alternative_minimum_tax_notes - 1 TAX 6845 Tax Planning &...

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1 TAX 6845 – Tax Planning & Consulting (Oct. 26 and Nov. 2) Topic: Alternative minimum tax (AMT) updated: October 11, 2010 I. The alternative minimum tax – a general overview: A. What is the AMT? – The AMT is a separate and parallel federal income tax system – with different tax rates, different definitions of income, deductions and credits – designed to measure the taxpayer’s “economic” income. The AMT applies to individuals, corporations, estates and trusts. It is an alternative tax because the AMT rules constitute a complete, alternative set of rules & minimum tax because taxpayer must pay the larger of its AMT or its regular income tax liabilities. B. Why do we have the AMT? – The AMT was put into place to make sure that “high-income” taxpayers paid their fair share of tax. Over the years, Congress has used the income tax law for a variety of reasons other than just raising revenue to fund government operations and programs, such as enacting provisions to promote economic and social goals. As the number of special tax provisions increased, many taxpayers were able to carefully plan their financial affairs to substantially reduce or eliminate their entire income tax liability. A study released in 1986 reported that 130 of the 250 largest corporations in the U.S. paid no federal tax or received refunds between 1981 and 1985. The AMT grew out of the minimum tax that was enacted in 1969. It was intended to target 155 high-income individual households that had been eligible for so many tax benefits that they owed little or no income tax under the tax code of the time. C. The minimum tax (enacted in 1969) – The original add-on minimum tax was 10% x the taxpayer’s tax preference items in excess of $30,000. It was referred to as an “add-on” tax because it was added to the taxpayer’s regular income tax liability. The present AMT system evolved from this in 1978. D. Calculation of the AMT 1. Taxpayers are first required to compute their regular income tax liability and then compute their tax under the AMT system. The AMT system requires taxpayers to adjust their regular taxable by a number of adjustments and preferences, and then subtract an exemption amount to arrive at the AMT base. 2. The AMT base is multiplied by the special AMT rate (26 or 28% for individuals and 20% for corporations) to compute their “tentative minimum tax” (TMT). 3. Taxpayers are required to pay the greater of (1) the regular income tax, or (2) the TMT. 4. Even though the highest tax rate under the AMT – 28% – is lower than that in the regular tax system, AMT victims are paying more because they are taxed on a greater amount of income. Under the AMT rules, many deductions and exemptions are disallowed.
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2 E. Typical AMT modifications : 1. tax preference items (TPIs) – always increase AMTI. TPIs subject otherwise nontaxable income to the AMT. Many tax preferences items (TPIs) are permanent differences between taxable income and AMTI (alternative minimum taxable income). 2. AMT adjustments – may either increase or decrease AMTI. Are mainly
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This note was uploaded on 09/09/2011 for the course TAX 6845 taught by Professor Kelliher,c during the Fall '08 term at University of Central Florida.

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alternative_minimum_tax_notes - 1 TAX 6845 Tax Planning &...

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