Chapter 7 Tax Quiz

The explanation for the given correct answer is that the Alternative Minimum Tax (AMT) is designed to prevent higher-income individuals from taking advantage of various deductions, exemptions, and other tax benefits in a way that would result in them paying significantly lower taxes than intended. The AMT imposes a separate tax calculation that limits the extent to which these deductions and exemptions can reduce an individual's tax liability, ensuring that they still pay a minimum amount of tax. Therefore, the statement that AMT is meant to prevent higher-income individuals from receiving excessive benefits from allowable deductions is true.

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An AMT exemption is a provision that helps lower income individuals avoid paying the Alternative Minimum Tax (AMT). By providing an exemption, it reduces the likelihood that they will have to pay AMT. Therefore, the statement that an AMT exemption increases the likelihood that lower income individuals will have to pay AMT is false.

See example 7-9

175,000 x 26% = 45,500
65,000 x 28% = 18,200
Dividends
10,000 x 15% = $1.500
Tentitive minimum tax = $65,200

See page 7-11

The correct answer is 10% and 15%. This means that taxpayers falling into these tax brackets will be subject to preferential tax rates of either 10% or 15%.

Depreciation is a common AMT adjustment that can classify as a plus or minus adjustment. Under the regular tax system, businesses are allowed to deduct the cost of their assets over time through depreciation. However, under the Alternative Minimum Tax (AMT), the depreciation deductions may be different. The AMT requires businesses to use a different depreciation method and recovery period for certain assets, which can result in either a positive or negative adjustment to their taxable income. Therefore, depreciation can be classified as a plus or minus adjustment depending on how it affects the taxpayer's AMT liability.

The personal exemption amount, standard deduction amount, and miscellaneous itemized deductions must be added back as AMT adjustments. The personal exemption amount is added back because it is not allowed as a deduction for AMT purposes. The standard deduction amount is added back because AMT does not allow for a standard deduction. Miscellaneous itemized deductions are added back because they are generally subject to a 2% AGI floor for regular tax purposes, but not for AMT purposes.

The common AMT adjustments that classify as minus adjustments are state income tax refunds included in regular taxable income and gain or loss on the sale of depreciable assets. These adjustments reduce the taxpayer's alternative minimum taxable income, which is used to calculate the alternative minimum tax (AMT). State income tax refunds that were previously deducted as an itemized deduction are added back to taxable income for AMT purposes. Similarly, the gain or loss on the sale of depreciable assets is adjusted to reflect the AMT calculation.

The Common AMT Adjustments that classify as plus adjustments include tax-exempt interest from private activity bonds, real and personal property taxes deducted as itemized deductions, state income or sales taxes, home equity interest expense, and misc. itemized deductions in excess of 2% floor. These adjustments increase the taxpayer's alternative minimum tax liability.