 Hello and welcome to this session. This is Professor Farhad in which we would look at AMT Part 4 of 5. It means I already have three other parts before this. In this session, we're going to work an example simulation because in the first three session, I explained AMT in details. Now it's time to work an example or a CPA simulation. Obviously, this topic is dreaded by students. It's covered on the CPA exam 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, this is where you can find additional resources to supplement your accounting education, your CPA exam, your finance courses. Don't shortchange yourself. Your education is important. Passing the exam is a 20, I would say 30, the 40-year investment in your career. Study hard. Get, put it behind you so you can focus on your career, make the money, live the life that you want. So let's take a look at this CPA simulation. Again, I could even give you more exhibits and I'll show you how I can do that. Nathan is married with two children and has an AGI of 405. He has the following AMT adjustments and preferences. So rather than giving you AGI 405, I can give you the tax return and on the line, you have to find out that AGI is 405. Or I can just tell you AGI is 405. A potential itemized deduction are as follow, medical, after the floor, taxes, mortgage interest, and charitable contribution. And the first thing they're asking you in this exhibit, let's go over the problem then we'll do it step by step. They're giving you the itemized deduction. They're giving you depreciation of rental property purchase in August 2018 for 21,000, 210,000, depreciation on real property, on personal property. C, you have a computer, a piece of furniture, they're giving you the date, the cost. They want you to find the maker's life in AMT, maker's depreciation, AMT depreciation, and any adjustments. Also, you have incentive stock option, Nathan exercise options to purchase 3,000 shares at $19 when the market is 26. Prepare a 6251 for the calculation of AMT, assume regular tax of 76,785. Now, if you understand the AMT, this should be an easy, peasy problem. Okay, should be like, okay, bring it on. If this is a one simulation AMT and you understand the AMT, it should be good to go. But if you don't understand the AMT, you're going to be confused and intimidated. So let's go ahead and start to look at this step by step. So simply put, we have to complete a 6251. Calculation for AMT. Now, would they give you an actual form? I'm not really sure. They may not give you the actual 6251, but they might give you some sort of a drop down boxes where you have to kind of compute this in order. So let's first take a look at this itemized deduction. So we need to know what's deducted for regular tax and what's deducted for AMT and what type of adjustments we need to make. Well, remember, the first thing we do when we compute AMT, we have to compute what's called regular taxable income. Regular taxable income. Okay, now we are giving adjusted gross income. Now we have to come up with regular taxable income. So what does that mean? It means we have to take 405 and deduct from 405. You know, remember, itemized deduction are after AGI. They're from AGI. Therefore, we have to deduct those from AGI. So we have to deduct 5,375 for medical. Let me just 5,375 for medical. Taxes, we can only deduct. Remember, tax cuts and jobs act. We can only deduct 10,000 mortgage interest. We can deduct the whole thing, 14,900. In charitable contribution, another deduction of 18,000. So first let's find this individual regular taxable income because that's the first thing you want to know. So let's take a look at it. Let me increase the calculator here, the size of the calculator because that's the first thing you want to do. When you start 62, 51, you start with regular taxable income. So 405, this is adjusted gross income minus 5,375, minus 10,000, minus 14,900, minus 18,000. And that's gonna give us 356,725. And that's gonna be on the first line of the 62, 51 because you start with regular taxable income. Now, if they gave you the schedule, basically, you're gonna say, well, for AMT, this deduction is taken, 53,75, there is no adjustment. Taxes, remember, we only take 10,000 for regular. AMT, you don't take any. You cannot take this, you have to add back. So this is a positive adjustment. So simply put, we're gonna start for 356,725, then we're gonna add to it $10,000 for the taxes. You can take the 14,900 for AMT, no adjustments. You can take the 18,000 adjustment for charitable contribution, no adjustments. So simply put, remember, that taxes is the only adjustment. And remember, the maximum you can take for regular tax is 10,000. Therefore, the maximum you're gonna add back is 10,000. So this is the first thing we do. Now, we're gonna have to deal with the depreciation, but before we deal with the depreciation, I prefer to figure out the incentive stock option, get that out of the way, because for one thing, it's easier, not easier, it's cleaner, it's just have a quick calculation you have to make, it's cleaner, okay? Then we'll work on with the depreciation, but we'll go and work on it on an Excel sheet. I can do it here, but I prefer to do on Excel sheet because I wanna show you the exhibits where the numbers are coming from. So let's take a look at the incentive stock option. So Nathan exercise options to purchase 3,000 shares at 19 when the market value is 26. Well, it's gonna trigger some taxable income for AMT. So what's the difference between 26 and 19? Basically, he can make $7 per share. It's 3,000, not he make, he made, he made, he can make immediately $7 per share, whether he sells them or not, as far as AMT, Nathan will have 21,000 of taxable income as far as AMT. Now for regular tax, nothing happened until eventually Nate sells them, but for AMT, we have another adjustment. Therefore we started with 356, we added 10,000. Now we're gonna add another 21,000. The reason I'm doing this here because once I start to complete 6251, you know where the numbers are coming from. Now we're gonna focus on, we're gonna focus on the depreciation. So to do the depreciation, I'm gonna go to the Excel sheet once again because I wanna show you where all the numbers are coming from. So let's go ahead and do it. Remember, we purchased the real property, rental real property, rental property, rental property, which is commercial, it's not residential, commercial, that's very important for 210. So it's very important to know, it's not residential, it's commercial. Why is that important? Because for commercial, let me explain why. For B, you really have no adjustment. Because for commercial, you depreciate this over 39 years. For AMT, you depreciate this over 40 years. What Congress said, there's only one year difference. Don't worry about this adjustment. So simply put, because it's rental property, which is commercial, we don't have to worry about it. Be careful. If this was residential, remember the residential is 27 and a half years. And when you turn it into 40 years, it makes a difference. So for commercial, basically this is done. Okay, this is done. Again, easy peasy if you understand this concept. Now we're gonna work on the depreciation on the personal property. Let's take a look at this Excel sheet and see what we are given. We are giving two assets purchased in 2015 and we are in 2019. So we have 2015, 16, 17, 18, 19. We have five years. So first, if you want to find out what's the life, what's the life of the asset? What's the life of the asset? The life of the computer, you have to understand it's five years. It might be given to you in an example, or you might have to look it up in the exhibit. But remember, computers is five years. There are certain things you have to memorize. Furniture, the life of a furniture is seven years. The cost of the computer is 2,900. The cost for the furniture is 12,000 given. So the first thing you wanna do is you wanna compute maker's depreciation because you're gonna have to compute makers, compare makers to EMT and find out what your adjustment should be. So for makers, we are looking at a five-year asset. So let's go to the makers table. Here's the makers table. The computer is a five-year asset. Let me get my pen and start to draw. So it's maker's five-year asset and we're looking at year five. So this is 2015, 16, 17, 18, 19. So we're gonna take 11.52. So the rate is 11.52. Take the rate times the base. So the maker's depreciation is $334 and eight pens. Let's do the EMT immediately. For the EMT, you have to use a different table. You have to use the 150% double declining. Once again, those are the exhibit that you have to pull and this is gonna be intimidating on the exam day but all what you're doing is just clear your mind. This is depreciation. You know depreciation, slow down, relax and you'll be fine. Again, it's a five-year property. Recovery is five years and we are in year five. Therefore for EMT, you're gonna take 16.66%. So let's go ahead, 16.66%. Take your base times 16.66% and find the difference between makers and EMT. And look, for EMT, you're gonna take more deduction which is good, it's a negative adjustment. So for the asset, for this asset, for the computer, it's a negative adjustment. Let's do the same thing for furniture. The furniture is a seven-year asset. You go to the accelerated table, seven years and you would say, okay, seven years, year five, the rate for makers is 8.93, 8.93. Let me find 8.93 times 12,000, that's 1,071. I have to go to the 150 and seven year and 12.25%, 12.25% and I multiply it by my 12,000. Find the difference. Again, it's a negative adjustment. So basically what we have is we have a negative adjustment of 500 and $547. Now what they could do also on the exam, they could also give you the exhibit for the property. They could give you exhibits for the property, for the rental property to confuse you, but you don't have to do this for this in this situation because it's a commercial property. Just Congress ads, it's too small, just move on, don't worry about it. Now once we have this information, basically what we did is we answered all the questions. All that we have to do now is complete the 6251. So let's go ahead and complete the 6251. Let's take a look at form 6251 and start the form. Again, on line one, you're gonna start with taxable income that we computed early on and it was 356,725. Remember, we took AGI minus the standard deduction. Then we added from schedule A, we added from schedule A $10,000, $10,000 for the taxes that you could not. Then after that, we went to line two I, and this is exercise of incentive stock options. And here, let me increase the size of this a little bit more if I can, okay? For the incentive stock options, incentive stock options I, we added $21,000. Nathan exercised those options. Then for depreciation, depreciation of asset placed in service after 1986, difference between AMT and the regular tax. Remember, this was a negative adjustment, negative 547. So we did all these computation, all what I'm doing is filling out the form. If I net everything out, it will net out to 387178. Now let's complete the form. Nathan is merit filing jointly. Merit filing jointly exemption is 111,700. So 111,700. Are we gonna lose any of this 111,700? And the answer is no, we don't have to trim down the exemption because 387178 is way below the phase out of a million 20,000. Therefore, if Nathan's gonna qualify for the whole exemption, then 387178 minus 111, that's gonna give us 275, which is the taxable income for AMT 275,478. And I'm sure you're starting to notice something unusual here, I hope so. Now we multiply this rather than 26, we multiply this by 28% minus 3896. And that's gonna give us taxes of 73,238. We have no credits, we have no credits. Therefore, our AMT tax is 73,238, and we are giving regular tax was, from the problem 76,785. What does this number came from that was given to you at the end of the simulation? I told you regular tax 76,785. So guess what, we did all this work for nada, for nothing. So we don't have an AMT, why? Because the regular tax is 76,785, AMT is 73. The government doesn't want you to pay less taxes, they want you to pay more taxes. So that's why the software usually tells you whether you qualify or not, because sometimes if you do all this work, often time it's like, okay, I don't qualify for AMT tax. Qualifying for AMT tax, you will think it's better because it's minimum tax, not at all. It's in addition to your regular tax, if it's more than your regular tax. Here, we don't have anything. So we fill out the form, okay, great, that's excellent, that's excellent news. So this is basically, I hope now you understand AMT. I'm gonna remind you, go to my website, farhatlectures.com, if you're looking to learn about this topic, or tax topic, or audit, or governmental accountant to supplement your education or your CPA preparation. Study hard, good luck, stay safe, especially if you are still living through the coronavirus.