Solutions

CHAPTER 14
ALTERNATIVE MINIMUM TAX
SOLUTIONS TO PROBLEMS MATERIALS
Status: Q/P
Question/ Present in Prior
Problem Topic Edition Edition
1 AMT purpose Unchanged 1

2 AMTI: direct versus indirect calculation approach Unchanged 2
3 AMT adjustments Unchanged 3
4 Tax preferences Modified 4
5 Tax preferences Unchanged 5
6 AMT formula Unchanged 6
7 Regular income tax liability versus AMT Unchanged 7
8 AMT exemption amount Unchanged 8
9 AMT rates Unchanged 9
10 AMT and nonrefundable tax credits Unchanged 10
11 AMT adjustment for cost recovery on realty Unchanged 11
12 AMT adjustment for mining exploration and Unchanged 12
development costs
13 Issue ID Unchanged 13
14 Long-term contract income adjustment New
15 Incentive stock options adjustment New
16 Regular income tax adjusted basis versus AMT Unchanged 16
adjusted basis
17 Issue ID Modified 17
18 Passive activity losses AMT adjustment Unchanged 18
19 ATNOLD Unchanged 19
20 AMT and itemized deductions Unchanged 20
21 Issue ID Unchanged 21
22 AMT cutback adjustment Unchanged 22
23 AMT and interest Unchanged 23
24 AMT and personal and dependency exemptions Unchanged 24
25 Percentage depletion preference New
26 Private activity bond preference Unchanged 26
14-1
14-2 2004 Comprehensive Volume/Solutions Manual
Status: Q/P
Question/ Present in Prior
Problem Topic Edition Edition
27 Purpose of AMT credit Unchanged 27

28 Corporate versus noncorporate AMT New
29 Effect of ACE adjustment on financial and tax Unchanged 29
accounting
30 AMT planning on recognition of income Unchanged 30
* 31 AMT base Unchanged 31
* 32 AMT calculation Unchanged 32
* 34 AMT exemption amount Modified 34
* 35 AMT and nonrefundable credits Unchanged 35
36 AMT adjustments: circulation expenditures Modified 36
* 37 Adjustments for circulation expenditures Unchanged 37
38 Cost recovery adjustment for AMT: realty Modified 38
39 Cost recovery adjustment for AMT: personalty Unchanged 39
40 Mining and exploration costs adjustment Unchanged 40
* 41 AMT adjustment for long-term contract New
* 42 Incentive stock option adjustment Unchanged 42
43 Adjustments for incentive stock options New
* 44 AMT adjustments: adjusted gain or loss Unchanged 44
45 Computing AMT passive loss Unchanged 45
46 Itemized deductions adjustment for AMT and Modified 46
medical expenses
* 47 AMT adjustments for itemized deductions Unchanged 47
* 48 Mortgage interest adjustment for AMT Unchanged 48
49 Adjustment for investment interest and private Unchanged 49
activity bond preference
* 50 Itemized deductions adjustment for AMT New
51 AMT standard deduction and personal exemption New
adjustments
52 AMT percentage depletion preference New
* 53 AMT IDC preference Unchanged 53
54 Tax preference items and AMT adjustments Unchanged 54
including private activity bonds
* 55 Comprehensive AMT calculation New
* 57 Computation of taxable income and AMT Unchanged 57
* 58 Computation of taxable income and AMT New
* 59 AMT tax credit carryover Unchanged 59
* 60 Exemption from corporate AMT for small Modified 60
corporations
* 61 ACE adjustment Unchanged 61
* 62 Corporate AMT Unchanged 62
* 63 Corporate AMT Unchanged 63
* 64 Cumulative Modified 64
* 65 Cumulative Modified 65
*The solution to this problem is available on a transparency master.

Alternative Minimum Tax 14-3
CHECK FIGURES
31. $204,875. 44.b. $40,000 negative adjustment on the

32.a. $27,137. building and $0 on the land.
32.b. $57,365. 45. No deduction; $11,750 suspended
33. Case 1: MFJ $26,699; single regular tax; $3,000 suspended AMT.
$21,177. 46.a. $14,500.
Case 2: MFJ $11,699; single $6,177. 46.b. $9,500.
34. Case 1: Single $30,125; MFJ 46.c. $5,000 positive.
$49,000; MFS $9,500. 47.a. $14,500.
Case 2: Single $5,125; MFJ 47.b. $8,500 positive.
$27,750; MFS $0. 48. $5,000 positive.
Case 3: Single $0; MFJ $0; MFS $0. 49. Regular income tax $10,000; AMT
35.a. $0. $11,500.
35.b. $78,000. 50.a. $17,450 positive.
36. Expensing saves $31,128; 50.b. $17,450 positive and $1,100 tax
amortizing saves $36,080. preference.
37. 2003 positive $90,000; 2004 51. $207,800.
negative $5,000. 52. $9,000 tax preference.
38.a. $3,862 positive adjustment. 53. $24,000.
38.b. $0. 54. $51,800.
39.a. $12,500 positive. 55. $76,650 taxable income; $25,350
39.b. Elect 150% DB method. tentative AMT.
40.a. $540,000 positive adjustment for 56. $17,663.
2003. 57.a. $117,800.
40.b. Amortize expenditures over 10 57.b. $31,667.
years. 58. Total tax is $34,427.
41. $120,000 positive adjustment for 59. $63,795.
2003; $120,000 negative adjustment 60.a. Exempt initially from AMT as a
for 2004. “small corporation” in 1998.
42.a. No reporting required in 2003. 60.b. No.
42.b. No reporting required in 2007. 61. 2002 $750 positive; 2003 $750
42.c. Positive adjustment of $30,000 for positive; 2004 $1,500 negative.
AMT in 2008. 62. Quincy $22,000; Redland $24,500;
42.d. Regular income tax recognized gain Tanzen $64,000.
of $80,000; AMT recognized gain of 63.a. $1,020,000.
$50,000. 63.b. AMTI $3,690,000; tentative AMT
43. $27,000 positive AMT adjustment in $738,000.
2003; $27,000 negative AMT 63.c. AMT $0.
adjustment in 2004. 64. $3,349 regular tax liability plus
44.a. Regular income tax recognized gain $20,084 AMT.
of $350,000 on the building and 65. $43,352 regular tax liability plus
$150,000 on the land; AMT $9,648 AMT.
recognized gain of $310,000 on the
building and $150,000 on the land.
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. p. 14-2
2. Starting with taxable income in calculating the AMT is the indirect approach. This is the
approach normally used and the one followed in Form 6251. However, the AMT also
can be calculated using 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: AMT income
Minus: Exemption
Equals: AMT base
Times: Rates
Equals: Tentative AMT before foreign tax credit
Minus: AMT foreign tax credit
Equals: Tentative AMT
Minus: Regular income tax liability before credits other than the foreign tax credit
Equals: AMT
Note that both approaches produce the same amount of AMT. pp. 14-4, 14-5, and
Figure 14-1
3. The statement is correct for AMT adjustments that relate to timing differences (e.g.,
circulation expenditures and depreciation). However, not all AMT adjustments relate to
timing differences (e.g., itemized deductions permitted for regular income tax purposes
that are not permitted for AMT purposes). These adjustments do not reverse. pp. 14-4 to
14-6
4. a., d., and e. are tax preferences for the AMT. p. 14-6
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. pp. 14-4 to 14-6
6. The AMT tax formula is as follows:
Regular taxable income

Plus or minus: 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
Minus: Regular tax liability*

Equals: Alternative minimum tax (if amount is positive)
*Regular tax liability for the year reduced by any allowable foreign tax credit.
Figure 14-2
7. The statement is incorrect. There is an AMT liability only if the tentative AMT exceeds
the regular income tax liability. The amount of the excess is the AMT. The total tax
liability is the summation of the regular income tax liability and the AMT. pp. 14-9 and
14-10
8. a. The AMT exemption can be thought of as a materiality amount. It relieves

taxpayers who do not have substantial adjustments and preferences from the
burden of the AMT.
b. The initial amount (prior to the phaseout) of the exemption is as follows:
• $35,750 for a single taxpayer.

• $49,000 for married taxpayers filing jointly.
• $24,500 for married taxpayers filing separately.
c. The phaseout of the exemption amount is an application of the wherewithal to pay

concept. As the ability to pay increases as measured by the taxpayer’s AMTI, the
justification for relieving the taxpayer of the burden of the AMT decreases.
pp. 14-8 and 14-9
9. In calculating the tentative AMT, the AMT base normally is multiplied by the AMT
statutory rates of 26% (on the first $175,000 of the AMT base) or 28% (on the AMT base
in excess of $175,000). However, Alice’s net capital gain of $100,000 that is included in
the AMT base is eligible for the same alternative tax rate (i.e., 20% for Alice) that is used
in the regular tax liability calculation. p. 14-9
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 certain
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. 14-10
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
straight-line 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, however, that for
real property placed in service after December 31, 1998, the regular income tax cost
recovery period of 39 years (or 27.5 years for residential property) is to be used in
calculating the AMT cost recovery. Thus, for such property, there will be no AMT
adjustment for cost recovery. pp. 14-11 and 14-12
12. For regular income tax purposes, mining exploration and development costs may be
expensed in the year incurred. For AMT purposes, such costs must be amortized over 10
years. The AMT adjustment for mining exploration and development costs is equal to
the amount expensed minus the amount that would have been allowed if the costs had
been capitalized and amortized ratably over a 10-year period. The AMT adjustment can
be avoided if the taxpayer elects to write off the costs over a 10-year period for regular
income tax purposes. pp. 14-13 and 14-14
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. pp. 14-7 and 14-13
14. For a long-term contract, taxpayers are required to use the percentage of completion
method for AMT purposes. If a taxpayer uses the completed contract method for regular
income tax purposes, this will give rise to an AMT adjustment equal to the difference
between income reported under the percentage of completion method and the amount
reported using the completed contract method. The adjustment can be either positive or
negative depending on the amount of income recognized under the different methods.
p. 14-14
15. a. If Megan exercises the incentive stock option (ISO), she will have an AMT
adjustment of $4,500 [($65 fair market value – $20 option price) X 100 shares] in
the first taxable year in which the rights in the stock are freely transferable or are
not subject to a substantial risk of forfeiture. She will not be required to
recognize any income for regular income tax purposes as a result of exercising the
ISOs. For AMT purposes, the basis of such stock is equal to the fair market value
taken into account in determining the adjustment. Examples 10 and 11 and
related discussion
b. Yes. If Megan exercises the option and disposes of the stock in the same tax year,
there is no AMT adjustment. p. 14-14
16. The regular income tax adjusted basis for the building is determined by subtracting the
regular income tax depreciation deductions. The AMT adjusted basis for the building is
determined by subtracting the AMT depreciation deductions. Since the regular income
tax and the AMT depreciation deductions are not the same for a building placed in
service before January 1, 1999, the adjusted basis for regular income tax and AMT
purposes will differ. Consequently, the recognized gain or loss for regular income tax
and AMT purposes will also differ. pp. 14-15 and 14-16
17. The relevant issues are the tax consequences of each of the two proposed transactions for
both regular income tax purposes and for AMT purposes. The AMT analysis is relevant
only if the AMT applies since the adjustment would be negative. For regular income tax
purposes, the sale to Abby in 2004 would result in deferring the reporting of the gain of
$20,000 until 2004. This deferral treatment also would apply for AMT purposes (i.e., the
realized loss of $5,000 cannot be recognized). If the sale occurred in 2003 to Ed, for
regular income tax purposes, the $20,000 realized gain is recognized. However, for
AMT purposes, there would be a $25,000 negative adjustment for the difference between
the $20,000 gain for regular income tax purposes and the $5,000 loss for AMT purposes.
Note also that for regular income tax purposes, any portion of the $20,000 recognized
gain that is classified as ordinary income will be subject to a higher tax rate in 2003
(27%) than in 2004 (26%). pp. 14-15 and 14-16
18. Income or loss from passive activities is computed differently for regular income tax
purposes and for AMT purposes. For example, the depreciation and depletion rules differ
for regular income tax and AMT purposes. The resulting difference in net income (loss)
could require an AMT adjustment. pp. 14-16, 14-17, and Example 15
19. Positive adjustments and tax preferences are added to the regular income tax NOL in
calculating the ATNOLD (i.e., making the ATNOLD a smaller amount). Negative
adjustments are subtracted from the regular income tax NOL in calculating the
ATNOLD. pp. 14-17 and 14-18
20. The tax treatment for regular income tax and AMT purposes is the same for the
following:
Casualty losses
Charitable contributions
A deduction for state income taxes, miscellaneous itemized deductions subject to the 2%
floor, and real estate taxes is not permitted for AMT purposes. While a deduction is
permitted for medical expenses for AMT purposes, the floor is 10% of AGI rather than
the 7.5% floor.
pp. 14-18 to 14-20
21. The obvious issue is whether Matt should follow the friend’s advice in order to increase
his itemized deductions. On the surface, this appears to be sound tax advice. Factoring
in the effect of indexing on the standard deduction, it appears that Matt may have to use it
in the future. Incurring the mortgage on the beach house would enable him to continue to
itemize deductions. However, another issue that needs to be addressed is whether Matt
will be subject to the AMT. The mortgage interest on the beach house will be deductible
for AMT purposes, since it is qualified housing interest. In addition, determination needs
to be made of whether the tax-exempt bonds in which Matt is investing are private
activity bonds, since the interest on such bonds is a tax preference. pp. 14-20 and 14-23
22. The purpose of the cutback adjustment for regular income tax purposes is to partially
phase out the deduction for itemized deductions for high income taxpayers (i.e., AGI
exceeds a threshold amount). The AMT calculation takes a different approach by
disallowing certain itemized deductions (e.g., state income taxes, property taxes) and by
reducing the amount of others (e.g., medical expenses, qualified housing interest versus
qualified residence interest). There is no cutback adjustment in calculating the AMT.
Since the starting point for calculating the AMT is taxable income, there is a negative
adjustment for the amount of the cutback adjustment in calculating AMTI. p. 14-19
23. The interest deduction for regular income tax purposes includes qualified residence
interest, investment interest to the extent of net investment income reported in computing
taxable income, and qualified interest on student loans (i.e., a deduction for AGI). The
alternative minimum tax itemized deduction for interest includes qualified housing
interest, plus other interest to the extent of qualified net investment income that is
included in the AMT base, and qualified interest on student loans. Qualified housing
interest could be less than qualified residence interest. pp. 14-19 to 14-21
24. For regular income tax purposes, a deduction of $3,050 in 2003 is permitted for each
personal exemption and dependency deduction (subject to partial phaseout as AGI
exceeds a threshold amount). For AMT purposes, the benefit of this deduction is
eliminated with a positive adjustment in calculating AMTI. However, in converting
AMTI to the AMT base, an AMT exemption is allowed ranging from $24,500 to $49,000
(subject to complete phaseout as AMTI exceeds a threshold amount). If there were not a
positive adjustment for the personal and dependency exemptions amount deducted in
calculating taxable income, the taxpayer would receive double benefits in calculating the
AMT. pp. 14-8, 14-9, and 14-21
25. A tax preference is created for AMT purposes once the adjusted basis of the mineral
deposit is reduced to $0 and percentage depletion continues to be deducted. p. 14-22
26. For regular income tax purposes, the $18,000 of interest income is excludible from gross
income and the $7,000 of interest expense is not deductible. For AMT purposes, interest
earned on private activity bonds is included in AMTI. Interest incurred in purchasing or
carrying such bonds is offset against the interest income. Also, for AMT purposes, the
interest earned (net of any related expenses) on private activity bonds is included in the
calculation of net investment income in calculating the investment interest deduction.
pp. 14-21 and 14-23
27. The purpose of the AMT credit is to provide equity for the taxpayer when timing
differences that give rise to AMT adjustments reverse. The credit arises when positive
adjustments are included in the AMT base. It is used to reduce the regular income tax
liability for prior years’ AMT liability attributable to timing differences.
To determine the amount of the AMT credit, it is necessary to compute the AMT with
timing adjustments and AMT exclusions (non-timing adjustments and preferences)
included in the AMT base. The AMT credit carryover is the difference between the
amount so computed and the AMT that would result without including timing
adjustments in the AMT base. The AMT credit may be carried over indefinitely.
Examples 29 to 31 and related discussion
28. The AMT applicable to corporations is similar to that applicable to noncorporate

taxpayers. However, there are several important differences:
• The corporate AMT rate is 20% versus 26% and 28% for noncorporate taxpayers.
• The AMT exemption for corporations is $40,000 reduced by 25% of the amount by
which AMTI exceeds $150,000.
• Tax preferences applicable to noncorporate taxpayers are also applicable to

corporate taxpayers, but some adjustments differ including the ACE adjustment.
• A small corporation is exempt from the AMT. In addition, all corporations are
exempt from the AMT in the first year of existence.
pp. 14-27 to 14-33
29. Through the ACE adjustment, Congress is indirectly imposing a conformity requirement
on corporations. While a corporation may still choose to use different methods for tax
and financial accounting purposes, it may no longer be able to do so without the
possibility of incurring AMT as a result of the ACE adjustment. Thus, a corporation may
incur AMT not only because of specifically targeted adjustments and preferences, but
also as a result of any methods that cause adjusted current earnings to exceed AMTI
before the ACE adjustment. pp. 14-30 to 14-32
30. Situations can arise when it would be advisable for a taxpayer to accelerate income into
an AMT year. A 27% to 38.6% taxpayer who is subject to the AMT in the current year
should consider accelerating income into the AMT year so the income will be taxed at a
26% or 28% rate. For example, collectibles that produce long-term capital gain can be
sold in the AMT year, exposing the gain to a possible 26% rate, rather than the 28%
alternative capital gains rate that might otherwise apply. Examples 36 and 37 and related
discussion
PROBLEMS
31. Rachel’s taxable income $175,000

Plus: Positive AMT adjustments 95,000
Tax preferences 25,000
Less: Negative AMT adjustments (80,000)
Equals: AMTI $215,000
Less: Exemption [$35,750 – 25%($215,000 – $112,500)] (10,125)
Equals: AMT base $204,875
pp. 14-4 to 14-9
32. a. Calculation of regular income tax liability:

Tax on $120,000: $ 14,868
On $68,800 15,360
On $51,200 X 30% $ 30,228
Calculation of AMT:
Taxable income $120,000
Adjustments 60,000
Tax preferences 45,000
AMTI $225,000
Exemption [$35,750 – 25%($225,000 – $112,500)] (7,625)
AMT base $217,375
Rate:
26% X $175,000 $45,500
28% X $ 42,375 11,865
Tentative AMT $ 57,365
Regular income tax liability (30,228)
AMT $ 27,137
b. Arthur’s total tax liability is $57,365, the summation of the regular tax liability of
$30,228 and the AMT of $27,137.
c. Willis, Hoffman, Maloney, and Raabe, CPAs

5191 Natorp Boulevard
Mason, OH 45040
February 6, 2004
Mr. Arthur East

100 Colonel’s Way
Conway, SC 29526
Dear Mr. East:
As you requested, we have calculated your Federal tax liability for 2003. The
total amount is $57,365. This consists of the regular income tax liability of
$30,228 and the alternative minimum tax (AMT) liability of $27,137. The
calculation of the regular income tax liability appears on Form 1040.
Since this is the first year that you have been subject to the AMT, I thought that I
should comment on this additional tax. The calculation of the AMT appears on
Form 6251. The AMT is a parallel income tax system. Its purpose is to provide
assurance that no taxpayer with substantial economic income can avoid
significant tax liability by using exclusions, deductions, and credits. As indicated
on Form 6251, some of the exclusions and deductions on your Form 1040 are
disallowed on your Form 6251. Such items are treated as positive adjustments
and preferences on Form 6251.
I would like to work with you to minimize your AMT in the future. Since this is
our first year to do tax compliance work for you, we think we can use tax
planning techniques to reduce your Federal tax liability. Please call me so we can
schedule a meeting at a time convenient to you.
Sincerely,
Steve Ash, CPA

Partner
pp. 14-7 to 14-9 and Figure 14-2
33. Case 1
Married
filing jointly Single
Tentative AMT $190,000 $190,000
– Regular tax liability (163,301)** (168,823)*
= AMT $ 26,699 $ 21,177
* $96,236 + $72,587 = $168,823.

** $90,714 + $72,587 = $163,301.
Case 2
Married
filing jointly Single
Tentative AMT $175,000 $175,000
– Regular tax liability (163,301)** (168,823)*
= AMT $ 11,699 $ 6,177
Figure 14-2
34. Single taxpayer:

Case 1 $35,750 – 25%($135,000 – $112,500) = $30,125
Case 2 $35,750 – 25%($235,000 – $112,500) = $ 5,125
Case 3 $35,750 – 25%($435,000 – $112,500) = $ -0-
Married filing jointly:

Case 1 $49,000 – $0(no exemption phase out) = $49,000
Case 2 $49,000 – 25%($235,000 – $150,000) = $27,750
Case 3 $49,000 – 25%($435,000 – $150,000) = $ -0-
Married filing separately:

Case 1 $24,500 – 25%($135,000 – $75,000) = $9,500
Case 2 $24,500 – 25%($235,000 – $75,000) = $ -0-
Case 3 $24,500 – 25%($435,000 – $75,000) = $ -0-
pp. 14-8 and 14-9
35. a. Leona’s AMT is $0.

Excess of tentative AMT over regular tax liability ($ 57,000)
Since the result is negative, Leona has no AMT.
b. The nonrefundable credits cannot reduce the regular income tax liability below
the amount of the tentative AMT. Therefore, Leona can use only $57,000 of the
$65,000 nonrefundable credits to reduce her regular income tax liability to
$78,000 ($135,000 – $57,000). The remaining $8,000 ($65,000 – $57,000) of
nonrefundable credits will be lost unless they are the type of credits which qualify
for carryback and/or carryforward.
pp. 14-9, 14-10, and Figure 14-2
36. Angela has two options available for the $123,000 of circulation expenditures. First, she
could deduct the entire $123,000 in 2003. If she does this, she will have a positive AMT
adjustment of $82,000 ($123,000 – $41,000) in 2003 and negative AMT adjustments of
$41,000 ($0 – $41,000) in 2004 and 2005.
Under the second option, Angela could elect to capitalize the circulation expenses and
deduct them over a 3-year period (i.e., $41,000 per year). If this election is made, there is
no AMT adjustment, since the deduction will be the same for regular income tax
purposes and AMT purposes.
The 30% bracket for single taxpayers begins at $68,800 and ends at $143,500 in 2003.
The first $6,000 is taxed at 10%, the next $22,400 is taxed at 15%, and the next $40,400
is taxed at 27%.
If Angela deducts the entire $123,000 in 2003, she will have zero taxable income. As a
result, she will have used $6,000 of the $123,000 deduction to offset income that would
be taxed at 10%, $22,400 of the $123,000 deduction to offset income that would be taxed
at a 15% rate, $40,400 to offset income that would be taxed at the 27% rate, and $54,200
to offset income that would be taxed at 30%. Her maximum potential savings from this
strategy will be $14,868 (the tax on $68,800) plus 30% on the remainder of $54,200
($123,000 – $68,800). Thus, the tax effect of the $123,000 deduction would be $31,128
[$14,868 + .30($54,200)].
The 30% bracket spans more than $41,000 in 2003 ($143,500 – $68,800 = $74,700), and
the 29% bracket is likely to span a similar range in 2004 and 2005. If Angela writes off
the circulation expenditures over three years at the rate of $41,000 per year, the entire
$123,000 deduction will offset income that would be taxed at near 30% (i.e., 30% in
2003 and 29% in 2004 and 2005). Therefore, Angela should be advised that she can
achieve substantial tax savings by amortizing the circulation expenditures over a three-
year period. Her tax savings from a $123,000 deduction spread over 3 years at 30% in
2003 and 29% in 2004 and 2005 would be $36,080 [($41,000 X 30%) + ($41,000 X
29%) + ($41,000 X 29%)].
In summary, Angela could save $31,128 in income tax if she expenses the circulation
expenditures in the year incurred, but could save $36,080 if she amortizes them over 3
years.
Note: The time value of money should be considered in computing the final tax savings
achieved by the three-year amortization strategy.
p. 14-11
37. Computation of adjustment for circulation expenditures:
2003 regular income tax deduction $135,000

2003 AMT deduction ($135,000/3) (45,000)
Positive AMT adjustment in 2003 $ 90,000
2004 regular income tax deduction $ 60,000
2004 AMT deduction: [($135,000/3) + ($60,000/3)] (65,000)
Negative AMT adjustment in 2004 ($ 5,000)
p. 14-11
38. a. If the apartment building is acquired and placed in service in 1997, there is an
AMT positive adjustment for 2003 because the regular income tax cost recovery
period is 27.5 years and the AMT cost recovery period is 40 years.
Regular income tax cost recovery for 2003 (Table 7-9):

$340,000 X 3.636% = $12,362
AMT cost recovery for 2003 (Table 7-10):

$340,000 X 2.500% = $8,500
Thus, the amount of the positive AMT adjustment is $3,862 ($12,362 – $8,500).
b. If the apartment building is acquired and placed in service in 2003, there is no

AMT adjustment for cost recovery for 2003 because the regular income tax cost
recovery period of 27.5 years also is used for AMT purposes.
Regular income tax cost recovery for 2003 (Table 7-9):

$340,000 X 3.485% = $11,849
AMT cost recovery for 2003 (Table 7-9):

$340,000 X 3.485% = $11,849
pp. 14-11 and 14-12
39. a. In order to produce the largest depreciation deduction for regular income tax
purposes, Helen will use Table 7-1 (200% DB method). For AMT purposes, she
must use Table 7-4 (150% DB method).
Regular income tax depreciation ($250,000 X 20%) $50,000

AMT depreciation ($250,000 X 15%) (37,500)
Positive adjustment $12,500
b. Helen could elect to depreciate the equipment using Table 7-4 (150% DB
method) for regular income tax purposes rather than under the regular MACRS
method (200% DB method). The election reduces the depreciation percentage
factor from 20% to 15%. Therefore, the depreciation deduction for both AMT
purposes and regular income tax purposes would be $37,500.
Making the election reduces the AMT adjustment to $0. Such an election may be
beneficial if Helen is going to be subject to the AMT. The election would not be
beneficial if Helen’s regular tax liability is going to exceed her tentative AMT
anyway.
c. Willis, Hoffman, Maloney, and Raabe, CPAs

Mason, OH 45040
August 8, 2003
Ms. Helen Carlon

500 Monticello Avenue
Glendale, AZ 85306
Dear Ms. Carlon:
In response to your inquiry regarding the appropriate depreciation method for the
$250,000 of equipment placed in service during March 2003, two options are
available. The first will produce a larger depreciation deduction, but may result
in the AMT being paid. The second option will produce a smaller depreciation
deduction, but will have no effect on the AMT.
Under the first option, depreciation is calculated using the 200% declining
balance method with a 5-year recovery period. The amount of the depreciation
deduction under this method is $50,000 ($250,000 X 20%). However, for AMT
purposes, the depreciation is calculated using the 150% declining balance method
with a 5-year recovery period. The amount of the depreciation deduction for
AMT purposes is $37,500 ($250,000 X 15%). Therefore, for AMT purposes,
there will be a positive adjustment of $12,500 ($50,000 – $37,500).
Under the second option, depreciation for regular income tax purposes and AMT
purposes is calculated using the depreciation method and recovery period required
for AMT purposes. Thus, in both cases, the amount of the depreciation deduction
is $37,500. The benefit of electing to calculate the regular income tax
depreciation this way is that the aforementioned positive adjustment for AMT
purposes is avoided.
Whether the election that produces a smaller depreciation deduction for regular
income tax purposes but avoids a positive AMT adjustment is beneficial depends
on your AMT status absent the effect of the depreciation deduction. In order to
advise you regarding this election, I need to meet with you to obtain additional
tax information. Please provide me with a date and time that is convenient to you.
Sincerely,
James Singer, CPA

Partner
pp. 14-12 and 14-13
40. a. Mining exploration and development costs can be expensed in the year incurred
for regular income tax purposes. These expenditures must be amortized over a
10-year period for AMT purposes. Gary’s regular income tax deduction would be
$600,000 in 2003 and his AMT deduction would be $60,000 ($600,000/10).
Therefore, Gary would have a positive adjustment of $540,000 in 2003 ($600,000
regular income tax deduction – $60,000 AMT deduction). His negative
adjustment for each of the next nine years will be $60,000 ($0 regular income tax
deduction – $60,000 AMT deduction).
b. Gary can avoid having an adjustment by electing to amortize the mining

exploration and development costs over a ten-year period for regular income tax
purposes.
c. Gary should consider the present value of the cash flows, different tax brackets
between regular income tax and AMT, and the possible effect this adjustment will
have on future AMT calculations.
Example 9 and related discussion

41. For 2003, there is a positive AMT adjustment of $120,000.
AMT:
Revenues ($500,000 X 60%) $300,000
Expenses (180,000) $120,000
Regular income tax:

Revenues $ -0-
Expenses (-0-) (-0-)
AMT adjustment $120,000
For 2004, there is a negative AMT adjustment of $120,000.
AMT:
Revenues ($500,000 – $300,000) $200,000
Expenses ($295,000 – $180,000) (115,000) $ 85,000
Regular income tax:

Revenues $500,000
Expenses (295,000) (205,000)
AMT adjustment ($120,000)
p. 14-14
42. a. For regular income tax purposes and for AMT purposes, there are no tax results
which need to be reported in 2003, the year of grant.
b. For regular income tax purposes and for AMT purposes, there are no tax results
which need to be reported in 2007, the year of exercise.
c. For regular income tax purposes, the spread of $30,000 ($100,000 fair market
value – $70,000 option price) is not recognized in 2008, the year when rights in
the stock become freely transferable and are not subject to a substantial risk of
forfeiture. For AMT purposes, however, the spread of $30,000 is a positive AMT
adjustment in 2008.
d. The regular income tax basis of $70,000 is different from the AMT basis of
$100,000 ($70,000 + $30,000). Thus, there is a negative AMT adjustment in
2011, the year of sale, of $30,000 ($80,000 – $50,000).
Regular Income Tax AMT

Amount realized $150,000 $150,000
Amount basis (70,000) (100,000)
Recognized gain $ 80,000 $ 50,000
pp. 14-14 and 14-15
43. In 2003, when the rights become freely transferable and are not subject to a substantial
risk of forfeiture, Diego has a positive $27,000 adjustment for AMT purposes [($92 –
$65) X 1,000 shares]. The transaction has no effect on regular taxable income or
alternative minimum taxable income in 1998. There is no effect on regular taxable
income in 2003 when the rights in the stock become freely transferable and are not
subject to a substantial risk of forfeiture.
When the stock is sold in 2004, the recognized gain for regular income tax purposes and
AMT purposes is calculated as follows:

Amount realized $100,000 $100,000
Amount basis (65,000) (92,000)
Recognized gain $ 35,000 $ 8,000
The AMT basis is the fair market value on the exercise date (i.e., $92 per share). Since
the gain on the sale for regular income tax purposes exceeds the recognized gain for
AMT purposes, there is a $27,000 negative adjustment in calculating AMT. pp. 14-14
and 14-15
44. a. Alicia has a recognized gain for both regular income tax and AMT purposes.
Building Land Building Land

Amount realized $800,000 $250,000 $800,000 $250,000
Adjusted basis (450,000) (100,000) (490,000) (100,000)
Realized gain $350,000 $150,000 $310,000 $150,000
Recognized gain $350,000 $150,000 $310,000 $150,000
b. There is no AMT adjustment associated with the sale of the land because the
recognized gain for regular income tax purposes and AMT purposes is the same
($150,000).
There is a negative AMT adjustment associated with the sale of the apartment
building of $40,000 ($310,000 – $350,000). This results because the cost
recovery deductions on the building for regular income tax purposes exceed those
for AMT purposes by $40,000 ($450,000 adjusted basis – $490,000 adjusted
basis).
Recognized gain: regular income tax $350,000

Recognized gain: AMT (310,000)
Negative AMT adjustment $ 40,000
pp. 14-15 and 14-16
45. The 2003 loss will not be deductible either for regular income tax or AMT purposes,
since no passive income is present. The suspended passive loss for regular income tax
purposes is $11,750 ($160,000 gross income – $122,000 operating expenses – $49,750
regular income tax depreciation). The suspended passive loss for AMT purposes is
$3,000 ($160,000 gross income – $122,000 operating expenses – $41,000 ADS
depreciation). Examples 15 and 16 and related discussion
46. a. All of the medical expenses are eligible for the medical expense deduction.
Therefore, for regular income tax purposes, Wally’s and Gloria’s medical expense
deduction is $14,500 [$29,500 – 7.5%($200,000)].
b. For AMT purposes, only the medical expenses in excess of 10% of AGI can be
deducted. Therefore, the medical expense deduction is $9,500 [$29,500 – 10%
($200,000)].
c. The AMT adjustment for medical expenses is a positive adjustment of $5,000

($14,500 – $9,500).
pp. 14-18 and 14-19
47. a. Wolfgang’s itemized deductions for AMT purposes are calculated as follows:
Medical expenses [$5,500 – (10% X $60,000)] $ -0-

Charitable contributions 7,000
Qualified housing interest 6,000
Casualty loss 1,500
Total $14,500
Neither the state income taxes of $4,200 nor the miscellaneous itemized
deductions of $3,300 are deductible for AMT purposes. An additional 2.5% of
AGI ($1,500) is disallowed in calculating medical expenses. Thus, none of the
medical expenses are deductible.
b. The AMT adjustment is calculated as follows:
Itemized deductions for regular income tax $23,000

Less: Itemized deductions for AMT purposes (14,500)
Positive AMT adjustment $ 8,500
pp. 14-18 to 14-21
48. For regular income tax purposes, the following amounts are deductible as qualified
residence interest:
Interest on personal residence $12,000

Interest on cabin 4,800
Interest on home equity loan 5,000
Total qualified residence interest deduction $21,800
For AMT purposes, however, the deduction is limited to qualified housing interest, which
includes the following:
Interest on personal residence $12,000

Interest on cabin 4,800
Total qualified housing interest deduction $16,800
Interest on the home equity loan is not deductible for AMT purposes because the
proceeds were not used to substantially improve a qualified residence. Therefore, an
AMT adjustment is required:
Total qualified residence interest deduction $21,800

Total qualified housing interest deduction (16,800)
Positive AMT adjustment $ 5,000
pp. 14-19 and 14-21
49. For regular income tax and AMT purposes, investment interest expense is limited to net
investment income. Therefore, Yoon’s regular income tax deduction for investment
interest expense is limited to $10,000 (the amount of dividends received). For regular
income tax purposes, the private activity bond interest of $5,000 is excludible from gross
income and the related $3,500 interest expense is not deductible. The $5,000 interest
income on the private activity bonds is offset by the $3,500 interest expense, so Yoon
reports a $1,500 tax preference for AMT purposes. In addition, the net investment
income of $1,500 ($5,000 – $3,500) from the private activity bonds is treated as part of
net investment income for AMT purposes. Net investment income is $11,500 ($10,000 +
$1,500). Therefore, for AMT purposes, $11,500 of the $13,000 investment interest
expense can be deducted. pp. 14-20 and 14-21
50. a. Walter and Edith’s itemized deductions are calculated as follows:
Regular
Income Tax AMT Adjustment
Medical expenses (see Note 1) $ 1,250 $ -0- $ 1,250
State income taxes 2,800 -0- 2,800
Personal property tax 900 -0- 900
Real estate tax 9,100 -0- 9,100
Interest on residence 8,600 8,600 -0-
Interest (home equity) 1,800 -0- 1,800
Investment interest 2,600 2,600 -0-
Charitable contribution 4,200 4,200 -0-
Employee expenses (Note 2) 1,600 -0- 1,600
Totals $32,850 $15,400 $17,450
NOTES
(1) Medical expenses:
For regular income tax [$9,500 – (7.5% X $110,000)] $1,250

For AMT [$9,500 – (10% X $110,000)] -0-
(2) Unreimbursed employee expenses:
Expenses $3,800
2% of AGI ($110,000) (2,200)
Deduction for regular income tax $1,600
pp. 14-18 to 14-21
b. Walter and Edith would have a positive adjustment of $17,450, as computed

above. In addition, they would have a tax preference of $1,100 ($5,000 interest
on private activity bonds – $3,900 related interest expense). pp. 14-18 to 14-21
51. There are positive AMT adjustments of $4,750 for the standard deduction and $3,050 for
the personal exemption. Alternative minimum taxable income is $207,800 ($82,000
taxable income + $118,000 preferences + $4,750 standard deduction + $3,050
exemption). Examples 24 and 25 and related discussion
52. Emily’s percentage depletion deduction for regular income tax purposes is $21,000
($140,000 income X 15% depletion rate). This results in a tax preference of $9,000
($21,000 percentage depletion – $12,000 basis at beginning of year). Example 26
53. Amos’s preference item for IDC is computed as shown below:
IDC expensed in the year $70,000

Less: IDC if amortized over 10 years (7,000)
Excess IDC $63,000
Less: 65% of $60,000 net income from oil and gas (39,000)
IDC preference $24,000
p. 14-22
54. $9,000 interest on private activity bonds + $35,000 bargain element on incentive stock
options + $4,750 standard deduction + $3,050 personal exemption = $51,800. pp. 14-14,
14-21, and 14-23
55. Pat’s tentative AMT for 2003 is computed as shown below:
Taxable income computation

Salary $ 90,000
Interest and dividend income 6,000
Gambling income 4,000
Adjusted gross income $100,000
Itemized deductions:
Medical expenses ($12,000 – $7,500) $4,500
State income taxes 4,100
Real estate taxes 2,800
Mortgage interest on residence 3,100
Investment interest expense 1,800
Gambling losses (limited to gambling income) 4,000
Total itemized deductions (20,300)
Personal exemption (3,050)
Taxable income $ 76,650
Tentative minimum tax computation

Plus adjustments:
Medical expenses 2,500
Regular income tax [$12,000 – (7.5% X $100,000) = $4,500]
AMT [$12,000 – (10% X $100,000) = $2,000]
State income taxes 4,100
Real estate taxes 2,800
Personal exemption 3,050
Subtotal $ 89,100
Plus: Preference (interest on private activity bonds) 40,000
Alternative minimum taxable income (AMTI) $129,100
Exemption [$35,750 – 25%($129,100 – $112,500)] (31,600)
AMT base $ 97,500
AMT rate X .26
pp. 14-18 to 14-22

56. Based on the amount of Ronald’s standard deduction and number of personal and
dependency exemptions, Ronald’s filing status is head of household. Therefore,
Ronald’s regular income tax liability is $21,987 [$21,462 + 30%($100,000 – $98,250)].
Ronald’s AMT is calculated as follows:

Adjustments ($7,000 + $6,100) 13,100
Preferences 60,000
AMTI $173,100
Exemption [$35,750 – 25%($173,100 – $112,500)] (20,600)
AMT base $152,500
Rate X 26%
AMT $ 17,663
pp. 14-3 to 14-10, 14-21, and Figure 14-2
57. a. Computation of Tara’s items of AMT adjustments and preferences for 2003:
Incentive stock option adjustment $ 45,000

Excess depreciation on equipment preference ($41,000 – $26,000) 15,000
Percentage depletion in excess of property’s adjusted basis preference 50,000
Standard deduction adjustment 4,750
Personal exemption adjustment 3,050
Total adjustments and preferences $117,800
pp. 14-12, 14-14, 14-21, and 14-22
b. Calculation of alternative minimum tax:

Adjustments and preferences 117,800
Alternative minimum taxable income (AMTI) $238,800
Less: Exemption amount (Note 1) (4,175)
Alternative minimum tax base $234,625
Tentative minimum tax (Note 2) $ 62,195

Less: Regular income tax on $121,000 (30,528)
Alternative minimum tax $ 31,667
Regular income tax calculation
Tax on $121,000:
On $68,800 $ 14,868
On ($121,000 – $68,800) at 30% 15,660
Total tax $ 30,528
Notes
(1) Exemption phase-out: ($238,800 – $112,500) X .25 = $31,575; then

$35,750 – $31,575 = $4,175 exemption amount. pp. 14-8 and 14-9
(2) AMT tax calculations:

$175,000 X 26% $45,500
($234,625 – $175,000) X 28% 16,695
Tentative minimum tax $62,195
Concept Summary 14-1 and Examples 24 and 25
58. Gross income:

Salary $135,000
Interest from bank 12,000
Interest on corporate bonds 7,000
Dividends 6,000
Short-term capital gain 8,000 $168,000
Less: Deductions for AGI (-0-)
Less: Deductions from AGI
Itemized deductions (Note 1) $ 31,685
Personal exemptions (Note 5) 2,318 (34,003)
Regular income tax calculation
Tax on $133,997:
On $68,800 $ 14,868
On $133,997 – $68,800 at 30% 19,559
Total tax $ 34,427
Computation of alternative minimum tax:

Plus adjustments and preferences:
Itemized deductions (Note 6) 17,285
Preferences 116,000
Cutback adjustment (855)
Alternative minimum taxable income $268,745
Less: Exemption [phaseout (Note 7): AMTI exceeds $255,500] (-0-)
AMT base $268,745
Tentative AMT (Note 8) $ 71,749
Less: Regular income tax (34,427)
Alternative minimum tax $ 37,322
Notes
(1) Because Larry’s AGI exceeds $139,500, Category A itemized deductions are
those subject to the cutback adjustment (i.e., subject to the 3% of AGI floor).
p. 10-30
Category A Category B
Unreimbursed employee Not subject to cutback adjustment:

business expenses (Note 2) $ 640 Medical expenses $11,400
State income taxes 6,500 Casualty loss (Note 4) -0-
Real property taxes 6,800
Mortgage interest 7,200
Totals $21,140 $11,400
(a) Determine 80% limitation: (80% X $21,140 Category A deductions =
$16,912 maximum reduction).
(b) Determine 3% of the excess amount over the threshold: [3% X ($168,000
– $139,500) = $855].
(c) Subtract from the Category A itemized deductions the lesser of the
amounts determined in Step a. or b.: ($21,140 – $855 = $20,285).
(d) Add the amount determined in Step c. to the Category B itemized

deductions: ($20,285 + $11,400 = $31,685 total itemized deductions).
(2) Unreimbursed employee expenses $4,000

Less: 2% of $168,000 (3,360)
Deductible amount $ 640
(3) Total medical expenses $24,000

Less: 7.5% of $168,000 (12,600)
Deductible amount $11,400
(4) Casualty loss ($20,000 decline – $12,000 insurance – $100 floor) $ 7,900
Less: 10% of $168,000 AGI (16,800)
Deductible amount $ -0-
(5) Personal exemption phaseout:

Personal exemption amount $3,050
AGI less threshold amount ($168,000 – $139,500) = $28,500
$28,500/$2,500 (rounded up) = 12 X 2% = 24%
24% X $3,050 = (732)
Personal exemption amount $2,318
(6) AMT itemized deductions:

Mortgage interest $ 7,200
Medical expenses [$24,000 – 10%($168,000)] 7,200
Total $14,400
Regular income tax itemized deductions (Note 1) $31,685

Less: AMT itemized deductions (14,400)
(7) AMT exemption phaseout:

Exemption amount $35,750
Less: Reduction [($268,745 – $112,500) X 25%] (39,061)
Exemption $ -0–
(8) AMT tax calculation:

$175,000 X 26% $45,500
($268,745 – $175,000) X 28% 26,249
Tentative minimum tax $71,749
pp. 14-18 to 14-22
59. AMT computation

Taxable income $ -0-
Plus: Timing adjustments 200,000
Plus: AMT exclusion items 100,000
AMTI $300,000
Minus: Exemption [$35,750 – .25($300,000 – $112,500)] (-0-)
AMT base $300,000
Tentative AMT [.26($175,000) + .28($300,000 – $175,000)] $ 80,500

Minus: Regular income tax liability (-0-)
AMT $ 80,500
AMT without timing adjustments

Taxable income $ -0-
Plus: AMT exclusion items 100,000
AMTI $100,000
Minus: Exemption [$35,750 – .25($100,000 – $112,500)] (35,750)
AMT base $ 64,250
Tentative AMT (.26 X $64,250) $ 16,705

Minus: Regular income tax liability (-0-)
AMT $ 16,705
Credit carryover computation

AMT $ 80,500
Less: AMT without timing adjustments (16,705)
AMT credit carryover $ 63,795
Examples 29 to 31
60. a. Aqua is first exempt from the AMT for 1998 (the first year for which the
exemption is available) as a “small corporation.” Aqua is classified as a small
corporation if (1) it had average annual gross receipts of $5 million or less for the
three-year period beginning after December 31, 1993 and (2) it had average
annual gross receipts for each subsequent three-year period of $7.5 million or less
(i.e., 1995, 1996, and 1997 if the tax year is 1998; 1996, 1997, and 1998 if the tax
year is 1999; 1997, 1998, and 1999 if the tax year is 2000; 1998, 1999, and 2000
if the tax year is 2001; 1999, 2000, and 2001 if the tax year is 2002; 2000, 2001,
and 2002 if the tax year is 2003). For the three-year period which includes 1994,
1995, and 1996, Aqua had average annual gross receipts of:
$4,800,000 + $5,300,000 + $4,600,000 = $4,900,000

3 years
Thus, Aqua passes the $5 million test for this period. For the three-year period
which includes 1995, 1996, and 1997, Aqua had average annual gross receipts of:
$5,300,000 + $4,600,000 + $8,200,000 = $6,033,333

3 years
Thus, Aqua passes the $7.5 million test for this period. Aqua is a small
corporation for 1998. Thus, it is exempt from the AMT for 1998.
b. Aqua remains exempt from the AMT in 2003. In order to do so, Aqua’s average
annual gross receipts for the three-year period consisting of 1996, 1997, and 1998
do not exceed $7.5 million.
$4,600,000 + $8,200,000 + $8,500,000 = $7,100,000

3 years
Likewise, Aqua’s average annual gross receipts for the three-year period
consisting of 1997, 1998, and 1999 do not exceed $7.5 million.
$8,200,000 + $8,500,000 + $5,200,000 = $7,300,000

3 years
$8,500,000 + $5,200,000 +$8,000,000

= $7,233,333
3 years
$5,200,000 + $8,000,000 + $6,000,000 = $6,400,000

3 years
Finally, Aqua’s average annual gross receipts for the three-year period consisting
of 2000, 2001, and 2002 do not exceed $7.5 million.
$8,000,000 + $6,000,000 + $6,200,000 = $6,733,333

3 years
pp. 14-29
61. 2002 2003 2004

ACE $4,000 $3,000 $2,000
Less: Unadjusted AMTI (3,000) (2,000) (5,000)
Difference $1,000 $1,000 ($3,000)
Rate X .75 X .75 X .75
Adjustment $ 750 $ 750 ($1,500)*
*$2,250 ($3,000 X .75) but limited to $750 + $750, or $1,500. Further, the unusable
negative adjustment of $750 ($2,250 – $1,500) is lost forever.
Concept Summary 14-2, Example 32, and related discussion
62. Quincy Corporation:

AMTI $150,000
Less: Exemption amount (40,000)
AMT base $110,000
Rate X .20
Note: In this case, there is no reduction in the exemption amount because AMTI
does not exceed $150,000.
Redland Corporation:
Step 1
AMTI $160,000
Less: Threshold amount for exemption (150,000)
Amount by which AMTI exceeds $150,000 $ 10,000
Reduction rate X .25
Applicable reduction in exemption amount $ 2,500
Step 2
Exemption amount $ 40,000
Less: Reduction in exemption amount from Step 1 (2,500)
Applicable exemption amount $ 37,500
Step 3
AMTI $160,000
Less: Applicable exemption amount from Step 2 (37,500)
AMT base $122,500
Rate X .20
Tanzen Corporation:
Step 1
AMTI $320,000
Less: Threshold amount for exemption (150,000)
Amount by which AMTI exceeds $150,000 $170,000
Reduction rate X .25
Applicable reduction in exemption amount $ 42,500
Step 2
Less: Reduction in exemption amount from Step 1 (42,500)
Applicable exemption amount $ -0-
Step 3
AMTI $320,000
Less: Applicable exemption amount from Step 2 (-0-)
AMT base $320,000
Rate X .20
Note: In this case, the exemption amount is phased out entirely because AMTI
exceeds $310,000.
pp. 14-27 and 14-32
63. a. Tax on taxable income of $3,000,000:
$3,000,000 X 34% = $1,020,000
b. Taxable income $3,000,000

Adjustments and tax preferences:
Depreciation for regular income tax on realty in
excess of ADS straight-line $150,000
Excess amortization of certified pollution control
facilities 450,000
Tax-exempt interest on private activity bonds 30,000
Percentage depletion in excess of the property’s
adjusted basis 60,000 690,000
AMTI $3,690,000
Less: Exemption (AMTI exceeds $310,000) (-0-)
Alternative minimum tax base $3,690,000
AMT tax rate X .20
Tentative AMT ( no foreign tax credit) $ 738,000
c. Tentative AMT $ 738,000

Less: Regular income tax liability (1,020,000)
AMT $ -0-
pp. 14-27 to 14-32
CUMULATIVE PROBLEMS
64. Regular income tax computation:

Free housing (Note 1) $ -0-
Grocery allowance (Note 2) 13,000
Short-term capital gain 38,000
Dividend and interest income (Note 3) 37,000
Lottery winnings 10,000
Incentive stock option exercise (Note 4) -0-
Life insurance proceeds (Note 5) -0-
AGI before rental loss and alimony $98,000
Real estate rental loss (Note 6) (25,000)
Alimony (24,000)

Charitable contribution (Note 7) $5,200
Consumer interest (Note 8) -0-
State and local income taxes 4,600
Medical expenses [$7,500 – (7.5% X $49,000 AGI)](Note 9) 3,825
Gambling losses (Note 10) 8,000
Miscellaneous itemized deductions (Note 11) -0- (21,625)
Personal exemption (3,050)
Income tax on $24,325 (Note 12) $ 3,349
AMT computation:

Adjustments and preferences:
Incentive stock option adjustment $50,000
State and local income taxes 4,600
Medical expenses (Note 13) 1,225
Interest on private activity bonds 40,000
Total adjustments and preferences 98,875
Alternative minimum taxable income $123,200
Less: AMT exemption [$35,750 – 25%($123,200 – $112,500)] (33,075)
AMT base $ 90,125
AMT rate X .26
Less: Regular income tax (3,349)
AMT $ 20,084
2003 Tax Liability

Regular income tax liability $ 3,349
Alternative minimum tax 20,084
Total tax liability $23,433
Note 1
Because Ron is a minister of the gospel, he can exclude the fair rental value of the
parsonage of $2,000 per month.
Note 2
The grocery allowance of $250 per week does not qualify for the § 119 meal exclusion.
Note 3
The $40,000 of interest on private activity bonds is excludible from gross income.
Note 4
The spread on the ISO of $50,000 ($70,000 – $20,000) is not recognized in 2003.
Note 5
The life insurance proceeds of $500,000 are excludible from Ron’s gross income.
Note 6
Loss on rental property: Because Ron is an active participant, he may deduct part of the
$55,000 loss ($190,000 – $245,000) under the rental real estate exception. Because his
AGI is less than $100,000, the loss allowed under the rental real estate exception is
$25,000. The balance of the loss of $30,000 is suspended. p. 10-23
Note 7
Because the holding period of the stock is long-term and the stock is an intangible asset,
the full fair market value of $3,200 qualifies for the charitable contribution deduction.
The $2,000 he gave to the church from the lottery also qualifies.
Note 8
The $3,700 of consumer interest cannot be deducted.
Note 9
The $8,500 of medical expenses paid by Ron for the hospital expenses of Kate’s
deceased husband are not deductible by Ron because he was not Ron’s dependent.
Note 10
Gambling losses can be deducted only to the extent of gambling income. Thus, all of the
$8,000 of gambling losses from the lottery can be deducted since the gambling winnings
are $10,000.
Note 11
Miscellaneous itemized deductions are deductible only to the extent they exceed 2% of
AGI ($49,000 X 2% = $980). The $200 for the safe deposit box rental is classified as a
miscellaneous itemized deduction. Since the $200 is less than the $980, none of it can be
deducted.
Note 12
Tax on $6,000 $ 600
15% X ($24,325 – $6,000) 2,749
$3,349
Note 13
Regular income tax medical deduction $3,825

AMT medical deduction (2,600)*
Medical deduction positive adjustment $1,225
* $7,500 – (10% X $49,000) = $2,600 medical deduction.

65. Robert and Jane have taxable income for 2002 as follows:
Salary for Robert (Indiana Foundry, Inc.) $ 89,000

Salary for Jane (Carmel Computer Associates) 102,000
Interest income (Carmel National Bank) (Note 1) 3,300
Dividend income (Able Computer Corporation) 3,500
Gambling income (Note 2) 4,000
Award income (Note 3) 15,000
Capital gain (Note 4) 13,000
Deductions from AGI
Medical expenses [$19,725 – 7.5% X $229,800 AGI)] $ 2,490
State income tax ($3,970 + $4,710) 8,680
Real property tax on personal residence 4,600
Mortgage interest on personal residence 7,500
Contributions ($11,000 + $2,000) 13,000
Gambling losses (Note 2) 4,000
Subtotal $42,170
Minus: reduction under 3% cutback adjustment (2,775)
(Note 5)
Total itemized deductions (39,395)
Exemptions (Note 6) (9,600)
Alternative minimum tax for Robert and Jane is computed as shown below.
Taxable income plus exemptions ($180,805 + $9,600) $190,405

Reduction caused by 3% cutback adjustment for itemized deductions (2,775)
(Note 5)
Subtotal $187,630
Adjustments:
Medical expenses [$2,490 for regular income tax – $0
for AMT (Note 7)] $ 2,490
Taxes ($8,680 state income tax + $4,600 real
property tax) 13,280
Total adjustment for itemized deductions 15,770
Preference:
Interest on private activity bonds 30,200
Alternative minimum taxable income (AMIT) $233,600
Less: Exemption (Note 8) (28,100)
Alternative minimum tax base $205,500
Less: Amount eligible for alternative tax on net capital gain (13,000)
AMT base subject to ordinary tax rates $192,500
Tentative AMT liability on $192,500 (Note 12) $50,400

Tentative AMT liability on $13,000 (Note 13) 2,600
Tentative AMT $53,000
Less: Regular income tax liability (Note 9) (43,352)
AMT $ 9,648
Note 1 – excludible interest income
The Carmel Sanitation District Bonds interest income of $30,200 is excluded from gross
income.
Note 2– gambling income and losses
Since their gambling losses of $5,750 exceed the gambling income of $4,000, the excess
loss of $1,750 is disallowed. The $4,000 of gambling income is included in gross income
and the allowed $4,000 of gambling losses are classified as an itemized deduction.
Note 3 – award received
The $15,000 that Jane received for the “Citizen of the Year” is included in her gross
income.
Note 4 – sale of land
Robert’s adjusted basis for the land he purchases is $67,000. So his recognized gain on
the sale of the land is $13,000 ($80,000 amount realized – $67,000 adjusted basis).
Robert’s holding period is long term. The gain is classified as long-term capital gain and
is eligible for the alternative tax rate.
Note 5 - reduction for 3% cutback adjustment for itemized deductions
This computation determines the reduction in itemized deductions from application of the
3% cutback adjustment. The computation follows the format provided by the IRS in the
instructions for Schedule A.
Medical expenses [$19,725 – (7.5% X $229,800 AGI)] $ 2,490

State income tax 8,680
Real property tax on personal residence 4,600
Mortgage interest on personal residence 7,500
Contributions 13,000
Gambling losses 4,000
Total itemized deductions $42,170
Medical expenses [$19,725 – (7.5% X $229,800 AGI)] $2,490
Gambling losses 4,000
Total of itemized deductions not subject to reduction (8,390)
Itemized deductions subject to reduction $33,780
80% of $33,780 = maximum cutback adjustment $27,024
AGI $229,800
Less: Threshold for married, joint return (137,300)
Excess AGI $ 92,500
3% of $92,500 excess AGI $ 2,775
Reduction (smaller of $27,024 or $2,775) $ 2,775
Note 6 – dependency deductions and phaseout
Robert and Jane qualify for four personal and dependency exemptions. The two
dependency deductions are for the twins, Ellen and Sean. They do not qualify for a
dependency deduction for Robert’s daughter, Amy, even though Robert provides over
50% of her support. Margaret, Robert’s former wife, is the custodial parent, and she does
not furnish Robert with a signed Form 8332.
$3,000 X 4 = $12,000
However, because Robert and Jane’s AGI exceeds the threshold amount, the personal and
dependency exemptions are subject to the phaseout provision.
AGI $229,800
Less: Threshold amount (206,000)
Excess $ 23,800
Divided by $2,500 = 9.52%
Round to 10%
X 2% = Phaseout percentage 20%
Amount of phaseout ($12,000 X 20%) $ 2,400
Personal and dependency exemptions $12,000

Less: Phaseout (2,400)
Deductible personal and dependency exemptions $ 9,600
Note 7 - AMT medical deduction
$229,800 X 10% = $22,980

$19,725 – $22,980 = $0 medical deduction for AMT.
Note 8 - alternative minimum tax exemption
The AMT exemption phase-out for a married couple filing jointly applies if alternative
minimum taxable income (AMTI) exceeds $150,000. The Armstrong’s have AMTI of
$233,600, so the $49,000 exemption is reduced as follows:
AMTI $233,600
Less: Threshold (150,000)
Excess $ 83,600
X 25% X 25%
Amount of phaseout $ 20,900

Less: Amount of phaseout (20,900)
Deductible exemption amount $ 28,100
Note 9 - regular income tax liability
Tax on $171,950 $ 41,996

35% X ($180,805 – $171,950) 3,099
$ 45,095
However, since the $13,000 long-term capital gain on the sale of the land is eligible for
the alternative tax on net capital gain, Robert and Jane’s regular income tax liability is
$43,352 rather than the $45,095 calculated above.
Tax on $167,805 ($180,805 – $13,000):

Tax on $112,850 $24,266
30% X ($167,805 – $112,850) 16,486
$40,752
Plus: Tax on net capital gain of $13,000:
$13,000 X 20% 2,600
$43,352
Note 10 – holding period for the land
Robert’s holding period begins on March 15, 1997.
Note 11 – Jane’s inheritance
The $600,000 that Jane inherited from her grandfather is excluded from Jane’s gross
income.
Note 12 – tentative AMT liability on AMT base subject to ordinary tax rates
$175,000 X 26% = $45,500

17,500 X 28% = 4,900
$192,500 $50,400
Note 13 – tentative AMT liability on AMT base eligible for alternative tax on net capital
gain
The $13,000 amount that qualifies for the alternative tax treatment for regular income tax
purposes also qualifies for alternative tax treatment for AMT purposes.
$13,000 X 20% = $2,600
Note 14 – child tax credit
The twins, Ellen and Sean, satisfy the statutory requirements for the child tax credit.
However, Robert and Jane’s AGI of $229,800 results in a full phaseout of the credit (i.e.,
the phaseout commences at an AGI of $110,000).
See the tax return solution beginning on p. 14-34 of the Solutions Manual.
Willis, Hoffman, Maloney, and Raabe, CPAs

Mason, OH 45040
April 2, 2003
Mr. and Mrs. Robert Armstrong

1802 College Avenue
Carmel, IN 46302
Dear Bob and Jane:
Your 2002 income tax return is enclosed and indicates that you have a refund of $2,000
($53,000 tax liability – $55,000 withholdings).
Because the Carmel Sanitation District bonds are private activity bonds subject to the
alternative minimum tax, $9,648 of the total tax owed is due to the alternative minimum
tax. In order to avoid this tax in the future, you might consider changing the investment
to tax-free bonds which are not private activity bonds and, therefore, not subject to the
alternative minimum tax. If you have any questions, please call me.
Sincerely,
John Jones, CPA

Partner
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CHAPTER 14

ALTERNATIVE MINIMUM TAX

SOLUTIONS TO PROBLEMS MATERIALS

1 AMT purpose Unchanged 1

27 Purpose of AMT credit Unchanged 27

*The solution to this problem is available on a transparency master.

31. $204,875. 44.b. $40,000 negative adjustment on the

Gross income computed by applying the AMT rules

6. The AMT tax formula is as follows:

Regular taxable income

Minus: Regular tax liability*

8. a. The AMT exemption can be thought of as a materiality amount. It relieves

b. The initial amount (prior to the phaseout) of the exemption is as follows:

• $35,750 for a single taxpayer.

c. The phaseout of the exemption amount is an application of the wherewithal to pay

pp. 14-8 and 14-9

pp. 14-18 to 14-20

28. The AMT applicable to corporations is similar to that applicable to noncorporate

• Tax preferences applicable to noncorporate taxpayers are also applicable to

pp. 14-27 to 14-33

31. Rachel’s taxable income $175,000

pp. 14-4 to 14-9

32. a. Calculation of regular income tax liability:

c. Willis, Hoffman, Maloney, and Raabe, CPAs

Mr. Arthur East

Dear Mr. East:

Steve Ash, CPA

* $96,236 + $72,587 = $168,823.

34. Single taxpayer:

Married filing jointly:

Married filing separately:

pp. 14-8 and 14-9

35. a. Leona’s AMT is $0.

Tentative AMT $ 78,000

Since the result is negative, Leona has no AMT.

pp. 14-9, 14-10, and Figure 14-2

37. Computation of adjustment for circulation expenditures:

2003 regular income tax deduction $135,000

Regular income tax cost recovery for 2003 (Table 7-9):

AMT cost recovery for 2003 (Table 7-10):

b. If the apartment building is acquired and placed in service in 2003, there is no

Regular income tax cost recovery for 2003 (Table 7-9):

AMT cost recovery for 2003 (Table 7-9):

pp. 14-11 and 14-12

Regular income tax depreciation ($250,000 X 20%) $50,000

c. Willis, Hoffman, Maloney, and Raabe, CPAs

Ms. Helen Carlon

Dear Ms. Carlon:

James Singer, CPA

pp. 14-12 and 14-13

b. Gary can avoid having an adjustment by electing to amortize the mining

Example 9 and related discussion

41. For 2003, there is a positive AMT adjustment of $120,000.

Regular income tax:

For 2004, there is a negative AMT adjustment of $120,000.

Regular income tax:

Regular Income Tax AMT

pp. 14-14 and 14-15

Regular Income Tax AMT

Regular Income Tax AMT

Building Land Building Land

Recognized gain $350,000 $150,000 $310,000 $150,000

Recognized gain: regular income tax $350,000