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Area I: Individual Compliance and PlanningTCPIndividual TaxAMT

CPA · Question 02 · Area I: Individual Compliance and Planning

A taxpayer is calculating their Alternative Minimum Tax (AMT) liability for Year 1. They claimed a standard deduction of $27,700 (married filing jointly) and received $2,000 in tax-exempt interest from private activity bonds issued in Year 1. They also exercised ISOs creating a spread of $10,000. Which of the following correctly describes the adjustments to reach Alternative Minimum Taxable Income (AMTI)?

Answer options:

A.

Add back the standard deduction and ISO spread only.

B.

Add back the private activity bond interest and ISO spread only.

C.

Add back the standard deduction, the private activity bond interest, and the ISO spread.

D.

Add back the standard deduction and private activity bond interest; subtract the ISO spread.

How to approach this question

Recall the formula: Taxable Income +/- Adjustments + Preferences = AMTI. Standard deduction is disallowed (add back), Private Activity Bond interest is a preference (add back), and ISO bargain element is an adjustment (add back).

Full Answer

C.Add back the standard deduction, the private activity bond interest, and the ISO spread.✓ Correct
IRC §56 and §57 outline AMT adjustments and preferences. The standard deduction is not allowed for AMT (IRC §56(b)(1)(E)), so it is added back. Interest on private activity bonds is a tax preference item (IRC §57(a)(5)). The spread on ISO exercise is an adjustment (IRC §56(b)(3)).

Common mistakes

Thinking the standard deduction is allowed for AMT; forgetting private activity bond interest is taxable for AMT.
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