protection, IRS Defense From Bob
Parrish CPA PCAction Checklist
Alerts & Dangers - Risks
Asset Protection
Your Defense
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alternative_minimum_tax .htm |
