Determine Alternative Minimum Tax - CPA Reg

1. For AMT purposes, which of the following correctly describes the treatment of the standard deduction?
   Answer: If a taxpayer claims the standard deduction for regular tax, the standard deduction must be added back in computing AMTI because it is not allowed for AMT. The standard deduction is not allowed for AMT purposes. If a taxpayer claims the standard deduction on their regular tax return, the full amount must be added back to regular taxable income when computing AMTI. Taxpayers who itemize for regular tax avoid this add-back on some deductions, though many itemized deductions (such as SALT) are also disallowed for AMT. Answer A is incorrect because the standard deduction is specifically disallowed for AMT. Answer C is incorrect because no special $10,000 AMT deduction replaces the standard deduction. Answer D is incorrect because there is no 50% allowance; the standard deduction is simply not permitted for AMT.
2. Which of the following nonrefundable credits may generally be used to offset the AMT (in addition to offsetting regular tax) under current law?
   Answer: The child and dependent care credit, the adoption credit, and certain other personal credits may be used to offset AMT under current law. Under current law (post-TCJA), certain nonrefundable personal credits are allowed to offset AMT, including the child and dependent care credit, the adoption credit, the retirement savings contributions credit, and others listed in Section 26. Prior law restricted nonrefundable credits from offsetting AMT, but the TCJA temporarily (and subsequent legislation more permanently) allowed these credits to offset AMT. Answer A is incorrect because certain credits are allowed against AMT under current law. Answer B is incorrect because while the child tax credit is partially refundable, it is not the only credit permitted against AMT. Answer D overstates the change; not all nonrefundable credits offset AMT.
3. A married couple filing jointly has AMTI (after exemption) of $100,000. What is their tentative minimum tax?
   Answer: $26,000 The AMT rate structure applies 26% to the first $232,600 of AMTI above the exemption and 28% to amounts above that threshold (2024 figures). Since the couple's AMTI after exemption is $100,000, which is below the $232,600 bracket threshold, the entire amount is taxed at 26%. Tentative minimum tax = $100,000 x 26% = $26,000. Answer A ($28,000) would result from applying the 28% rate to the entire amount. Answer B ($20,000) would result from applying a 20% rate. Answer D ($15,000) would result from applying a 15% rate, which is not an individual AMT rate.
4. A taxpayer exercises ISOs, creating an AMT adjustment. The taxpayer subsequently sells the stock in a disqualifying disposition in the same year. Which of the following correctly describes the tax consequences?
   Answer: On a disqualifying disposition in the same year as exercise, the AMT adjustment is eliminated because ordinary income recognized on the disqualifying disposition replaces the ISO spread in both regular and AMT income. When a taxpayer exercises an ISO and makes a disqualifying disposition in the same year, the spread that would have been an AMT adjustment is recognized as ordinary income for regular tax in the same year. Because the income is now included in regular taxable income, the AMT adjustment is effectively neutralized - the income appears in both regular tax and AMTI, so no separate AMT adjustment is needed for the ISO spread. This avoids the AMT trap that would otherwise result from holding the stock. Answer A is incorrect because the elimination is not automatic in all cases; the key is same-year recognition. Answer B is incorrect because the adjustment is not permanent; it reverses on disqualifying disposition in the same year. Answer D is incorrect because no additional AMT preference arises from the ordinary income recognized.
5. Which of the following correctly describes the AMT credit (minimum tax credit) that arises when a taxpayer pays AMT in one year?
   Answer: The AMT credit may be carried forward indefinitely to reduce regular tax in future years when regular tax exceeds the tentative minimum tax, but only to the extent AMT was generated by timing differences (deferral items), not exclusion items. The AMT credit (minimum tax credit) under Section 53 arises from AMT paid that is attributable to timing (deferral) items such as accelerated depreciation and ISO exercises, not from exclusion items such as private activity bond interest or the standard deduction add-back. The credit carries forward indefinitely and may be used to reduce regular tax in future years, but only to the extent regular tax exceeds the tentative minimum tax. Answer B is incorrect because the AMT credit has an indefinite carryforward with no carryback. Answer C is incorrect because the AMT credit is not refundable in the general individual AMT context (though corporate AMT credit refundability existed under prior law). Answer D is incorrect because the AMT credit reduces regular tax only, not the tentative minimum tax.
6. For AMT purposes, which of the following correctly describes the treatment of research and experimental (R&E) expenditures that are expensed for regular tax?
   Answer: For AMT, R&E expenditures expensed for regular tax by a taxpayer who does not materially participate in the research activity must be amortized over 10 years, creating timing adjustments; taxpayers who materially participate in the research are not subject to this AMT capitalization requirement. Under pre-TCJA IRC Section 56(b)(2), R&E expenditures that were expensed for regular tax by a taxpayer who did not materially participate in the research activity had to be capitalized and amortized over 10 years for AMT purposes, creating a positive AMT adjustment in the year of expenditure and negative adjustments in later years. However, this 10-year capitalization requirement did not apply when the taxpayer materially participated in the research activity. Note that the TCJA (effective 2022) now requires capitalization of R&E for regular tax as well, which largely eliminates this AMT timing difference going forward. Answer B is correct. Answer A is incorrect because R&E is not a preference item; it is an AMT timing adjustment. Answer C is incorrect because a 10-year amortization requirement exists for AMT when material participation is absent. Answer D is incorrect because there is no 50% AMT deduction rule for R&E.
7. Under the Tax Cuts and Jobs Act, the corporate alternative minimum tax (AMT) was repealed for tax years beginning after December 31, 2017. However, the individual AMT was retained with modified exemption amounts. Which of the following correctly describes the individual AMT framework post-TCJA?
   Answer: The individual AMT was retained but the exemption amounts were significantly increased and the phase-out thresholds were raised, reducing the number of taxpayers affected. The TCJA retained the individual AMT but substantially increased the exemption amounts and the income thresholds at which the exemptions phase out, significantly reducing the number of individual taxpayers subject to AMT. For 2024, the exemption is $85,700 for single filers and $133,300 for married filing jointly. The corporate AMT was repealed by the TCJA but reinstated for large corporations by the Inflation Reduction Act (2022) as a 15% corporate AMT on book income for corporations with average annual adjusted financial statement income over $1 billion. Answer A is incorrect because the individual AMT was retained. Answer B is incorrect regarding the threshold. Answer D is incorrect because the individual AMT rates remain 26% and 28%.
8. Which of the following itemized deductions is allowed for AMT purposes (i.e., is NOT added back as an AMT adjustment)?
   Answer: Charitable contributions deducted on Schedule A. Charitable contributions are allowed as a deduction for both regular tax and AMT purposes. They are not an AMT adjustment or preference item. Answer A is incorrect because SALT deductions (state and local income taxes, property taxes) are not deductible for AMT purposes and must be added back as an AMT adjustment. Answer C is incorrect because home equity loan interest not used to acquire, build, or improve the home is not deductible for AMT (only qualified housing interest on acquisition debt is allowed for AMT). Answer D is incorrect because miscellaneous itemized deductions subject to the 2% AGI floor are not deductible for AMT purposes (though the TCJA suspended these deductions for regular tax through 2025 as well).
9. A taxpayer has regular taxable income of $350,000 and AMTI (before exemption) of $430,000. The AMT exemption for a married filing jointly couple begins phasing out at $1,218,700. What is the AMTI after exemption using the 2024 MFJ exemption of $133,300?
   Answer: $296,700 The MFJ AMT exemption for 2024 is $133,300, and it phases out at a rate of 25% of AMTI above $1,218,700. Since the taxpayer's AMTI ($430,000) is below the phase-out threshold ($1,218,700), the full exemption applies. AMTI after exemption = $430,000 - $133,300 = $296,700. Answer A ($430,000) is the AMTI before subtracting the exemption. Answer B ($350,000) is the regular taxable income. Answer C ($216,700) would result from subtracting $213,300, which is not the correct exemption amount.
10. Which of the following correctly describes how net operating losses (NOLs) are treated for AMT purposes?
    Answer: An AMT NOL deduction (AMTNOLD) is computed separately from the regular tax NOL and may reduce AMTI by no more than 90% of AMTI (before the AMTNOLD deduction) under Section 56(d)(1). For AMT purposes, a separate alternative minimum tax net operating loss (AMTNOL) is computed, reflecting AMT adjustments and preferences in the year the loss arose. Under Section 56(d)(1), the AMTNOLD deduction is limited to 90% of AMTI (before the AMTNOLD deduction) - a limit that is distinct from the 80% regular-tax NOL limitation enacted by the TCJA. The 90% AMT limit has applied since before the TCJA. Answer D is correct. Answer A is incorrect because the AMTNOL is computed using AMT-specific rules and is subject to the 90% limitation. Answer B is incorrect because AMT NOLs are deductible, subject to limitations. Answer C is incorrect because the 90% limitation applies in all years, not only when there are no AMT adjustments.
11. The exercise of an incentive stock option (ISO) creates an AMT adjustment. Which of the following correctly describes this adjustment?
    Answer: The spread between the fair market value of the stock and the exercise price at the time of exercise is an AMT adjustment that increases AMTI. When a taxpayer exercises an ISO, there is no regular income tax recognized (assuming the holding period requirements are met). However, for AMT purposes, the spread (FMV of stock minus exercise price) at the time of exercise is an AMT preference/adjustment item that increases AMTI. This is one of the most common triggers of individual AMT for employees of high-growth companies. Answer A is incorrect because ISOs create an AMT adjustment even though they are not recognized for regular tax. Answer B is incorrect because only the spread (not the entire FMV) is the AMT adjustment. Answer C is incorrect because the exercise price paid is subtracted from FMV to determine the spread; the full FMV is not added.
12. Which of the following correctly describes how long-term capital gains and qualified dividends are taxed under the AMT?
    Answer: Long-term capital gains and qualified dividends retain their preferential tax rates (0%, 15%, 20%) for both regular tax and AMT purposes; they are not taxed at the higher AMT rates. Under Section 55(b)(3), the preferential rates applicable to long-term capital gains and qualified dividends (0%, 15%, 20%) are preserved for AMT purposes. These income items are included in AMTI but are not subject to the 26%/28% AMT rates; they retain the lower capital gains rates. The AMT rates apply only to ordinary income within AMTI. Answer A is incorrect because LTCG are not subject to the 26%/28% AMT rates. Answer B is incorrect because qualified dividends are not added back as preference items. Answer D is incorrect because LTCG are included in AMTI but taxed at preferential rates, not exempted entirely.
13. A taxpayer has a tentative minimum tax of $45,000 and a regular tax liability (before credits) of $38,000. How much AMT, if any, is the taxpayer required to pay?
    Answer: $7,000, the excess of tentative minimum tax over regular tax. AMT payable = tentative minimum tax - regular tax (before credits) = $45,000 - $38,000 = $7,000. The taxpayer pays their regular tax of $38,000 plus the $7,000 AMT, for a total tax liability of $45,000. The AMT is not added to the regular tax as a separate item but is the amount by which TMT exceeds regular tax. Answer B ($45,000) is the TMT; the taxpayer pays regular tax plus the excess, totaling $45,000, but the incremental AMT payment is $7,000. Answer C ($38,000) treats the taxpayer as paying only the greater of the two, ignoring the excess AMT. Answer D is incorrect because the AMT regime exists precisely to ensure a minimum tax payment regardless of regular tax deductions.
14. An individual taxpayer's regular taxable income is $200,000. After AMT adjustments and preferences, AMTI is $260,000. The AMT exemption for a single filer in the current year is $85,700 and the phase-out threshold is $609,350. What is the taxpayer's AMT exemption?
    Answer: $85,700 because the taxpayer's AMTI is below the phase-out threshold. The AMT exemption phases out at a rate of 25 cents per dollar of AMTI above the phase-out threshold. The single filer phase-out threshold is $609,350 (2024). Since the taxpayer's AMTI of $260,000 is below $609,350, no phase-out applies and the full exemption of $85,700 is available. Answer A is incorrect because the taxpayer's AMTI ($260,000) is well below the phase-out threshold ($609,350). Answer C is incorrect because the 50% reduction is not a standard formula; the exemption is reduced only when AMTI exceeds the phase-out threshold. Answer D is incorrect because itemized deductions do not directly reduce the AMT exemption in this manner.
15. Which of the following AMT adjustments applies when a taxpayer uses accelerated depreciation for regular tax purposes on personal property placed in service after 1986?
    Answer: The taxpayer must recompute depreciation using the 150% declining balance method over the AMT class life (ADS life), with the difference between AMT and regular depreciation added to or subtracted from AMTI. For AMT purposes, personal property placed in service after 1986 must be depreciated using the 150% declining balance method switching to straight-line over the property's ADS (Alternative Depreciation System) class life, rather than the 200% declining balance method (MACRS) used for regular tax. The positive or negative difference between AMT depreciation and regular MACRS depreciation is an AMT adjustment. Answer A is incorrect because MACRS uses 200% DB, which is faster than the 150% DB required for AMT. Answer B is incorrect because straight-line over GDS life is not the AMT standard for personal property; 150% DB over ADS life is used. Answer C is incorrect because there is no flat 50% add-back; the actual depreciation difference is computed.
16. The starting point for computing alternative minimum taxable income (AMTI) for an individual is regular taxable income. Which of the following correctly describes the next step in computing AMTI?
    Answer: Add back AMT preference items and make AMT adjustments (both positive and negative) to regular taxable income to arrive at AMTI. AMTI is computed by starting with regular taxable income and then adding back tax preference items (such as percentage depletion in excess of basis, excluded gain on qualified small business stock, and private activity bond interest) and making AMT adjustments (such as adding back the standard deduction if taken, recalculating depreciation using AMT methods, and adding back miscellaneous itemized deductions). Answer A is incorrect because itemized deductions are handled through specific AMT adjustments, not a blanket subtraction. Answer B is incorrect because the standard deduction add-back is one of many adjustments; it does not stand alone. Answer D is a fabricated formula with no basis in the Code.
17. Which of the following home mortgage interest deductions is allowed for AMT purposes?
    Answer: Interest on acquisition debt (mortgage used to buy, build, or substantially improve a qualified residence), up to $750,000 of principal. For AMT purposes, only qualified housing interest (interest on acquisition debt used to acquire, construct, or substantially improve a qualified residence) is deductible. The acquisition debt limit is $750,000 (post-TCJA). Interest on home equity loans or lines of credit used for purposes other than acquisition, construction, or substantial improvement is not deductible for AMT purposes, even if it is deductible for regular tax (when used for home improvement). Answer A (credit card payoff) is not acquisition debt and is not AMT-deductible. Answer B (vacation funding) is not acquisition debt. Answer C would be deductible for AMT only if the home equity loan was used for home improvement meeting the acquisition/improvement standard, but the $100,000 limit is a regular tax concept, not AMT.
18. The AMT is owed when it exceeds the regular tax liability. Which of the following correctly states the AMT payable formula?
    Answer: AMT payable = tentative minimum tax minus regular tax liability (before credits); if the result is positive, the AMT is owed in addition to the regular tax. AMT is computed as tentative minimum tax (TMT) minus the regular tax liability (computed before most nonrefundable credits). If TMT exceeds regular tax, the excess is the AMT due, which is added to regular tax to arrive at total tax liability. If regular tax equals or exceeds TMT, no AMT is owed. Answer B is incorrect; AMT is not computed as a percentage of the AMTI-to-taxable-income difference. Answer C is incorrect; the taxpayer does not pay simply the greater of the two amounts - they pay regular tax plus any excess of TMT over regular tax. Answer D is incorrect because most nonrefundable credits do not directly reduce the AMT; they reduce regular tax, which is compared to TMT.
19. Percentage depletion in excess of the adjusted basis of a property is a tax preference item for AMT purposes. Which of the following correctly describes this preference item?
    Answer: The excess of percentage depletion claimed over the adjusted basis of the property at year end is added to AMTI as a preference item. Under Section 57(a)(1), the excess of percentage depletion deductions over the adjusted basis of the property at the end of the year is a tax preference item added to AMTI. Once the property's adjusted basis has been reduced to zero, any further percentage depletion is entirely a preference item. Answer B is incorrect because only the excess over adjusted basis is the preference item; depletion up to adjusted basis is not added back. Answer C is incorrect because the preference applies to percentage depletion from any property, not only oil and gas. Answer D is incorrect because the preference is measured against adjusted basis, not against cost depletion.
20. Which of the following correctly describes the treatment of accelerated depreciation on real property for AMT purposes for property placed in service after 1986?
    Answer: For AMT, real property must be depreciated using the straight-line method over the ADS class life, versus straight-line over GDS life for regular MACRS; the difference between AMT and regular depreciation is an AMT adjustment. For real property placed in service after 1986, regular MACRS uses straight-line depreciation over the GDS recovery period (27.5 years for residential rental property, 39 years for nonresidential real property). For AMT, real property must use straight-line over the ADS life (40 years for most real property). The longer ADS life produces smaller AMT depreciation deductions in early years, creating a positive AMT adjustment. Answer A is incorrect because the GDS and ADS lives differ, creating an AMT adjustment. Answer C is incorrect because real property uses straight-line for both regular and AMT, not declining balance. Answer D is incorrect because depreciation on real property is an AMT adjustment, not a preference item.

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