Chapter 12, Problem 54CP

Robert A. Kliesh, age 41, is single and has no dependents. Robert’s Social Security number is 111-11-1115. His address is 201 Front Street, Missoula, MT 59812. He does not contribute to the Presidential Election Campaign fund through the Form 1040.

Robert works as a financial analyst and is very well regarded in his field. This year his salary totaled $650,000. His professional success has allowed him to purchase investments in real estate and corporate stocks and bonds. He also spends time volunteering with various organizations that help people develop financial literacy skills. Examination of Robert’s financial records provides the following information for 2018.

1. a. On January 16, Robert sold 1,000 shares of stock for a loss of $12,000. The stock was acquired 14 months ago for $17,000 and sold for $5,000. On February 15, he sold 400 shares of stock for a gain of $13,100. That stock was acquired in 2010 for $6,000 and sold for $19,100.
2. b. He received $30,000 of interest on private activity bonds that he purchased in 2015. He also received $40,000 of interest on tax-exempt bonds that are not private activity bonds.
3. c. Robert received gross rent income of $190,000 from an apartment complex he owns. He qualifies as an active participant in the activity. The property is at 50 Big Sky Resort Road, Big Sky, Montana, 59716.
4. d. Expenses related to the apartment complex, acquired in 2009, were $225,000.
5. e. Robert’s taxable interest income, all from corporate bonds, totaled $23,000. Because he invests only in growth stocks, he receives no dividend income.
6. f. He won $60,000 in the Montana lottery.
7. g. Robert was the beneficiary of an $800,000 life insurance policy on the life of his uncle Jake. He received the proceeds in October.
8. h. In February, Robert exercised an incentive stock option that was granted by his employer in 2015. The strike price of the option was $10 per share. On the date of exercise, the fair market value of the stock was $25 per share. Robert purchased 400 shares with the option; as of the end of the year, he still owns the stock (current FMV $20 per share).
9. i. Robert incurred the following potential itemized deductions.
10. • $5,200 fair market value of stock contributed to the Red Cross ($3,000 stock basis). He had owned the stock for two years. Robert also made cash contributions of $8,000 to qualified organizations during the year.
11. • $4,200 interest on consumer purchases.
12. • $8,900 state and local income tax.
13. • $15,000 of medical expenses that he paid on behalf of his administrative assistant, who unexpectedly took ill.
14. • $8,000 paid for lottery tickets associated with playing the state lottery.
15. • $750 contribution to the campaign of the Democratic candidate for governor of Montana.
16. • Because Robert lived in Montana, he paid no state-income tax.

Robert made estimated Federal tax payments of $210,000, and he was covered by health insurance for the entire tax year.

Use Forms 1040 and 6251 and Schedules A, B, D, and E to compute the tax liability (including AMT) for Robert A. Kliesh for 2018. Omit Forms 8283, 8582, and 8949. Suggested software: ProConnect Tax Online.

To determine

Determine R’s taxable income and regular tax liability and Alternative Minimum Taxable Income (AMTI). Also, find whether he has an AMT liability.

Explanation of Solution

Determine R’s taxable income and regular tax liability.

Calculation of taxable income and regular tax liability
Description	Amount
Salary	$650,000
Long-term capital gain	$1,100	Refer working note 1
Interest income	$23,000	Refer working note 2
Lottery winnings	$60,000
Life insurance proceeds	$0	Refer working note 3
Adjusted Gross income before rental loss	$734,100
Real estate rental loss	$0	Refer working note 4
Adjusted Gross income	$734,100
Less: Itemized deductions:	$(30,100)	Refer working note 5
Taxable income	$704,000
Regular income tax liability	$225,983	Refer working note 6

Compute R’s AMT (alternative minimum tax).

Calculation of AMT
Particulars	Amount
Taxable income	$704,000
Add: Adjustments and preferences
Incentive stock option adjustment	$6,000	Refer working note 7
State and local income taxes	$8,900
Interest on private activity bonds	$30,000
Alternative minimum taxable income (AMTI)	$748,900
Less: Exemption	$(8,075)	Refer working note 8
AMT base	$740,825
TMT	$203,521	Refer working note 9
Less: Regular Income tax liability	$225,983	Refer working note 6
AMT	$0

Calculate R’s tax owned or (refund due).

Calculation of total tax liability
Particulars	Amount
Regular income tax liability	$225,983
Alternative minimum tax	$0
Medical and investment taxes	$4,955
Total tax liability	$230,938
Less: Estimated tax payments	(210,000)
Tax owned	$20,938

Working Note (1):

Long-term capital gain of $13,100 is offset by long-term capital loss of $12,000. Hence, net long-term capital gain is $1,100$\left(\$13,100-\$12,000\right)$.

Working Note (2):

$30,000 of interest on private activity bonds and $40,000 of other tax-exempt interest is excluded from gross income. $23,000 of interest income on growth stock is included in gross income.

Working Note (3):

The life insurance proceeds of $800,000 are excluded from gross income.

Working Note (4):

Calculate the amount of loss on rental property.

R is an active participant. Hence, he may deduct a loss of $35,000 $\left(\$190,000-\$225,000\right)$ under the rental real estate exception. But, R’s modified AGI of $734,100$\left(\$650,400+\$1,100+\$23,000+\$60,000\right)$ is greater than $100,000. Hence, his loss $35,000 rental real estate is suspended.

Working Note (5):

Calculate itemized deductions.

Calculation of itemized deduction
State and local income taxes	$8,900
Gambling losses	$8,000
Charitable contributions	$13,200
Itemized deductions	$30,100

Note: Consumer interest of $4,200 is not deductible. As the assistant is not the dependent of R, Medical expense of $15,000 is not deductible.

Working Note (6):

Calculate regular income tax liability.

$\begin{array}{c}\text{Regular income tax liability = }\left(\begin{array}{l}\text{Tax on long-term capital gain of \$1,100 }\\ \text{+ Tax on remaining taxable income of \$702,900}\end{array}\right)\\ =\left(20\%\times \$1,100\right)+\text{[\$150,689}\text{.50 + 37\%(\$702,900 - \$500,000)]}\\ \text{=}\text{\$220 +\$225,763}\\ \text{=}\text{\$225,983}\end{array}$

Working Note (7):

Calculate the amount of incentive stock option adjustment.

$\begin{array}{c}\text{Incentive stock option adjustment}=\text{Acquired price – Option price}\\ =\text{\$10,000}-\text{\$4,000}\\ =\text{\$6,000}\end{array}$

Working Note (8):

Determine the AMT exemption (files as single taxpayer).

$\begin{array}{c}\text{AMT exemption}=\$70,300–\left[\left(\$748,900-\$500,000\right)\times \frac{25}{100}\right]\\ =\$70,300–\left[\$248,900\times \frac{25}{100}\right]\\ =\$70,300– \$62,225\\ =\$8,075\end{array}$

Working Note (9):

Calculate the amount of tentative minimum tax.

$\begin{array}{c}\text{Tentative minimum tax}=\left(\begin{array}{l}\text{Tax}\text{on}\text{net}\text{capital}\text{gain}\\ +\text{Tax}\text{on}\text{Remaining}\text{AMT}\text{base}\text{of}\$739,725\end{array}\right)\\ =\left(\text{\$1,100 }\times 20\%\right)+\left[\begin{array}{l}\left(\text{26\%}\times \text{\$191,100}\right)\\ \text{+}\left(\text{\$739,725 - \$191,100}\right)\times \text{28\%}\end{array}\right]\\ =\$220+\$203,301\\ =\$203,521\end{array}$

Complete the appropriate form for R.