South-Western Federal Taxation 2019: Individual Income Taxes (Intuit ProConnect Tax Online 2017 & RIA Checkpoint 1 term (6 months) Printed Access Card)
South-Western Federal Taxation 2019: Individual Income Taxes (Intuit ProConnect Tax Online 2017 & RIA Checkpoint 1 term (6 months) Printed Access Card)
42nd Edition
ISBN: 9781337702546
Author: James C. Young, William H. Hoffman, William A. Raabe, David M. Maloney, Annette Nellen
Publisher: Cengage Learning
Question
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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.

Expert Solution & Answer
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Explanation of Solution

Determine R’s taxable income and regular tax liability.

Calculation of taxable income and regular tax liability
DescriptionAmount
Salary$650,000 
Long-term capital gain$1,100Refer working note 1
Interest income$23,000Refer working note 2
Lottery winnings$60,000 
Life insurance proceeds$0Refer working note 3
Adjusted Gross income before rental loss$734,100 
Real estate rental loss$0Refer 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$225,983Refer working note 6

Compute R’s AMT (alternative minimum tax).

Calculation of AMT
ParticularsAmount
Taxable income$704,000 
Add: Adjustments and preferences  
   Incentive stock option adjustment$6,000Refer 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$203,521Refer working note 9
Less: Regular Income tax liability$225,983Refer working note 6
AMT$0 

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

Calculation of total tax liability
ParticularsAmount
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($13,100$12,000).

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 ($190,000$225,000) under the rental real estate exception. But, R’s modified AGI of $734,100($650,400+$1,100+$23,000+$60,000) 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.

Regular income tax liability = (Tax on long-term capital gain of $1,100 + Tax on remaining taxable income of $702,900)=(20%×$1,100)+[$150,689.50 + 37%($702,900 - $500,000)]=$220 +$225,763=$225,983

Working Note (7):

Calculate the amount of incentive stock option adjustment.

Incentive stock option adjustment=Acquired price – Option price=$10,000$4,000=$6,000

Working Note (8):

Determine the AMT exemption (files as single taxpayer).

AMT exemption=$70,300[($748,900$500,000)×25100]=$70,300[$248,900×25100]=$70,300  $62,225=$8,075

Working Note (9):

Calculate the amount of tentative minimum tax.

Tentative minimum tax=(Taxonnetcapitalgain+TaxonRemainingAMTbaseof$739,725)=($1,100 ×20%)+[(26%×$191,100) +($739,725 - $191,100)×28%] =$220+$203,301=$203,521

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Chapter 12 Solutions

South-Western Federal Taxation 2019: Individual Income Taxes (Intuit ProConnect Tax Online 2017 & RIA Checkpoint 1 term (6 months) Printed Access Card)

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