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TCP CPA Practice Questions: AMTI (Alternative Minimum Taxable Income)
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May 14, 2024
In this video, we walk through 5 TCP CPA exam practice questions teaching about AMTI (Alternative Minimum Taxable Income). Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/tcp-cpa-practice-questions-explained-amti-alternative-minimum-taxable-income/ See the other TCP walkthrough videos here: https://www.superfastcpa.com/free-tcp-cpa-practice-question-walkthroughs/ 00:00 Intro 00:57 Question 1: Calculating AMT 02:38 Question 2: Learning about the TMT Rate 04:19 Question 3: AMTI Adjustments 06:18 Question 4: How ISOs Can Affect AMT 08:09 Question 5: Putting It All Together 10:55 Pillar Topics
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Welcome to another TCP walk-through video. I'm Logan, and in today's video, we're going to be going over
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AMTI, or alternative minimum taxable income, and everything that goes with it. And we're going to be
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doing it the Superfast CPA way, which is diving straight into questions to learn the material
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If you don't know much about our strategies, make sure you go to superfastcpa.com and check out our
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free training webinar, where we go over the key ingredients to passing the CPA exam. It's free
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it's one hour long, and it will save you so much time struggling with your process. make sure you go check it out. The link will be in the description. Also, if you like the idea of
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going through questions as your main learning material, make sure you check out our Super Fast CPA app
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where we have five-question mini quizzes that you can easily access on your phone. Finally, this
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video will only be five questions long, whereas Super Fast CPA members will have access to the full
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10 question video when we post it there. So if you like this, you can get more of it by being a Super Fast
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CPA member. With that said, let's dive straight into the questions. Okay, here's question one
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For the current tax year, Michelle's regular income tax liability is $33,000
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After applying the necessary exemptions, her alternative minimum taxable income, or AMTI, stands at $120,000
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If the calculation of her tentative minimum tax or TMT from the MTI amounts to $31,200
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what would be Michelle's alternative minimum tax? Okay, if you don't know how AMT works, that's okay
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That's why we're doing this video. So since this is the first question and we don't know how it works, let's dive straight into the answer
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Okay, and the answer is $0.00. You doesn't have any AMT. So let's learn why
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The alternative minimum tax is the difference between the tentative minimum tax and the regular tax liability, but only if the TMT is greater
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So it's not the tax liability less the TMT. It's the TMT less the tax liability
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So in this case, her TMT is not bigger than her regular tax liability
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So, you know, subtracting the regular tax liability from the TMT would give you a negative number, which is not what we're looking for
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so you just don't have any AMT. However, if this was reversed, if the TMT was $33,000 and the regular tax was $31,200, then it would be, you know, $1,800 of AMT
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The alternative minimum tax, by the way, is a parallel tax system designed to ensure that individuals who benefit from certain tax benefits pay at least a minimum amount of tax
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basically it's for rich people or things or people kind of like that who have been able to take
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advantage of a lot of different tax benefits and this basically requires that they pay a bit more
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tax all right so that's an intro to amt let's go ahead and go to the next question okay here's
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question two james has a regular tax liability of twenty eight thousand dollars for the year after
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necessary adjustments and exemptions his alternative minimum taxable income is 130,000 assuming a tentative minimum tax rate of 25% is applied to his AMTI
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What is James' alternative minimum tax amount? So we kind of learned a little bit about this in the previous question
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However, there's still some of this calculation that we don't know how to do. So let's go ahead and dive straight into the answer to learn how it works
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Okay, and the answer is that he would have $4,500 of AMT. So you start out by calculating the TMT so you would take the AMTI And again this is after adjustments and exemptions And we going to talk about those next
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But you take the AMTI and multiply it by the tentative minimum tax rate
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And in this case, it's 25%. Just letting you know, that's not the actual number for TMT
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That's something that changes over time. So again, we're not trying to teach you all the exact specific numbers because those change every year
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We're trying to teach you the concepts. so that whatever numbers they are, you'll know how to do it
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And so, again, you take that percentage. That is the TMT. And then since his regular tax liability is less than the TMT
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you subtract it from them TMT, and that gives you $4,500 of AMT
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So lots of little acronyms, TMT, AMT, AMT, AMTI. But basically, you calculate the TMT based off of the alternative minimum taxable income
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and then if that's greater than the current tax liability, then the difference is your
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alternative minimum tax. All right, let's go to the next question. Okay, here's question three
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Which of the following items would be added back to a taxpayer's AGI when calculating the
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alternative minimum taxable income? Okay, we kind of mentioned this in the previous question
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There are some adjustments and there's some exemptions that happen to get to AMTI
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So if you don't really know what these are, again, that's okay. If you have a guess, go ahead and pause the video and you can kind of think through it
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But if not, we're going to go ahead and go to the answer to learn what these are. Okay, let's read the explanation
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When calculating the alternative minimum taxable income for the alternative minimum tax
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several deductions allowable under regular tax rules are added back to AGI or adjusted gross income
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Basically, they're not allowed under AMT. These include state and local tax deductions, interest on certain home equity loans
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not used for home improvement, and interest from private activity municipal bonds
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It also includes miscellaneous itemized deductions such as unreimbursed employee expenses, and the differences in depreciation methods also need adjustment
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And then also for AMT, medical expenses are only deductible if they exceed 10% of AGI
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compared to the 7.5% of regular taxes. For the more personal exemptions, the standard deduction
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and the benefit from exercising incentive stock options are all added back
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eliminating these breaks under AMT to ensure a minimum tax level is met by those with significant
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tax preferences. So again, basically a lot of things that give big tax breaks to people
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they're added back to AGI so that at least a minimum amount of tax is taxed to this person
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So the standard deduction added back. You don't add back all itemized deductions, just a few
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specific ones. Charitable contributions are okay. You don't need to add them back because they are an
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okay deduction under AMT. And then again, medical expenses, also are okay if the medical expenses exceed 10% of AGI instead of the 7.5% that is typical for
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normal taxes. But again, these are all the items that are added back to AGI so that you can then
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calculate AMTI. Let's go ahead and go to the next question. Okay, here's question four
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Elena, a single taxpayer, has a regular taxable income of $95,000. This year, Elena exercised
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incentive stock options paying for stock that had a market value of at the time of exercise The AMT exemption for a single taxpayer for the year is What is Elena AMT taxable income or AMTI after applying the exemption assuming no other
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adjustments or preference items? Okay. So again, we've kind of learned about how to do these different things up to this point
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Here's that exemption I was talking about. So see if you can figure this out
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However, you might not know how to treat the. I mean, we did talk about it a little bit in the previous question, but go ahead, pause the video, see if you can figure this out with everything we've learned so far
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And when you're ready, come back and we will look at the answer together. Okay, the answer is $34,700
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So to compute AMTI, we start with her regular taxable income, and then we make the adjustments that we talked about in the previous question
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So ISOs are one of those things. So you take the market value of the stock and you subtract the amount that was paid for the stock, and that gives you the bargain element or the spread
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for the ISO, and you add that back to AGI to get the AMTI
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And then you subtract the AMT exemption. And again, this is something that changes from year to year, and it's different for single
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taxpayers compared to married. It's not something you super need to focus on, but you subtract the exemption that is given
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that slash that you know from your review course. And that gives you the AMTI
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And that's all it was asking for in this question. It just wanted to know what was the AMTI
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It wasn't asking what the AMT or the tax was at the end
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It wasn't asking what the tentative minimum tax is. It's just asking what is the AMTI
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Okay, we've learned some good stuff so far. Let's go to the next question. Here's question five
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Hey, Logan. Logan has a regular tax liability of $30,000 for this year
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He reports an AGI of $160,000. During the year, Logan deducted $15,000 for state and local taxes
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and $10,000 for interest on private activity bonds. Additionally, Logan took a standard deduction of $12,550, assuming no other adjustments or preference
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items, calculate Logan's alternative minimum tax if the AMT rate is 26% for the first $197,900 of AMTI
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The AMTI exemption for Logan in this scenario is $73,900. Okay, we're five questions in
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You've learned a lot. I think you should be able to do this. Go ahead and pause the video, see if you can figure this out, and when you're ready, come back
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and we will look at the answer to see if you got it right. All right. And the answer is $2,149
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Answer C. Did you get it right? So let's go through the steps to see how we get to that point
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So we take his AGI of $160,000. We add back the state and local taxes
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the interest on private activity bonds, and the standard deduction, because again, those are not allowed under AMT
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And that gives you the AMTI before exemption of $197,550. and then you apply the exemption, and that gives you $123,650
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And then you take the 26% AMTI rate and multiply it by that $123,650 of AMTI
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And that gives you the TMT or the tentative minimum tax. And then you subtract the regular tax liability from that TMT and that gives you the AMT of Now one more thing I want to point out here this 26 is actually the current number
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You don't need to worry about that necessarily. That might change with time. One thing you should know is that over a certain amount, you know
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potentially this $197,900, there's another AMT tax rate of potentially something like 28%
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or again, it might change as time goes on. Currently, it's 28%. but anything over that amount has a slightly different tax rate than the 26%
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So there will always be two AMT tax rates. We didn't focus on them very much in this because we're focused more on calculating AMT
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and learning about that. But there are typically two AMT tax rates, one that's 26%, or that might change as time goes on
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And that's under a certain amount, you know, potentially this $197,900. And then anything over that is taxed at another tax rate, which is
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is 28%, but that might change as time goes on as well. All right, we've done five questions
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We've learned a lot. Before we go any further, let's go ahead and do one more part of the super fast CPA strategy
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which is something called Pillar Topics. Now, the idea behind Pillar Topics is as you're going through the questions to learn the
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material, you will notice the things that are most important. You will notice the concepts, the definitions, the things that keep popping up in like
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three, four, five of the questions that you did that day. And you just know that obviously this is something important
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something that I need to know for the exam. So you write them down. Let's go ahead and look at the
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pillar topics for this video. Okay, here are the pillar topics. Alternative minimum tax is there
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to ensure that people who get certain tax benefits still have to pay tax. You start by calculating
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the AMTI, which is the alternative minimum taxable income, and you do this by taking your AGI
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and adding back any adjustments that aren't allowed for AMT purposes, and that gives you your AMTI
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and this would include things like state and local tax deductions, standard deductions, certain itemized deductions like maybe tax prep fees or investment expenses
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medical expenses over 10% of AGI, interest on helox, and that depends on the helock
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the spread from ISOs, if not sold in the same year, and differences in depreciation
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So just in case I didn't mention it before, for ISOs, that spread that we had to add back to the AGI
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that only matters if you didn't sell those ISOs in the same year, they were excellent. And then you subtract the AMT exemption that's applicable to that person, and that's different depending on whether they're single or not or things like that
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Then you multiply it by the correct AMT tax rate, giving you the tentative minimum tax
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And then however much the difference is between the TMT and the tax liability, if the TMT is greater, that is your AMT
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So a little bit of an involved calculation there, but not too difficult once you understand the process and the steps
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All right. That is the end of this video. Thank you so much for watching. Just another reminder
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Make sure you go check out our Superfast CPA webinar on superfastcpa.com. We go over the key ingredients to passing the CPA exam
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And again, it's only one hour. It's free. Definitely go check it out. Also, again, if you liked this, this video was only five questions, but members of Superfast CPA will have access to this full video that's 10 questions when we post it on the forum
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If you liked this video, make sure to like it and leave a comment. I hope this was helpful, and I will see you in the next video. video
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