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The Alternative Minimum Tax and Tax Credits
Solutions to Problem Materials DISCUSSION QUESTIONS
131 Two sets of books may be required in the sense that many items must be computed in one manner for regular tax purposes and another manner for alternative minimum tax (AMT) purposes. For example, as a general rule, the modified ACRS system used for computing depreciation is based on a 200 percent decliningbalance method of depreciation; however, the maximum allowable depreciation for AMT purposes is 150 percent declining balance. An extra set of books may be required to maintain two separate depreciation schedules resulting in two different adjusted bases for the same asset, one for the regular tax system and the other for the AMT system. (See Example 3 pp. 137 through 139.) To avoid an adjustment for AMT, and thereby reduce the recordkeeping with respect to fixed assets, Congress has provided the election to use the alternative depreciation system (ADS) for regular tax purposes. If elected, the ADS deduction will be the same amount for AMT purposes. [See 168(g)(7) and 56(a)(1)(A)(I).] Also, in TRA of 1997 an election to use the 150 percent decliningbalance method over the recovery period of the property for AMT purposes was provided. This election will allow a faster writeoff while providing an identical amount of depreciation for both tax systems; and therefore, an AMT adjustment will not be required. [See Example 4 and pp. 138 and 139, Exhibit 134 and 56(a)(1)(A).] The taxpayer must pay the IRS $28,000: $25,000 of regular tax plus $3,000 of alternative minimum tax. Technically, the excess of the tentative minimum tax over the regular tax is the AMT. But as seen from the formula if the TAMT exceeds the regular tax, the taxpayer pays the AMT plus the regular tax. [See Exhibit 131, Example 2, pp. 133 through 134, and 55(a).] No. For individuals, the only tax credits that can be used to reduce the AMT are the AMT foreign tax credit, the empowerment zone credit, and certain nonrefundable personal credits. [See 26(a)(2).] The individual taxpayer in this question will be required to pay the $50,000 in AMT by the due date of the return. The $50,000 of general business credit can be carried back or carried over to offset the regular income tax imposed in the carryback/carryover years. [See p. 134, and 55(c)(2) and 38(c)(2).] The same rules apply to corporate taxpayers. No. All taxpayers, regardless of their marginal tax rate, are subject to the AMT. Although primarily aimed at wealthy taxpayers, it may apply to any taxpayer that has substantial adjustments and tax preference items in a given year. The AMT is computed starting with taxable income, making the specified adjustments, and adding back all tax preference items.
131 132 133 134 135 132 Chapter 13 The Alternative Minimum Tax and Tax Credits The 26 percent AMT rate (20% corporations) is applied to this broad base. (See Exhibit 131 on p. 134 and p. 135 for specified rates for individual taxpayers. Also, see Examples 12 through 14 and pp. 1317 through 1319 for a situation where the AMT applied in part because of the taxpayer's mix of itemized deductions.) 136 In determining when G should pay her property taxes, she should recognize that property taxes are not deductible for AMT purposes. Thus, to minimize federal income taxes, G should pay the property taxes in 2012 rather than 2011. She will get no tax benefit from a payment in 2011 due to the AMT. However, in 2012, she will get a tax benefit equal to the product of her marginal rate for 2012 and the taxes paid, and the net benefit will be reduced by the five percent penalty for delaying property tax payment until 2012. Note, this advice has an interesting policy implication, in that the taxpayer is financially rewarded by the federal government for making a delinquent payment to a state or local government. (See Exhibit 133 and pp. 1310 and 1311.) The AMT rules for interest deductions are more restrictive. For most interest limitations listed in 163 for the regular tax, 55(b)(1)(C) specifies a similar or more restrictive rule. For example, more stringent rules apply to qualified housing interest. For AMT purposes, the interest on a qualified residence will be allowed only if the loan on the residence was incurred in acquiring, constructing, or substantially rehabilitating the property. [See pp. 1311 through 1312 and 56(b)(1)(C) and 56(e)(1).] Yes, the Senate Finance Committee Report HR 3838, page 552, allows the 179 deduction for the AMT system. (See p. 1310.) Taxpayers that are above a 25 percent marginal tax bracket (e.g., 28% is currently the bracket above the 25% bracket) would be well advised to choose the $1,000 deduction. Taxpayers with marginal tax rates less than 25 percent (e.g., 15%) should choose the $250 credit. Taxpayers with a 25 percent marginal rate would receive the same amount of benefit from the deduction and the credit. (See Example 20 and p. 1326.) If the building is torn down, rehabilitation credits will not apply. In order to maximize the rehabilitation credits, try to have the property approved as a certified historic structure. To qualify for the regular rehabilitation credit, the taxpayer must leave 75 percent of the external and internal walls in existence. [See pp. 1329 and 30 and 48(g)(1).] The business investment energy credit may apply to either the old renovation or the proposed new construction. (See p. 1330.) When a rehabilitation tax credit or a disabled access credit is claimed, a corresponding downward adjustment to the basis of the rehabilitated property equal to the amount of credit claimed is required. Similarly, when an energy tax credit is claimed, a downward basis adjustment is required equal to amount of the energy tax credit claimed. [See Examples 24 and 25 and pp. 1331 and 1340 and 50(c)(l) and (3).] The general rule stipulates one consequence of making an early disposition of investment credit property; it requires the taxpayer to recapture any unearned IC and treat the recapture amount as an additional tax imposed in the year of early disposition. The exceptions to the general rule provide the second consequence, which is that the taxpayer will not have to recapture the unearned IC in the year of early disposition. However, except in a transfer by reason of death, the transferee in an excepted transaction has the burden of recapturing the unearned IC if the transferee makes a subsequent disposition of the property before the IC on the property is earned (within five years of the date that the transferor placed the property in service). [See pp. 1331 and 1332 and 50(a)] When a taxpayer pays an AMT in the current year, the payment may give rise to a minimum tax credit, which may be carried forward to future years. However, a minimum tax credit for a current year cannot be used to offset the minimum tax liability for any future year and, therefore, has no effect on the AMT liability that may be owed in subsequent years. Any minimum tax credit attributable to the payment of an amount in the current year may be used as a credit against the taxpayer's regular tax liability in subsequent years. [See Examples 15 and 16 pp. 1319 through 1322 and 53(a) and (c).] If care is provided in the taxpayer's home, the costs of household services qualify as long as the predominant purpose is care of the qualified dependent. (See p. 1345.) a. All of the babysitter's salary would qualify for the child care credit up to the allowable maximum dollar limit. b. None of the babysitter's salary would qualify for the child care credit. 137 138 139 1310 1311 1312 1313 1314 Solutions to Problem Materials 133 1315 The son is too old to be a qualifying child with respect to his parents (he is older than 18). The husband and wife may qualify for the EIC for individuals without a qualifying child if the three conditions are met. The son will not qualify for the EIC because he has not attained the age of 25 years old during the taxable year. [See p. 1358 and 32(c)(1)(A)(ii).] In accordance with the R&E rules enacted in RRA of 1990, it appears that the entrepreneur would be entitled to an R&E credit in 2010, calculated in accordance with Exhibit 139. (See Example 28 and pp. 1335 and 1336.) R&E credit 20% (qualified R&E expenditures base amount) Base amount fixed base percentage average gross receipts for four years For startup companies, fixed base percentage 3% The minimum base amount 50% qualified research expenditures Under the general rule, the base amount is 0 (3% 0 average gross receipts) But, the exception provides that the minimum base amount 50% qualified research expenditures R&E credit 20% ($15,000 $7,500 $7,500) R&E credit $1,500 This credit will be carried over and will be available to offset the tax that is incurred by the shareholders and is attributable to the S Corporation. [See Exhibit 139, p. 1338, and 41 (c).] Note: This problem is intended to focus on 41(c), which allows startup companies a credit for R&E expenditures before they are in a trade or business for years after 1989. 1316 1317 Note: The targeted jobs credit expired on December 31, 1994 but it was extended in 1996 and it was given a new name, the Work Opportunity Tax Credit. The new credit expires for wages paid after August 31, 2012. (See p. 1333.) One change that might increase the effectiveness of the credit would be to increase the amount of work opportunity tax credit so that employers will be willing to train the hard core unemployed and suffer through the initial employment adjustment period. PROBLEMS
1318 T's tentative AMT is $21,057, and her AMT is $10,794 computed in accordance with Exhibit 131 as follows: Regular taxable income Plus: AMT adjustments: Positive adjustments Standard deduction Personal exemption AMTI Exemption $48,450 25% ($125,900 $112,500) AMTI base AMT rate Tentative AMT Regular tax liability AMT $ 56,550 60,000 5,800 3,700 $ 126,050 (45,063) $ 80,987 ,26% $ 21,057 (10,263) $ 10,794 T must pay total taxes of $21,057 the sum of the regular tax of $10,263 and the AMT of $10,794. (See pp. 135 through 139, 1314, 1316 through 1321.) 134 Chapter 13 The Alternative Minimum Tax and Tax Credits 1319 V and W's tentative AMT is $37,616, and their AMT is $21,803 computed as follows: Regular taxable income Plus: AMT adjustments: Positive AMT adjustments Standard deduction Personal exemption AMT adjusted taxable income Plus: Tax preference items: Positive tax preference items AMTI Exemption $74,450 25% ($205,300 $150,000) AMTI base AMT rate Tentative AMT Regular tax AMT (See pp. 135 through 139, 1314, 1316 through 1321.) $ 94,250 32,050 11,600 7,400 $145,300 60,000 $205,300 (60,625) $144,675 26% $ 37,616 (15,813) $ 21,803 1320 a. The results of the sale of 5,000 shares of BC on January 9, 2011 are as follows: Amount realized Adjusted basis Gain realized 50% excluded Gain recognized for regular purposes $ 250,000 (50,000) $ 200,000 (100,000) $ 100,000 b. 1321 a. For AMT purposes, T must report a tax preference of $7,000 (7% $100,000). (See Example 11 and p. 1318.) See new 1202(a)(3) for special rules that apply to 1202 stock acquired in 2010 and 2011. Although the cutback of itemized deductions expired in 2011, this problem is retained to demonstrate the issue in case the problem is reinstated. J's allowable charitable contributions deduction for regular tax purposes is $60,000 (the FMV of the property on the date of the gift). However, because of J's A.G.I. the cutback rules limiting total itemized deductions apply. Itemized deductions are subject to the 1 percent cutback rule because A.G.I. exceeds the applicable amount of $166,800 for 2009. A.G.I. Applicable amount Excess A.G.I. Deduction cutback for 2010 Tentative cutback Cutback is lower of A) Tentative cutback or B) Maximum cutback ($60,000 80%) Total itemized deductions subject to cutback Less: Cutback Amount deductible after 1% cutback Plus: Itemized deductions not subject to cutback Total allowable itemized deductions $ 300,000 166,800 $ 133,200 ,1% $ 1,332 $ 1,332 $48,000 $ 60,000 (1,332) $ 58,668  $ 58,668 (See pp. 1340 through 1342 for discussion.) Solutions to Problem Materials 135 b. In years prior to 1993 charitable contributions of capital gain property may have resulted in a tax preference item equal to the difference between the fair market value and the adjusted basis of the property. In the RRA of 1993 this tax preference item was repealed for contributions made after 1992. Therefore, J does not have a tax preference item resulting from this contribution. However, as a result of 56(b)(1)(F), which states that 68 shall not apply to itemized deductions for the AMT system, a negative adjustment equal to the 68 regular tax itemized deduction cutback is allowed, or negative adjustment equal to $1,332. 1322 B's tax liability and AMT are computed below. Note that this solution assumes that $10,000 of net capital gain is treated as investment income to enable the deduction of all the investment interest. This also impacts the AMT and regular tax calculations.
Regular Tax Salary Net capital gain (15% gain) Gross income Deductions for A.G.I. A.G.I. Itemized deductions: Medical: excess of 7.5% of $250,000 ($17,500 $18,750) Casualty loss Taxes Charitable contribution Interest on home mortgage Interest on investments Total deductions Deductible itemized deductions Personal exemptions Taxable income Regular Tax Liability (note 1)
Alternative Minimum Tax $ 50,000 200,000 $250,000 ,000 $250,000 $ ,000 ,000 35,000 15,000 12,000 10,000 $ 72,000 (72,000) (3,700) $174,300 $ 20,970 $174,300 Taxable income Adjustments: Add back: Regular tax itemized deductions and exemptions Add back: Exercise of ISOs $ 75,700 88,000 163,700 $338,000 Subtract: ATIDs Subtract: Charitable contributions Subtract: Interest on mortgage Subtract: Interest investment AMTI Exemption [$48,450 (25% ($301,000 $112,500 $188,500) $47,125)] AMTI base 0% $34,500 15% $155,500 LTCG 26% ($299,675 $190,000 $109,675) ( $ 15,000) (12,000) (10,000) (37,000) $301,000 (1,325) $299,675 $00,0000 $ 23,325 28,516 $ 51,841 (20,970) $ 30,871 AMT rate: Tentative AMT Regular tax liability (note 1) AMT (See Exhibits 131 and 132 and pp. 135 through 137, and 1312) 136 Chapter 13 The Alternative Minimum Tax and Tax Credits Notes: 1. Regular tax liability: From 2011 Rate Schedule X (single) and 1(h) as computed below. Taxable income is $174,300, however the taxpayer has $200,000 of net capital gain. Therefore, under 1(h) the tax liability is equal to $20,970 as shown below. This solution assumes that B made the election to treat $10,000 of NCG as investment income for purposes of 163(d). Taxable income (treated as all longterm capital gain) For purposes of 1(h) the amount taxed at the rate below 15% is $34,500 Tax on $34,500 0% Tax on ($174,300 taxable income $34,500 $139,800) 15% $174,300 $ ,000 20,970 $ 20,970 1323 Because the AMT required the inclusion in income as an AMT adjustment in the year in which the ISO was exercised, the stock for AMT purposes will have a high basis. For AMT purposes, the stock basis is $100,000 ($12,000 $88,000). For regular tax purposes, the stock has a low basis equal to $12,000, the exercise price. On the sale for $105,000 during the second year, the following gain should be reported:
Regular Tax AMT Sale price Basis Gain $105,000 (12,000) $ 93,000 $105,000 (100,000) $ 5,000 [See Examples 5 and 6 and pp. 1313 and 1314, and 56(b)(3).] 1324 The adjustment for depreciation on the truck placed in service, assuming a midyear convention, is $2,000 computed as follows. (The class life of light duty trucks is five years and the recovery period is five years.)
Regular Tax (200%) AMT (150%) Cost Recovery period (five yearssame for both) Straight line rate (1=5 ) Declining balance rate Halfyear convention AMT rate Depreciation AMT depreciation Positive adjustment to AMTI $40,000 20% 200% 20% $ 8,000 (6,000) $ 2,000 20% 150% $40,000 15% $6,000 Therefore, the adjustment in 2011 is a net $2,000 increase in the AMTI. (See Example 3 and pp. 139 through 1310.) 1325 The adjustment for depreciation on each heavyduty truck placed in service, assuming the midyear convention, is computed as follows. (The class life of heavy duty trucks is six years and the recovery period is five years.) For property placed in service after 1998 the same recovery period can be used for both the regular tax and the AMT. See calculations in problem 1324 above.
Regular Tax (200%) AMT (150%) Positive Adjustment Increase to AMTI 2011 $8,000 $6,000 $2,000 The total adjustment in 2011 is a net $2,000 increase in the AMTI. (See Example 3 and pp. 139 and 1310.) Solutions to Problem Materials 137 1326 For realty, the straightline method must be used for both AMT and regular tax purposes. However, an adjustment is necessary since the AMT class life is longer than the normal recovery period (40 years vs. 27.5 or 39 years). Here the property is residential real estate therefore the MACRS life is 27.5 years while the AMT (ADS) life is 40 years. The adjustment for depreciation on residential property for 2011 and 2012 is computed as follows:
Positive AMT Adjustments 2011 2012 0.03485 $200,000 $6,970 0.03636 $200,000 $7,272 Regular Tax 0.02396 $200,000 $4,792 0.025 $200,000 $5,000 AMT $2,178 $2,272 (See Appendix C, p. C13, for the alternative depreciation tables, and pp. 139 and 1310.) (See Appendix C, p. C4, for residential real property depreciation tables and pp. 139 and 1310.) 1327 The tax liability for O and G should be computed both under the regular tax rules and under the AMT rules. O and G's tax liability is as follows: Regular Tax A.G.I. Standard deduction Exemption Taxable income Taxable liability AMT Taxable income Add back standard deduction and exemptions AMT adjusted taxable income Plus tax preferences: Percentage depletion on gold properties in excess of cost basis AMTI Less: Exemption AMTI base AMT rate Tentative AMT Less: Regular tax liability Additional tax due to AMT (See Exhibit 131 and p. 1317.) 1328 This problem assumes that T does not qualify under 469(c)(7) as being in the real property business. The active participation rule in 469(i) that allows up to $25,000 of losses to lessors of real property also applies to AMT system. T's regular tax and AMT are computed as follows: Regular Tax Income from stock brokerage business Section 469 active participation loss Standard deduction Personal exemption Taxable income Regular tax liability before credits Credit carryover Regular tax after credits $ 70,000 (11,600) (7,400) $ 51,000 $ 6,800 $ 51,000 19,000 $ 70,000 50,000 $ 120,000 (70,450) $ 45,550 26% , $ 11,843 (6,800) $ 5,043 $ 100,000 (25,000) (5,800) (3,700) $ 65,550 $ 12,500 (12,500) $ 0 138 Chapter 13 The Alternative Minimum Tax and Tax Credits AMT Taxable income Add: Standard deduction and exemptions AMTI Less: Exemption AMT base Taxable rate Tentative AMT $ 65,500 9,500 $ 75,000 (48,450) $ 26,550 ,26% $ 6,903 T's AMT is $6,903 (Tentative AMT $6,903 regular tax after credits $0). Note that the credit effectively reduced T's tax liability from $12,500 to $6,903. Consequently T will be allowed to carry the remaining $19,403 ($25,000 $5,597) of general business credit forward to 2012. The net result is that T will write the IRS a check for the $6,903, which is the amount of T's tentative AMT. [See Exhibit 13.1 and p. 134, Chapter 12, and 38(c)(1)(A).] 1329 Using the information from problem 1322, the AMT credit is the amount of the adjusted net minimum tax, which is determined below. AMT per return Less: AMT computed with permanent differences only: Taxable income ATIDS permanent difference ($74,000 $37,000) AMTI Less: Exemption (1) AMTI base 0% $34,500 LTCG 15% $150,550 $174,300 35,000 $209,300 (24,250) $185,050 $ ,000 $ 22,583 $ 22,583 (20,970) 1,613 $29,258 $30,871 AMT rate Tentative AMT Regular tax liability AMT computed with permanent differences only AMT credit available to offset 2011 regular taxable income (1) $209,300 $112,500 base $96,800 25% $24,200; $48,450 $24,200 $24,250. (See Example 16 and pp. 1319 through 1322.) 1330 The business credit is limited to $25,000 plus 75 percent of the liability in excess of $25,000. The $40,000 of general business credit is limited by the amount of the tax liability: Regular tax liability before credits Basic credit allowance Remaining tax liability Percentage allowed Additional credit allowed General business credit allowed Tax due $35,000 (25,000) $10,000 75% $35,000 $25,000 7,500 $32,500 (32,500) $ 2,500 There is a $7,500 ($40,000 $32,500) general business credit carryback for three years, or carryforward for 15 years. K must pay $2,500 as the tax liability for the year. Note that an amended return may be filed to claim a refund. If the carryback cannot be utilized, it should be carried forward to the next 15 years. (See Example 21 and pp. 1328 and 1329.) Solutions to Problem Materials 139 1331 a. J may claim a business energy credit of $6,000, computed as follows: Qualified investment Rate of credit Current IC before limitations $60,000 , ,,,,10% $ 6,000 b. J's basis in the energy property must be reduced by the amount of the allowable energy credit. Cost of property Adjustment for credit Basis in energy property $60,000 (3,000) $57,000 (See Examples 23 and 24 and pp. 1330 through 1331.) 1332 The property in this problem was placed in service prior to 1936 so the rehabilitation credit of 10% is available. [See 48(g)(l)(B).] a. The amount of rehabilitation credit is $30,000, computed as follows: Qualified investment Rate of credit Current credit b. $300,000 10% $ 30,000 T's basis in the rehabilitated property must be reduced by the total amount of the rehabilitation credit claimed, or $30,000. Beginning basis of property Rehabilitation expenditures Basis reduction Basis for cost recovery $100,000 300,000 (30,000) $370,000 (See Examples 22 and 24 and pp. 1329 and 1330.) 1333 a. The rehabilitation credit for all certified historic structures is 20% regardless of when they were placed in service or their age. The rehabilitation credit is $40,000, computed as follows: $200,000 ,,1 020% $ 40,000 b. Adjusted basis at the end of the year is $335,998, computed as follows: Cost Rehabilitation expenditure Allowable credit Basis of building before MACRS deduction Cost recovery deduction equals [($340,000 .01177*)] $4,002. $340,000 (4,002) $335,998 $180,000 200,000 (40,000) $340,000 Adjusted basis at end of year *See Appendix C, p. C8, 39year recovery property for this factor. (See Examples 22 and 24 and pp. 1330 and 1331. This problem is a variation on Example 22, changed to certified historic structure.) 1310 Chapter 13 The Alternative Minimum Tax and Tax Credits 1334 Assuming that the property was sold on January 7, 2011 D held the property only two full years after placing it in service. As a result, he must recapture 60 percent of the IC claimed in 2008. IC claimed in 2008 Recapture percentage Additional tax to report in 2011 (See Exhibit 138, Example 26, and pp. 1331 through 1332.) $30,000 60% $18,000 1335 A likekind exchange is a disposition of the rehabilitated property that triggers the IC recapture rules applicable to early dispositions. Since L held the property for three full years, L is only required to recapture 40 percent of the IC claimed in 2008. IC claimed in 2008 Recapture percentage Additional tax to report in 2011 (See Exhibit 138 and p. 1331 and 1332.) $80,000 40% $32,000 1336 a. M's R&E credit is $4,000, computed as outlined in Exhibit 139. In this problem, "Qualified R&E Expenditures" are $40,000 and the "average gross receipts" are $150,000. R&E 20% (Qualified R&E expenditures Base amount) Base amount Fixed base percentage Average gross receipts For startup companies, the Fixed Base Percentage 3 percent. Base amount under general rule 3% $150,000 $4,500. However, the base amount cannot be less than the "Minimum Base Amount." Minimum 50% (Current year's qualified research expenditures) Minimum 50% $40,000 $20,000 Base Amount the greater of $4,500 or $20,000 $20,000 R&E Credit $4,000 [20% ($40,000 $20,000)] b. M's current R&E deduction is Current expenditures R&E credit Current deductions $40,000 (4,000) $36,000 (See Exhibit 139; Example 28; and pp. 1335 through 1338.) 1337 An eligible small business can elect to take a nonrefundable tax credit equal to 50 percent of the amount of the eligible access expenditures for any taxable year that exceed $250 but do not exceed $10,250. An eligible small business is defined as one having gross receipts for the preceding taxable year that did not exceed $1,000,000, or having no more than 30 fulltime employees during the preceding taxable year. a. P's disabledaccess credit is: ($9,000 $250) 50% $4,375 b. The basis of the wheel chair ramp eligible for cost recovery is: Expenditure Less: disabled access credit Basis eligible for cost recovery (See Example 30 and pp. 1338 through 1340.) $9,000 (4,375) $4,625 Solutions to Problem Materials 1311 1338 H and W's allowable child tax credit is $2,250. Tentative credit for each child Qualifying children Total credit before phaseout Reduction: Modified AGI Threshold for joint return Excess Reduction [$15,000=$1,000 15 $50] Child credit allowed for children (See Exhibit 13.10, Example 33 and pp. 1343 and 1344.) $ 1,000 ,003 $3,000 $ 125,000 (110,000) $ 15,000 ( ,750) $2,250 1339 M is entitled to a child tax credit of $600. Tentative credit for one child Reduction: Wages Investment income Modified AGI Threshold for single taxpayers Excess Reduction [$7,500 / $1,000 7.5, rounded to 8 $50] Child credit allowed (See Exhibit 13.10, Example 33 and pp. 1343 and 1344.) $1,000 $ 70,000 12,500 $ 82,500 (75,000) $ 7,500 ( ,400) $600 1340 V and J's dependent care credit is $1,196. Step 1: Determine applicable percent: A.G.I. $ 38,200 (15,000) $ 23,200 ($17,000 $21,200) 23,200 11.6 rounded to 12% 2,000 Maximum percentage is 35% less the reduction of 12% equals 23% as the applicable percent. Step 2: Employment expenditures $5,200. Step 3: Determine the dependent care credit: $ 5,200 ,23% $ 1,196 Dependent care credit (See Example 34 and pp. 1344 through 1348.) 1341 There is no child care credit because M is not a fulltime student nor is M employed. a. No child care credit is allowed if M enrolled on September 6. M does not meet the fivemonth requirement to qualify as a fulltime student. b. M will be considered a fulltime student for 10 months. M and B's child care credit is determined as follows: Step 1: The applicable percentage is 31% [35% ($23,000 $15,000 $8,000=$2,000 4% reduction)].* 1312 Chapter 13 The Alternative Minimum Tax and Tax Credits Step 2: Maximum allowable employmentrelated expenses are $3,000, limited by M's deemed income of $2,500 ($250 10 months). Step 3: Determine the dependent care credit: $2,500 31% $ 775 *Note: There is no increase in A.G.I. as a result of imputed income to M for reduction in the applicable percentage. (See Exhibit 13.11, Example 35 and pp. 1344 through 1347.) 1342 C's dependent care credit is $960, but there is another issue buried in these facts! Step 1: Determine the applicable percent: A.G.I. $ 19,500 (15,000) $ 4,500 $ 4,500 $ 2,000 2.25, rounded to 3%. The applicable percentage is 32% (35% 3%). Step 2: Maximum allowable employmentrelated expenses for one child is $3,000. Step 3: Determine the dependent care credit: $3,000 32% $ 960 (See Exhibit 13.11, Examples 34 and 35 and pp. 1344 through 1347.) Note: C also qualifies for an earned income credit (EIC) of $2,551. Maximum EIC Less reduction for A.G.I.: 15.98% ($19,500 $16,690 $2,810) Maximum EIC $3,094 ( ,449) $2,645 (See Exhibits 1313 and 1314, Example 41, and pp. 1355 though 1357.) Note: Don't forget about the child tax credit! This interaction is explained in the Solutions to Problems 1346 and 1347. 1343 D's allowable American Opportunity Tax Credit (AOTC) is $2,375. Maximum AOTC available: First Excess $2,000 100% $1,500 25% $2,000 $ ,375 $2,375 The phaseout of the credit for high income taxpayers does not limit the credit because the phaseout does not begin for single taxpayers until A.G.I. exceeds $80,000. (See Exhibit 1312, Example 38, and pp. 1349 through 1351.) Solutions to Problem Materials 1313 1344 a. The allowable American Opportunity Tax Credit (AOTC) for H and W is $2,000. The phaseout of the credit for high income taxpayers does not limit the credit because the phaseout does not begin for married taxpayers until A.G.I. exceeds $160,000. Maximum AOTC available: One child Second child $1,000 100% $1,000 100% $1,000 $1,000 $2,000 $2,000 Reduction for high income taxpayers: Reduction Tentative AOTC credit Modified AGI threshold Income range Reduction Reduction Allowable AOTC b. $2,000 $2,000 $83,000 160,000 $20,000 0 000000 $2,000 The maximum allowable AOTC credit is $2,500 per student. If H and W prepaid next year's first semester tuition before the end of this year they would qualify for a tentative $4,000 AOTC credit ($2,000 for each student). This tentative credit would have to be reduced by the same reduction percentage (0) which would result in an allowable $4,000 AOTC credit. (See Exhibit 1312, Examples 37 and 38, and pp. 1349 through 1351.) 1345 Calculation of the earned income credit: a. R's earned income credit is $1,870 determines as follows: Amount of credit 34% $5,500 $1,870. b. R's refund is calculated as follows: Gross income Deduction for A.G.I. A.G.I. Standard deduction Two exemptions Taxable income (loss) Head of household filing status: Tax liability $ 5,500 ,000) ( $ 5,500 (8,500) (7,400) $(10,400) $ ,000 Earned income credit of $1,870 is all refunded. A refund is due even though no withholding was paid to the government. R may be entitled to an additional child tax credit that is refundable. See Solutions to Problems 1346 and 1347. (See Exhibit 1313, Examples 41 and 42 and pp. 1355 through 1357.) 1346 a. S's allowable earned income credit is $5,112, determined as follows: Maximum credit [(40% $12,780 in 2011)] Reduction for A.G.I.: $16,000 $16,690 in 2011 $0 21.06% Earned income credit (See Exhibits 1313 and 1314 and pp. 1355 through 1357.) $ 5,112 ( ,0) $ 5,112 1314 Chapter 13 The Alternative Minimum Tax and Tax Credits However, S is also eligible for the supplemental child tax credit. Income Standard deduction Three exemptions Taxable income Tax on $0 Earned income credit FICA paid ($16,000 7.65%) $ 16,000 (8,500) (11,100) $ ,000 $ $ $ ,000 5,112 1,224 The 2011 refundable portion of Child Tax Credit equals the lesser of: 1. 2. b. CTC determined as if the tax liability limitation did not apply $2,000 (2 children $1,000) or 15% of the earned income of $16,000 over $3,000 or $13,000 $1,950. Thus S's refundable portion of the CTC is $1,950. S's nonrefundable CTC is $50 and will be allowed to reduce her regular tax liability, if any. S's total tax refund is $7,062, computed as follows: Tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: CTC (limited to tax liability) . . . . . . . . . . . . . . . . . . . . . Tax liability before refundable credits . . . . . . . . . . . . . . . . . . . . Less: Refundable credits: . . . . . . . . . . . . . . . . . . . CTC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ ,000 ,000) ( $ ,000 $,1,950 5,112 (7,062) $ 7,062 Total refund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S is therefore allowed to treat $1,950 of her CTC as a refundable supplemental child tax credit as part of the earned income tax credit. So the total earned income credit is equal to $7,062. The refundable portion of the CTC is $1,950 and this amount will reduce the amount of child tax credit otherwise allowed to $50 ($2,000 $1,950), which will be limited to her regular tax liability which is $0 in this case. S's regular tax liability of $0 will be reduced by a CTC of $0 and a refundable EIC of $7,062 and the $200 withheld from her check results in a refund from the IRS of $7,262. (See Exhibits 1313 and 1314, Examples 41, 42 and 43, and pp. 1359 through 1361.)
1347 H and W should get a refund from the IRS of $8,431 as computed below. Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Standard deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Personal exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax on $0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earned income credit (see calculation at end of solution) . . . . . . . . . . . . FICA paid (7.65% $24,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,000 (11,600) (22,200) $ ,000 $ $ $ ,000 5,281 1,836 Solutions to Problem Materials 1315 The refundable portion of the CTC is the lesser of: 1. CTC determined as if the tax liability limitation did not apply $4,000 (4 children $1,000) or 2. 15% of the earned income of $24,000 over $3,000 or $21,000 $3,150. Taxpayers with three or more children may calculate the refundable portion of the credit using the excess of their social security taxes (i.e., the taxpayer's share of the FICA taxes and onehalf of selfemployment taxes) over the earned income credit if this calculation results in a greater amount than computed under the 15 percent rule. Since H and W have at least three children, they should compute the excess of their FICA taxes over their EIC and compare it to $3,150. In this case, there is no excess since their FICA is $1,836 and their EITC is $5,267. Thus H and W treats $3,150 as the refundable portion of their CTC. Thus their nonrefundable CTC is $850 ($4,000 $3,150). H and W's total refund is $8,417, computed as follows: Tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: CTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax liability after refundable credits. . . . . . . . . . . . . . . . . Less: Refundable credits: CTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ ,000 ,000) ( $ ,000 $3,150 5,281 (8,431) $ 8,431 Total refund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H and W's regular tax liability is zero, and they will have a refundable EIC of $8,431 ($3,150 $5,281), which results in a tax refund from the IRS of $8,431. *Note: Computation of the Earned Income Credit: Maximum credit [(45% $12,780)] Reduction for AGI: $24,000 21,770 $2,230 21.06% Earned income credit $ 5,751 (470) $ 5,281 (See Exhibits 1313 and 1314, Examples 41, 43 and 44, and pp. 1355 through 1361.) 1348 J's tax liability is computed as follows: A.G.I. Standard deduction Exemptions Taxable income Tax rate Tax liability J's refund is computed as follows: First determine the child care credit for his sixyearold child: Step 1: Applicable percentage 35%. 35% [($20,000 $15,000)/$2,000 rounded to 3%] 32% Step 2: Maximum allowable employment related expenses $3,000 Step 3: Determine the credit. $ 20,000 (8,500) (7,400) $ 4,100 10% , $ ,410 1316 Chapter 13 The Alternative Minimum Tax and Tax Credits Allowable expenses Applicable percentage Dependent care credit 11(See Exhibit 13.11, Example 34 and pp. 1344 through 1348.) Second, determine J's earned income credit. Maximum credit (34% $9,100) Less: Reduction for A.G.I. ($20,000 $16,690 $3,310) 15.98% $529 Earned income credit 11(See Exhibits 1313 and 1314, Examples 41 and 42 and pp. 1355 and 1357.) Next, consider the refundable portion of the child tax credit. The refundable portion of the CTC is the lesser of: 1. 2. $ 3,000 ,,.32 $ ,960 $ 3,094 ( ,529) $ 2,565 CTC determined as if the tax liability limitation did not apply $1,000 (1 child $1,000) or 15% of the earned income over $3,000 ($20,000 $3,000) 15% 2,550. Thus J's refundable portion of the CTC is $1,000. J's total tax refund is $0, computed as follows: Tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: child care credit (limited to tax liability) . . . . . . . . . . Tax liability before refundable credits . . . . . . . . . . . . . . . . . . Less: Refundable credits: . . . . . . . . . . . . . . . . . . . . . . . . . . . . CTC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,000 EIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,565 Total refund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1349 a. Gross Income Deduction for A.G.I. A.G.I. Standard deduction [$11,600 ($1,100 2)] Exemptions: ($3,700 2) Taxable income (loss) Tax liability Credit for elderly: Maximum amount Reduced by social security Reduced by 50% of A.G.I. over threshold of $10,000 $7,500 [50% ($14,000 $10,000 $4,000)] 22 amount available for credit Amount of credit b. $ 14,000 ,000) ( $ 14,000 (13,800) (7,400) $ (7,200) $ ,0 0 $ 410 ( ,410) $ ,000 $3,565 $3,565 $ 7,500 (2,500) (2,000) $ 3,000 ,15% $ ,450 There is no refund because the credit for the elderly is not a refundable credit. However, because there is no tax liability no payment is due. (See Example 39 and pp. 1353 and 1354.) Solutions to Problem Materials 1317 CUMULATIVE PROBLEMS
1350 Gross income Relocation expense reimbursement S salary R salary (State University) R salary (IEC) State tax refund Deduction for A.G.I. Rental of residence Reimbursed relocation expenses A.G.I. Itemized deductions Medical: Medical unreimbursed Less: 7.5% $92,500 Taxes: State and local Income Property taxes on lake property Property taxes on residence Interest on residence Charitable contributions Miscellaneous itemized deductions: Unreimbursed relocation expenses Temporary living expenses while away from home Rental $2,000 6 months Food $400 6 months ($2,400 50%) R's transportation R's lunches ($1,200 50%) S's transportation Less 2% of A.G.I. (2% $92,500) Total itemized deductions Exemptions (4 $3,700 in 2011) Taxable income Regular tax liability AMT Computations: Taxable income AMT adjustments: Passive loss adjustment State income refund Itemized deduction allowed for regular tax Itemized deductions for AMT: Medical Taxes Interest Charitable Adjustment for itemized deductions Exemptions Adjusted taxable income $ 5,000 12,000 25,000 60,000 1,500 $103,500 (6,000) (5,000) $ 92,500 $ 7,000 (6,938) $ 62 $ 4,000 3,000 2,000 9,000 4,800 5,000 $ 1,500 12,000 1,200 2,500 ,600 ,500 $ 18,300 (1,850) 16,450 (35,312) (14,800) $ 42,388 $ 5,508 $ 42,388 2,000 (1,500) $35,312 $ 0 ,000 4,800 5,000 (9,800) 25,512 14,800 $ 83,200 1318 Chapter 13 The Alternative Minimum Tax and Tax Credits Plus: AMT preferences: Interest on private activity bonds AMTI Exemption AMTI base AMT rate Tentative AMT Less: Regular tax liability AMT Tax liability before AMT and payments AMT Total taxes 2010 minimum tax credit credit carryover Less: CreditsChild Tax Credit (2 $1,000) Credit for Child Care ($6,000 20%) Less: Withholding Refund 7,000 $ 90,200 (74,450) $ 15,700 ,26% $ 4,095 (5,508) $ (1,413) $ 5,508 0 $ 5,508 (1,413) (2,000) (1,200) (12,000) $ (11,105) The 2010 $5,000 minimum tax credit carryforward is available to offset the regular tax to the extent it exceeds the tentative minimum tax in subsequent years. For this year, the regular tax exceeded the AMT by $1,413 ($5,508 regular tax $4,095 TAMT) so the credit is $1,413. R and S will get the benefit of the CTC and the child care credit which is allowed to offset the AMT for years after 2001 and before 2012. TAX RESEARCH PROBLEMS
Solutions to the Tax Research Problems (13511354) are contained in the Instructor's Resource Guide and Test Bank for 2012. ...
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