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24211_ch13_final_p001-018 - 13 The Alternative Minimum Tax...

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The Alternative Minimum Tax and Tax Credits Solutions to Problem Materials D I S C U S S I O N Q U E S T I O N S 13-1 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 declining-balance 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. 13-7 through 13-9.) 13-2 To avoid an adjustment for AMT, and thereby reduce the record-keeping 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 declining-balance method over the recovery period of the property for AMT purposes was provided. This election will allow a faster write-off 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. 13-8 and 13-9, Exhibit 13-4 and § 56(a)(1)(A).] 13-3 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 13-1, Example 2, pp. 13-3 through 13-4, and § 55(a).] 13-4 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. 13-4, and §§ 55(c)(2) and 38(c)(2).] The same rules apply to corporate taxpayers. 13-5 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. 13 13-1
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The 26 percent AMT rate (20% corporations) is applied to this broad base. (See Exhibit 13-1 on p. 13-4 and p. 13-5 for specified rates for individual taxpayers. Also, see Examples 12 through 14 and pp. 13-17 through 13-19 for a situation where the AMT applied in part because of the taxpayer s mix of itemized deductions.) 13-6
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24211_ch13_final_p001-018 - 13 The Alternative Minimum Tax...

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