Solution Manual South Western Federal Taxation Individual Income Tax 35e by Hoffman Chapter 12 PDF

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Download Solution Manual South Western Federal Taxation Individual Income Tax 35e by Hoffman Chapter 12 PDF

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CHAPTER 12 ALTERNATIVE MINIMUM TAX SOLUTIONS TO PROBLEM MATERIALS

Question/ Problem 1 2

Learning Objective LO 1 LO 2

3 4 5 6 7 8 9 10 11

LO 2 LO 2, 4 LO 2, 4 LO 2 LO 2 LO 2 LO 2 LO 2 LO 3

12 13

LO 3 LO 3, 8

14 15 16

LO 3 LO 3 LO 3

17

LO 3, 8

18 19 20 21 22 23 24

LO 3 LO 3, 4 LO 3 LO 3, 4, 8 LO 3 LO 3 LO 3

Topic AMT purpose AMTI: direct versus indirect calculation approach AMT adjustments and preferences Tax preferences Tax preferences AMT formula Regular income tax liability versus AMT AMT exemption amount AMT rates AMT and nonrefundable tax credits AMT adjustment for cost recovery on personalty AMT adjustment for circulation expenditures AMT adjustment for mining exploration and development costs Long-term contract income adjustment Incentive stock options adjustment Regular income tax adjusted basis versus AMT adjusted basis Regular income tax adjusted basis versus AMT adjusted basis Passive activity losses AMT adjustment ATNOLD AMT and itemized deductions AMT and itemized deductions AMT and medical expenses AMT and interest AMT and personal and dependency exemptions

Status: Present Edition New Unchanged

Q/P in Prior Edition 2

New Unchanged Unchanged Unchanged New New New New Unchanged

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Unchanged Unchanged

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Unchanged New Unchanged

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Unchanged

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Unchanged Unchanged Unchanged Unchanged Unchanged Unchanged Updated

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4 5 6

16

Instructor: For difficulty, timing, and assessment information about each item, see p. 12-4.

12-1 © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

12-2

Question/ Problem 25 26 27 28 29 30 *31 *32 *33 *34 *35 36 *37 *38 39 40 *41 42 *43 *44 45 46 *47 *48 49 *50 51 52 *53 54 *55 *56 *57 *58 *59 *60 *61

2012 Individual Income Taxes/Solutions Manual

Learning Objective LO 4 LO 4

Topic

Percentage depletion preference Private activity bond and interest as preference LO 6 Purpose of AMT credit LO 2, 7 Corporate AMT: exemption from LO 7 ACE adjustment LO 2, 8 AMT planning on timing of recognition of deductions LO 2 AMT base LO 2 AMT calculation LO 2 AMT calculation LO 2 AMT exemption amount LO 2 AMT and nonrefundable credits LO 2, 3, 8 AMT adjustments: circulation expenditures LO 2, 3 Adjustments for circulation expenditures LO 3 Cost recovery adjustment for AMT: realty LO 3, 8 Cost recovery adjustment for AMT: personality LO 3, 8 Mining and exploration costs adjustment LO 3 AMT adjustment for long-term contract LO 3 Incentive stock option adjustment LO 3 Adjustments for incentive stock options LO 3 AMT adjustments: adjusted gain or loss LO 3 Computing AMT passive loss LO 3 Itemized deductions adjustment for AMT and medical expenses LO 3 AMT adjustments for itemized deductions LO 3 Mortgage interest adjustment for AMT LO 3 Adjustment for investment interest and private activity bond preference LO 3 Itemized deductions adjustment for AMT LO 2, 3 AMT standard deduction and personal exemption adjustments LO 3, 4 AMT percentage depletion preference LO 4 AMT IDC preference LO 2, 3, 4 Tax preference items and AMT adjustments including private activity bonds LO 2, 3, 4 Comprehensive AMT calculation LO 2, 5 AMT calculation LO 2, 3, 4, Computation of taxable income and AMT 5 LO 2, 3, 4, Computation of taxable income and AMT 5 LO 5, 6 AMT tax credit carryover LO 7 Exemption from corporate AMT for small corporations LO 7 ACE adjustment

Status: Present Edition

Q/P in Prior Edition

Unchanged Unchanged

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Unchanged Unchanged New New

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Updated Updated Updated Updated Modified Updated Modified New Unchanged

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New Unchanged Updated

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55 56 57

39

49

New Updated Modified

59 60

Unchanged

61

Instructor: For difficulty, timing, and assessment information about each item, see p. 12-4.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Alternative Minimum Tax

Question/ Problem *62 *63 *64 *65

Learning Objective LO 7 LO 7

Topic Corporate AMT Corporate AMT Cumulative Cumulative

12-3

Status: Present Edition

Q/P in Prior Edition

Unchanged Unchanged Modified Modified

62 63 65 64

*The solution to this problem is available on a transparency master. Instructor: For difficulty, timing, and assessment information about each item, see p. 12-4

Research Problem 1 2 3 4 5 6 7

Topic AMT and contingent attorney fees AMT and private activity bond interest AMT and Form 6251 AMT and tax benefit rule Internet activity Internet activity Internet activity

Status: Present Edition

Q/P in Prior Edition

Unchanged Unchanged Unchanged Unchanged Unchanged Modified Unchanged

1 2 3 4 5 6 7

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

12-4

Question/ Problem

2012 Individual Income Taxes/Solutions Manual

Difficulty

Est’d completion time

Assessment Information AICPA* AACSB* Core Comp Core Comp

1

Easy

5

FN-Measurement | FNReporting FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Reporting FN-Measurement

2 3 4 5 6 7 8

Easy Easy Easy Easy Easy Easy Easy

10 5 5 10 10 5 5

9

Easy

5

10 11

Easy Easy

5 5

12 13

Easy Easy

5 5

14 15

Medium Easy

10 5

16

Medium

10

17

Easy

10

18

Medium

15

19 20 21

Easy Easy Easy

5 5 10

FN-Measurement | FNReporting FN-Measurement FN-Measurement FN-Measurement

22 23 24 25 26 27 29 30

Easy Easy Easy Easy Easy Medium Easy Easy

5 5 5 10 10 10 10 10

FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Reporting

31 32

Easy Medium

5 10

FN-Measurement FN-Measurement

33 34 35

Medium Easy Medium

5 10 5

FN-Measurement FN-Measurement FN-Measurement

FN-Measurement | FNReporting FN-Measurement FN-Measurement | FNReporting FN-Measurement FN-Measurement FN-Measurement FN-Measurement | FNReporting FN-Measurement | FNReporting FN-Measurement

Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic | Reflective Thinking Analytic Analytic Analytic Analytic Analytic | Reflective Thinking Analytic Analytic Analytic Analytic | Reflective Thinking Analytic | Reflective Thinking Analytic Analytic Analytic | Reflective Thinking Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic | Reflective Thinking Analytic Communication | Analytic Analytic Analytic Analytic

*Instructor: See the Introduction to this supplement for a discussion of using AICPA and AACSB core com petencies in assessment.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Alternative Minimum Tax

Question/ Problem

Difficulty

Est’d completion time

12-5

Assessment Information AICPA* AACSB* Core Comp Core Comp

36

Medium

10

37 38 39

Easy Medium Medium

10 10 10

FN-Measurement | FNReporting FN-Measurement FN-Measurement FN-Measurement

40

Medium

10

FN-Measurement

41 42 43 44 45 46 47 48 49

Medium Medium Medium Medium Easy Medium Medium Medium Medium

5 5 5 5 10 5 10 10 15

50 51 52 53 54 55 56 57 58 59 60 61 62 63 64

Hard Medium Medium Easy Easy Medium Easy Medium Medium Medium Medium Easy Medium Medium Hard

5 5 10 15 5 10 10 10 10 10 10 5 10 5

65

Hard

FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement | FNReporting FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement FN-Measurement | FNReporting FN-Measurement | FNReporting

Analytic | Reflective Thinking Analytic Analytic Communication | Analytic Analytic | Reflective Thinking Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Communication | Analytic Analytic

*Instructor: See the Introduction to this supplement for a discussion of using AICPA and AACSB core competencies in assessment.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

12-6

2012 Individual Income Taxes/Solutions Manual CHECK FIGURES

31. 32.a. 32.b. 33. 34.

35.a. 35.b. 36. 37. 38.a. 38.b. 39.a. 39.b. 40.a. 40.b. 41.

42.a. 42.b. 42.c. 42.d. 43. 44.a.

44.b.

$204,675. $18,892. $57,309. Case 1: MFJ $72,628; single $65,185. Case 2: MFJ $52,628; single $45,185. Case 1: Single $37,825; MFJ $73,200; MFS $17,225. Case 2: Single $4,075; MFJ $39,450; MFS $0. Case 3: Single $0; MFJ $0; MFS $0. $0. $98,000. Expensing saves $36,457; amortizing saves $42,840. 2011 positive $300,000; 2012 negative $70,000. $2,087 positive adjustment. $2,386 positive adjustment. $15,000 positive. Elect 150% DB method. $540,000 positive adjustment for 2011. Amortize expenditures over 10 years. $385,000 negative adjustment for 2011; $225,000 positive adjustment for 2012; $500,000 negative adjustment for 2013. No reporting required in 2011. No reporting required in 2015. Positive adjustment of $15,000 for AMT in 2016. Regular income tax recognized gain of $75,000; AMT recognized gain of $60,000. $23,000 positive adjustment in 2011 and $23,000 negative adjustment in 2012. Regular income tax recognized gain of $350,000 on the building and $150,000 on the land. AMT recognized gain of $310,000 on the building and $150,000 on the land. Negative AMT adjustment of $40,000 on the building.

45. 46.a. 46.b. 46.c. 47.a. 47.b. 48. 49.a. 49.b. 49.c. 50. 51. 52.a. 52.b. 52.c. 53. 54. 55. 56.a. 56.b. 57.a. 57.b. 58. 59. 60.a. 60.b. 61. 62. 63.a. 63.b. 64. 65.

No deduction; $11,750 suspended regular income tax; $3,000 suspended AMT. $21,375. $17,000. $4,375 positive. $16,300. $8,325 positive. $2,500 positive. $17,000. $35,000. $12,000 negative adjustment. $19,200 positive. AMTI $221,500; AMT exemption $21,200. $125,000 positive AMT adjustment. $0 regular income tax basis. $0 AMT adjusted basis. $24,000. $53,500. $76,000 taxable income; $22,048 tentative AMT. AMTI $364,500. Tentative AMT $92,729. $127,500. $34,537. Regular income tax is $31,736 and AMT is $39,223. $66,656. Exempt initially from AMT as a ‘‘small corporation” in 2001. No. 2010 $750 positive; 2011 $750 positive; 2012 $1,500 negative. Quincy $22,000; Redland $24,500; Tanzen $64,000. $61,250. AMTI $245,000; AMT $0. $8,050 regular tax liability plus $18,293 AMT. $37,257 regular tax liability plus $10,886 AMT.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Alternative Minimum Tax

12-7

DISCUSSION QUESTIONS 1.

Through the use of exclusions, deductions, and credits, the regular income tax liability can be reduced or eliminated. Congress felt that some taxpayers with substantial economic incomes were taking undue advantage of these tax reduction opportunities and thereby were concerned about the inequality that resulted. Therefore, the AMT was enacted. Priscilla evidently falls into this category of taxpayer. p. 12-3

2.

Under the direct method for calculating the AMT, the statutory provisions are applied to calculate the AMT without the starting point being taxable income (i.e., as in the regular income tax liability calculation). The following formula is used in the direct approach: Gross income computed by applying the AMT rules Minus: Deductions computed by applying the AMT rules Equals: AMTI before tax preferences Plus: Tax preferences Equals: AMTI Under the indirect approach, which is the approach taken in the Code and in Form 6251, taxable income (as in the regular income tax liability calculation) is the starting point. The following formula is used in the indirect approach: Taxable income Plus: Positive AMT adjustments Minus: Negative AMT adjustments Equals: Taxable income after AMT adjustments Plus: Tax preferences Equals: AMTI Note that both approaches produce the same amount of AMTI. pp. 12-3 and 12-4

3.

The statement is correct for AMT adjustments which can be both positive and negative (i.e., cause AMTI to increase or to decrease). However, AMT preferences can only be positive (i.e., can only cause AMTI to increase). Figure 12.1

4.

a. and d. are tax preferences for the AMT. p. 12-6

5.

d. and e. are tax preferences for the AMT. a. and b. are neither an AMT adjustment nor a tax preference. c. is an AMT adjustment. Concept Summary 12.1

6.

The AMT tax formula is as follows: Regular taxable income Plus or minus: AMT adjustments Equals: Taxable income after AMT adjustments Plus: Tax preferences Equals: Alternative minimum taxable income Minus: AMT exemption Equals: Alternative minimum tax base Times: 26% or 28% rate Equals: Tentative AMT before foreign tax credit Minus: Alternative minimum tax foreign tax credit Equals: Tentative minimum tax

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

12-8

2012 Individual Income Taxes/Solutions Manual Minus: Equals:

Regular tax liability* Alternative minimum tax (if amount is positive)

*Regular tax liability for the year reduced by any allowable foreign tax credit. Figure 12.2 7.

There will be an AMT if the tentative AMT exceeds the regular income tax liability. However, if the regular income tax liability exceeds the tentative AMT, the AMT is $0 and no carryover or carryback develops. p. 12-7

8.

The cause for the difference in the AMT exemption amounts for John and Mabel is the effect of the phaseout of the AMT exemption amount. For Mabel, none of her AMT exemption amount is phased out. For John, all of his AMT exemption amount is phased out. For a single taxpayer, the maximum AMT exemption amount for 2011 is $48,450. For Mabel’s and John’s filing status (single) for 2011, the phaseout begins at AGI of $112,500. The phaseout rate is 25%. So the $48,450 amount for John is completely phased out at an AMTI of $306,300. Evidently Mabel’s AMTI does not exceed $112,500. p. 12-8

9.

In calculating Alfred’s tentative AMT, the AMT base of $350,000 ($350,000 AMTI – $0 exemption amount) normally is multiplied by the AMT statutory rate of 26% (on the first $175,000) and 28% (on the excess over $175,000). However, Alfred’s net capital gain of $70,000 and qualified dividends of $30,000 both are eligible for the same alternative tax rate (i.e., 15% for Alfred) that is used in the regular tax liability calculation. •

$250,000 ($350,000 – $100,000) × 26% and 28% tax rates

•

$100,000 × 15% tax rate

p. 12-8 10.

Historically the answer was no. Only the foreign tax credit could reduce the regular income tax liability below the amount of the tentative AMT. However, now for 2000-2011, all nonrefundable personal credits (e.g., child tax credit, adoption expenses credit, credit for elective deferrals and IRA contributions) are permitted to offset both the regular income tax liability and the AMT. p. 12-9

11.

Andy’s conclusion is wrong. The AMT cost recovery for a warehouse placed in service in 1997 is computed under the alternative depreciation system (ADS), which uses the straightline method over a 40-year life. The regular income tax cost recovery is computed under the straight-line method over a 39-year life. Thus, the difference between the AMT cost recovery and regular income tax cost recovery on Andy’s warehouse is treated as an adjustment in computing the AMT. (Note: for real property placed in service after December 31, 1998, there will be no AMT adjustment for cost recovery.) pp. 12-10 and 12-11

12.

For regular income tax purposes, circulation expenditures can be expensed. So Nell can reduce the taxable income of the newspaper by the amount of the circulation expenditures. However, the circulation expenditures could cause or increase Nell’s AMT. Such expenditures must be capitalized and amortized ratably over a 3-year period for AMT purposes. So if Nell expenses circulation expenditures for regular income tax purposes, a

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Alternative Minimum Tax

12-9

positive AMT adjustment results in the first year. Since this AMT adjustment is a timing difference, a negative AMT adjustment takes place in the second and third years. From a tax planning perspective, the AMT adjustment can be avoided if Nell capitalizes the circulation expenditures and amortizes them ratably over a 3-year period for regular income tax purposes. p. 12-9 13.

Rick may be misinformed regarding the AMT. Merely because the AMT exemption amount is zero and there are adjustments or tax preferences present does not automatically mean an AMT will result. What Rick needs to do is to determine if an AMT (and the amount) would result if he expenses the mining exploration and development costs for regular income tax purposes. p. 12-12

14.

Taxpayers who use the completed contract method for regular income tax purposes (e.g., Janice) have a potential AMT adjustment each year for the difference between the income reported under the completed contract method versus that which would have been reported under the percentage of completion method. The adjustment can be either positive or negative depending on the amount of income recognized under the different methods. pp. 12-12 and 12-13

15.