AMT tax trap avoidance.

• Author: Ellentuck, Albert B.
• Position: Alternative minimum tax

Facts: In preparing Tom Smythe's 2001 return, his tax adviser notices that Tom has large deductions relative to income. The tax adviser wonders if Tom might be subject to the alternative minimum tax (AMT) for 2001.

Analysis: The AMT has long complicated return preparation. While all practitioners are presumably familiar with the AMT, it is a good idea to review some of the traps that exist. For individuals, the AMT traps usually involve the difference between AMT itemized deductions and itemized deductions for regular tax purposes, along with personal exemptions. Also, depreciation and certain income-recognition rules offer their own complexities. The checklist that follows includes AMT traps practitioners should consider when examining client data.

AMT Checklist for Individual Returns Client Name: -- Tax Year: -- Prepared by: -- Reviewed by: -- Trap Yes 1. Itemized deductions Comment: Casualty losses, wagering losses (to the extent of reported winnings) and charitable contributions are allowed in full for both regular tax and AMT. For other itemized deductions, determine whether any of the fol- lowing adjustments are needed: a. Interest expense on home-equity loans deducted for regular tax, but not for AMT. (However, consider whether such interest can be reclassified as business or investment interest to make it deductible for AMT purposes, too.) -- b. Interest expense on a boat treated as a second home for regular tax, but not deductible when calculating AMT (Sec. 56(b)(1)(C)(i)and (e)(2)). -- c. Investment-interest expense limit increased by amount of private-activity-bond interest included in alternative minimum taxable income (AMTI) (thus, possibly allowing a larger investment-interest expense deduction for AMT purposes, if deduction was limited for regu- lar-tax purposes) (Sec. 56(b)(1)(C)(iii)). -- d. Medical expenses deducted for AMT only to the extent they exceed 10% of adjusted gross income (AGI) (7.5%-of-AGI floor applies for regular-tax purposes) (Sec. 56(b)(1) (B)). -- e. State and local taxes deducted for regular tax but not deductible for AMT (Sec. 56(b)(1)(A)(ii)). -- f. Miscellaneous deductions claimed on Schedule A are not deductible for AMT (Sec. 56(b)(1)(A)(i)). -- 2. Basis and loss adjustments a. Has the basis of any depreciable asset sold during the year been adjusted for differences between regular-tax and AMT depreciation? -- b. If suspended passive losses were deducted for regular tax, were adjustments made to...