Chapter14 Solutions - Chapter I:14 Special Tax Computation...

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Chapter I:14 Special Tax Computation Methods, Tax Credits and Payment of Tax Discussion Questions I:14-1 Most taxpayers are not subject to the alternative minimum tax (AMT) because they do not have substantial tax preferences and AMT adjustments and because there is a liberal exemption amount to reduce the tax base on which the AMT is calculated. However, more and more taxpayers in recent years are being subjected to the AMT. p. I:14-2. I:14-2 The alternative minimum tax does not apply if an individual's tentative minimum tax under the AMT rules is less than his regular tax liability. It applies only if the tentative minimum tax exceeds the regular tax liability. p. I:14-3. I:14-3 b. only. Only the excess depreciation for real property placed in service before 1987 is a tax preference item. For tax years prior to 1987, net long-term capital gains were a tax preference item (i.e., the 60% long-term capital gain deduction) and for taxable years prior to 1993 the appreciated element related to charitable contributions of capital gain real property was a tax preference item. p. I:14-4. I:14-4 a, b, c only. Itemized deductions that are not allowed in computing AMTI, excess depreciation on real property placed in service after 1986, and excess MACRS depreciation for personal property placed in service after 1986, are all AMT adjustments. Tax-exempt interest is not an AMT adjustment but may be a tax preference item if the bonds are private activity bonds. pp. I:14-4 through I:14-6. I:14-5 a and b only. Charitable contributions and mortgage interest on a personal residence are deductible when computing AMT. Mortgage interest is subject to the restrictions pertaining to qualified housing interest. Other interest is deductible up to the amount of qualified net investment income and since the individual has no investment income, the other interest (investment interest) is not deductible. Medical expenses are deductible only for amounts in excess of 10% of AGI and state and local taxes are not deductible for AMT purposes. pp. I:14-4 and I:14-5. I:14-6 Most people are not subject to the self-employment tax because they are classified as employees for tax purposes. Employees make FICA employee contributions, which must be matched by their employers. p. I:14-8. I:14-7 Tony will have to make social security tax payments in the form of self-employment taxes if he continues to operate his consulting business as a sole proprietor. If Tony continues to be employed, he will not be subject to the OASDI portion of the self-employment tax on the first $97,500 (2007) of total earnings. However, any income (i.e., salary or consulting) above this amount will be subject to the hospital insurance (HI) premium portion of the FICA tax (1.45% I:14-1
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for employment related income and 2.9% for his self-employment earnings). If he retires from his salaried job, Tony's consulting income will all be subject to the 15.3% self-employment rate on the first $97,500 and 2.9% on income in excess of $97,500 in 2007 although Tony will then
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Chapter14 Solutions - Chapter I:14 Special Tax Computation...

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