 Hello and welcome to the session. This is Professor Farhad in which we would look at CPA questions that deal with alternative minimum tax. This is part five of five. This means I already finished four quarts explaining AMT, which involved a simulation. In this session, we would look at practice questions. This topic is covered on the CPA exam, obviously, as well as an income tax course. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,700 plus accounting, auditing, tax, finance, as well as Excel tutorial. If you like my lectures, please like them, share them, put them in playlists. If they benefit you, it means they might benefit other people. Connect with me on Instagram. On my website, farhadlectures.com, you will find additional material to supplement and complement your accounting education, as well as your CPA exam. If you are planning to add 10 to 15 points to your CPA exam score, pass the exam and put it behind you so you could focus on your career, check out my website. So let's take a look at the first question. The calculation of AMT begins with what? So simply put here, they're asking us, do we know how to compute AMT? Well, what do you start with? You start with taxable income. So let's look at A, begins with taxable income so far so good, then adds back adjustments. Yes, partially true, then subtract out preferences. Well, preferences we always add, that's one thing. So now adjustments, they could be pluses, they could be minuses, A is out. B, begins with taxable income so far so good, then add back adjustments and preferences and subtract AMT exemption. Well, that looks good, that looks good because we do add, we do add back adjustments and preferences, add them back, it means they could be plus, they could be minuses, they did not specify, preferences always a plus. Okay, adjustments, they could be plus, they could be minuses, then we subtract AMT. This looks like a good answer. Let's look at the other. Does not involve the addition or subtraction of itemized deduction out. It does involve the addition of itemized deduction, except for charitable contribution, that's not true. Does not involve the addition or subtraction of municipal bond interest income from private activity bond. No, private activity bond, this is a preference, part of the preferences and we add those private activity bond. So it does involve the addition of that. Therefore, as expected, B is the answer. Let's take a look at this question. Mark is single with no dependent. During 2019, Mark has 110,000 of taxable income, he has 38,000 of positive AMT adjustments and 22,000 of tax preferences. Mark does not itemize his deduction, but takes the standard deduction, calculate Mark's alternative minimum taxable income. So to start with, we'll start with 110, his regular taxable income and definitely we add the preferences, 22,000 and here they're telling us the AMT is a positive adjustment. Therefore, we add the positive adjustment, 38,000. We're up to 170. I wrote this question this way for a purpose. You look at the answers and you don't see 170 and you may go with none of the above. That's not true. What happened here, you have to remember, but here you don't, in a sense, you have to remember from my perspective to help you understand this, you are missing the standard deduction and the standard deduction is 12,200 for 2019. Now, rather than giving you the standard deduction, they may show you the tax form when you have to pull out the standard deduction. So simply put, don't forget to add back the standard deduction because he does not itemize. Therefore, you add back the standard deduction. So this question is on purpose this way, kind of to remind you that you basically, the first thing you have to do once they said that he doesn't itemize you would say 110 plus standard deduction. That's the first thing you have to do because it means you don't have itemized deduction to worry about, but you have to add back the standard deduction. So be careful. Which of the following itemized deduction not allowed for AMT? Simply put, you cannot take the deduction for AMT. You have one, two, and three real estate taxes, charitable contribution, medical expenses. Let's look at three. Are they all not allowed? That's not true. Some of them are not allowed, but not all of them. Therefore, B is out. One in three. Well, here's what you have to know. Kind of, I'm going to make it easy for you. What is not allowed for AMT? Real estate taxes. Anything that does, any taxes paid on Schedule A. Taxes paid on Schedule A is not allowed for AMT. It's not allowed for AMT. Therefore, one only. And remember, this amount, this amount, not real estate, the taxes paid on Schedule A, the maximum an individual can take is $10,000. So what you have to do usually is start with your taxable income, add back this $10,000 from, if not the standard deduction, you'll have to add back the taxes if you have up to $10,000. AMT depreciation of furniture, seven-year life, as calculated using which method? Okay. So you have to understand, you have to choose between makers and AMT. Well, you have to know. Hopefully, you know, when you walk under the exam, that makers is a 200% declining balance. Therefore, they're asking us about AMT. AMT is out. Once, you know, makers is 200%, the straight line is not for furniture, the sums of year digit, we don't really use it for IRS. So what's left is $150. But remember, even let's assume you memorize this and you're confused. Is it $150 or is it $200? Let's assume you are down to those two. Is it $150 or is it $200? I know it's one of them. Well, think about it. AMT, it's going to give you less deduction, generally speaking, not generally speaking. The purpose is less deduction. Okay. So which one will give you less deduction? $150. In total, they're the same. But if I told you use the $150, it means it's going to give you less deduction at least early on. Therefore, AMT uses $150, makers uses the $200 declining balance. And I want to make sure when you go into the exam, you know makers is $200. Otherwise, you know, it's not good not to know that. Okay. After computing all tax preferences and AMT adjustments, Adam and his wife, Lily has AMTI of $1,250,000. If Adam and Lily file a joint return, what exemption amount can they claim for AMT for that year? So I just made up some numbers here to make sure you understand how we compute the exemption, the exemption. Assume the phase out start at $1.2 million and the exemption amount is $1.15 million. Okay. So again, this purpose is for effectiveness here, because every year the exemptions and the phase out will change. That's why I just make up some numbers. So anytime you are faced with those numbers, you'll be able to answer the note. If this was a CPA question, you know, if this was a simulation, they will give you the phase out and the exemption. So simply put, their start, the government gives you $1.15 million. But hopefully, you know already that they cannot qualify for the $1.15. Why? Because their AMTI is more than the phase out, which is $1.2 million. So A is out. The second common error that students make is, oh, they would say, well, we are $50,000 above the phase out, let's deduct $50,000 from $1.15 and we'll get $65,000 or maybe there's a mistake, $65,300. It's not, that's not how you do it. So how do you compute this? How do you compute the reduction in the exemption? Well, first you have to see how much are you above the limit. So if we take $1,250,000 minus $1.2 million, you are $50,000 above the limit. You'll take the $50,000, you multiply it by 25%, and you need to reduce your exemption by $12,500. Therefore, if the government gives you $115,000, you have to reduce it by $12,500. And I believe this should be $102,500 and the answer is, D is in David. So an easy trap is you'll take the $50,000 and deduct the $50,000 from the $1.15. That's not what you do. Just make sure you know this. You find out how much you are over. By the amount you are over, for every dollar you are over the phase out, you reduce your exemption by 25 cent. Again, if this is given to you, it will not be given in a multiple choice because they will need to give you the phase out and the exemption. Usually it will be given most likely in a simulation. As always, I'm going to remind you to like my recording, share it, put it in playlist. I'm always going to remind you also to visit my website farhatlectures.com if you want to learn more about an individual income tax, entity tax, which is corporate tax, international accounting, advanced accounting, governmental audit. You want to supplement your education or you want to supplement for your CPA exam or your finance course. Check out my website. Your CPA investment is 30 to 40 years. So it's a long term investments. It's going to pay you dividend over a long period of time. Don't short change yourself. Invest in your career, invest in your education so you could move on, pass your exam, live the life that you like. Good luck, study hard, and stay.