The tax law gives special treatment to some kinds of income and allows special deductions and credits for some kinds of expenses. Taxpayers (including Realtors, Brokers, and Real Estate Professionals) who benefit from the law in these ways may have to pay at least a minimum amount of tax through an additional tax. This additional tax is called the alternative minimum tax (AMT). You may have to pay the AMT if your alternative minimum taxable income (AMTI) is greater than the AMT exemption amount. AMTI is calculated by increasing or decreasing regular taxable income for AMT preferences (which are always additions) and AMT adjustments (which may be additions or subtractions). As a result of changes made to the AMT by the Tax Cuts and Jobs Act of 2017 (TCJA), the AMT is a little less onerous for tax years 2018 through 2025.
The calculation of AMTI begins with your taxable income before the deduction for personal exemptions or the standard deduction. Thus, personal exemptions, which the TCJA eliminated for 2018 through 2025, and the standard deduction are not allowed for AMT purposes. Also, no deduction is allowed for any miscellaneous itemized deductions you claim on Schedule A. Further, in calculating AMTI, you must add back to taxable income all the taxes you deducted on Schedule A, except for any generation-skipping transfer taxes on income distributions and any new motor vehicle taxes. For 2017 and 2018, medical and dental expenses are deductible for AMTI purposes only to the extent they exceed 7.5 percent of your adjusted gross income. For years 2018 through 2025, medical and dental expenses are deductible for AMTI purposes only to the extent they exceed 10 percent of your adjusted gross income.
With respect to personal residence interest, only that portion that constitutes “qualified housing interest” is allowed as a deduction for AMT purposes. Qualified housing interest is qualified residence interest that you paid or accrued during the tax year on debt you incurred in acquiring, constructing, or substantially improving any property that is your principal residence, or a qualified dwelling that constitutes a qualified residence. It also includes interest on any debt resulting from refinancing debt that meets those requirements, but only to the extent the amount of the debt after the refinancing does not exceed the amount of the debt immediately before the refinancing. Qualified housing interest also includes qualified residence interest that is paid or accrued on debt that (1) you incurred before July 1, 1982, and (2) is secured by property that, at the time the debt was incurred, was your principal residence or a qualified dwelling used by you (or any member of your family).
The regular tax rule that says you recognize no income when you exercise an incentive stock option (ISO) does not apply for AMT purposes. Thus, you generally must include in AMTI the excess, if any, of (1) the fair market value of stock you acquired through exercise of the option when your rights in the acquired stock first become transferable or are no longer subject to a substantial risk of forfeiture, over (2) the amount you paid for the stock, including any amount you paid for the option you used to acquire the stock.
In addition, you also must add back tax-exempt interest on certain tax-exempt bonds issued for private activities in calculating AMTI.
Circulation costs you deducted in full for the regular tax in the year they were paid or incurred must be capitalized and amortized over three years for the AMT. Mining exploration and development costs, as well as research and experimental costs, deducted in full for the regular tax in the tax year they were paid or incurred must be capitalized and amortized over 10 years for the AMT. You must add back to taxable income, with respect to all your oil, gas, and geothermal properties, the amount (if any) by which the amount of the excess intangible drilling costs arising in the tax year is greater than 65 percent of your net income from oil, gas, and geothermal properties for the tax year. You can elect to amortize these tax preference items over an optional period beginning in the tax year in which you incurred the costs. If you make this election, there is no AMT adjustment. The applicable costs and the optional recovery periods are (1) circulation costs – three years, (2) intangible drilling and development costs – 60 months, (3) mining exploration and development costs – 10 years, and (4) research and experimental costs – 10 years.
Generally, you must recompute any depletion and depreciation deductions for the AMT. You must also recalculate passive activity gains and losses for the AMT by taking into account all adjustments and preferences and any AMT prior year unallowed losses that apply to that activity. For AMT purposes, you generally must use the percentage-of-completion method to determine income from any long-term contract. However, this rule does not apply to any home construction contract. The investment interest limitations that apply for regular tax purposes also apply for AMT purposes, with certain adjustments. An alternative tax net operating loss (ATNOL) deduction is available in computing AMTI. This deduction applies in lieu of the NOL deduction allowed for regular tax purpose.
Some nonrefundable credits may be available to offset your alternative minimum tax.
The AMT catches many taxpayers by surprise. Please contact me at your convenience to examine how the AMT might apply in your particular situation and to discuss strategies you might be able to employ to minimize its impact.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.
(Updated 03/26/2021 08:05 320-236)