 Hello and welcome to this session. This is Professor Farhad in which we would look alternative at alternative minimum tax part three of five. It means part one and part two are completed. Make sure to view them before you see part three. This topic is dreaded by many students and frankly when I listen to CPA review explaining this topic it gives me a headache. So I try to make I'm trying to make it as simple as possible to you because this topic is covered on the CPA exam covered in 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 this is where I add value to your education to your CPA preparation where I go in depth unlike a CPA review course. I explain the material. I teach you the material. So if you're interested in supplement on your accounting courses or your CPA exam I strongly suggest you check out my web. So this is where we end up the prior session. We looked at the regular taxable income plus the adjustment plus the rental minus the depreciation minus the sale on the asset plus the incentive stock option and we come up to alternative minimum taxable income before the exemption and basically on the form we are right here. The next thing we're going to do is look at the exemptions and here are the exemptions on the forms you may or may not see them and this is for 2019. Those will change for 2020, 2021, 2022 but once you understand them I don't think they're going to change that much but they will change. So in case you are looking at this at this lecture in 2022 and you might be saying this is an old lecture well they might change the adjustments make sure you know how to follow. Okay so this is the exemption but let me show you the exemption and where you can see them better. So for single the exemption is 71,700 but you will start losing part of that exemption when your AMTI exceeds 5, 10, 300. Merit file and jolly your exemption is 11,700 but the phase out will start at 1,020,600. Don't worry we're going to work an example. Merit file and separately this is the exemption and the phase out will start at 5, 10, actually 300 not 5, 10, 300. The phase out exemption exemption is reduced by 25% of AMTI in excess of the income limit simply put when you have a dollar one dollar in addition to 1,020,600 for every dollar you would use 25 pennies 25% okay you would lose 25 pennies from this exemption. The best way to do is to work an example let's assume Marge and Homer have an AMTI of 1,100,000 they're married fighting jointly so the initial exemption for them is 1,11,700 but guess what Marge and Homer income Marge and Homer income AMTI in excess of 1,020,000 therefore what we have to do we have to compute the access and by 25% of the access we will reduce this 1,11,700 so simply put the 1,11, the 1,11,700 becomes 91,850 how did we do this first we'll find the difference what's the amount that's in access so let me just compute this so let's see how much they are above the exemption so this way we multiply it by 25% let me increase the size of this and this is what you have to do on the CPA exam because you'll have the calculator given to you so you just want to make sure you're comfortable with that so 1,100,000 and you will deduct from it 1,020,600 so they are 79,400 in access they're going to lose 25% of that so this whole thing this whole thing because they're 17 this whole thing this whole formula here end up to be 19,850 and this is how much they lost minus 1,11,700 therefore their therefore their exemption is 91,850 not 1,11,700 okay also after the after the deduction after the I'm sorry after the exemption you might have credits usually most people don't qualify for those credits AMT people child tax credit child independent care credit contribution credit because your income is already too high so you don't really qualify for those you might qualify for the adoption and the foreign tax credit those credits are available so simply put let's take a look at this picture again and do this on the form so basically this was our taxable income for this individual for this example to 17245 they're married filing jointly married filing jointly therefore their exemption is 1,11,700 do they qualify for the whole thing yes why because their income is way below the limit so now we're what we're going to do we're going to take this exemption to 17245 minus 1,11,700 their AMTI is 105,545 now we're going to multiply this by the tax rate what tax rate well if this a flying six is below 194,800 we multiply it by 26% and it is if it's above this amount we multiply it by 28% minus 3896 and those you know that number will change but if we take 105,545 times 26% our AMTI or our AMT tax supposedly is 27,442 then we have no credit online aid therefore our our AMT tax is 27,442 we compare this to our regular tax our regular tax is 25,740 guess what we do have AMT as a result of the AMT we have to include an additional one thousand seven hundred and two dollars on our taxes now how do we add this from a form perspective this one thousand seven hundred and two will go to form schedule two of form 1040 1,702 then schedule two offline of schedule two offline one basically this that's assumed that's the only thing 1702 so this is the total then this number here will go to on your 1040 line 15 other taxes 1702 so when I was in practice when I was in practice it went from 6251 to the 1040 directly they did not have schedule two back then but the point is oftentimes you have to explain to the client it's okay could you tell me where this the 1702 came from because usually the client they look at their 1040 that's what they look at this is that this is form 1040 like what is this 1702 then you have to understand it came from usually again in the past I would go right to the AMT schedule but now you have to go to the schedule two because they're trying to simplify the process which is they make it they have more forms how do you simplify things by having more forms but that's not the point so it's coming from line one from your schedule two and this is coming from 6251 then the client sometimes they want to understand this so so I you never complete 6251 in practice actually the software does complete this this form for you but it's very important that you understand how it works some of the next session actually I'm going to complete 6251 in a form of a CPA simulation because when you learn you want to learn you have you want to have a strong base and I will not be surprised if the CPA if the ICPA gives you an AMT simulation it will be unfair but hey life is not fair but I will I will work a CPA simulation with 6251 and hopefully by going through these series of lectures you just put this AMT topic behind you and you tell them bring it on I'm willing to take to take on it in the next session we would look at part four of five which again I'm going I'm planning to work an example of a CPA simulation where you're going to have full confidence in answering these questions as always I'm going to remind you to like this recording visit my website farhatlectures.com and don't shortchange your education or your CPA preparation it's a lifetime investment good luck study hard and stay safe