Chapter 12, Problem 54CP

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
Total tax liability	$225,983
Less: Estimated tax payments	(210,000)
Tax owned	$15,983

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.

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