Kelly was promoted and received a substantial raise that includes compensation in the form of incentive stock options. She talks to her tax adviser about potential tax ramifications. After making some projections, her adviser welcomes her to the AMT club. Kelly is surprised to learn that her promotion will be rewarded with an additional tax in the form of the AMT. Explain to Kelly the purpose of the AMT and why it applies to her.
Explain the purpose of AMT and its application in Mrs K’s case.
Explanation of Solution
Alternative Minimum Tax (AMT): AMT is a tax system imposed by congress to collect a minimum amount of income tax for each year from the taxpayers who generated the income more than modest economics income. The AMT uses economic income as the tax base rather than the regular income tax base.
Purpose of AMT
- When the tax payer is uses alternate minimum tax, exclusions, deductions, and credits are used. This helps to reduce and eliminate the regular income tax liability of the tax payer.
- Secondly, Congress, the legislative body of Country U has a belief that some of the taxpayers who have substantial economic income take too much advantage of the minimization of the taxes and thus resulted in more inequality.
Thus, above two are the major reasons for enacting AMT.
Application of AMT
- Primarily, AMT was initiated to make sure that taxpayers who have uncertain economic income must also pay minimum tax. In the given case, K receives taxable income plus adjustments and preferences. She pays more state tax and has other investment alternatives. This results AMT consequences and thus, gets benefited out of the advantaged stock option compensation. Hence, K will incur AMT.
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Chapter 12 Solutions
Individual Income Taxes
- In each of the following problems, identify the tax issue(s) posed by the facts presented. Determine the possible tax consequences of each issue that you identify. Binh met Anika 10 years ago at a cocktail party. Anika was a wealthy investor with extensive holdings in the oil and gas industry. Binh was a real estate agent earning about 35,000 a year. Several months later, Binh proposed marriage and Anika accepted. Just before the wedding, Anika told Binh that she had a mental hangup about marriage, and Binh agreed to live with her without being married. In return, Anika promised to leave Binh her entire estate. In the ensuing years, they had an intimate, marriage-like relationship, attending social, business, and family functions together. Anika died in 2015. No will was found immediately. A few months after Anikas death, her sister found a one-page paper signed by Anika. The paper left Anikas entire estate to her brothers and sisters and named her sister as executor of the estate. Binh sued Anikas estate and won a judgment of 2 million for services rendered to Anika during their relationship. The estate appealed the decision, which was affirmed as to liability but reversed and remanded for a new trial on the amount of the judgment. Binh and the estate subsequently worked out an agreement in which the estate paid Binh 1.2 million to settle his claim.arrow_forwardFor her tax class, Yvonne must prepare a research paper discussing the tax aspects of qualified stock options. Explain to Yvonne how she can research this topic using various tax research resources.arrow_forward
- Individual Income TaxesAccountingISBN:9780357109731Author:HoffmanPublisher:CENGAGE LEARNING - CONSIGNMENT