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Determine R’s taxable income and regular tax liability and Alternative Minimum Taxable Income (AMTI). Also, find whether he has an AMT liability.
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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 | $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
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
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.
Working Note (7):
Calculate the amount of incentive stock option adjustment.
Working Note (8):
Determine the AMT exemption (files as single taxpayer).
Working Note (9):
Calculate the amount of tentative minimum tax.
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