Assessment >> Formal Assessment

Assessment: Income Tax Planning Web - Academic Partners Unit 5 Post-Assessment (C115V20U5L0A25Q20)
Date Submitted: 07/20/2022 06:30:00 PM
Total Correct Answers: 19
Total Incorrect Answers: 1

Your Mark (total correct percentage): 95%

1 Doris works part time as an insurance salesperson. Last year, she received a salary of $32,000 and
commission income of $6,200. She also operated an independent fee-only financial planning practice as
a sole proprietor with net income of $22,800. What was Doris' total employment income last year?

Correct

The correct answer: $38,200

Your answer: $38,200
Solution:

Employment income includes anything that an employee receives in respect of an office or employment, including salary,
wages, gratuities, sales commissions, director's fees, signing bonuses or performance bonuses. However, amounts that
the taxpayer earns as an independent contractor would not be employment income, but business income.

(Choice B) The amount that Doris earns as a sole proprietor is business income, but her salary and commissions are
both forms of employment income. So, her total employment income is $38,200, calculated as (salary + commission) or
($32,000 + $6,200).

2 Shelley recently accepted a job as the district sales manager for a frozen food wholesaler. She was offered the use of
a company car for both business and personal use on the condition that she reimburse the company $0.08 for each
kilometre she used the car for personal use. The operating cost benefit for the year is $0.28 per kilometre. If the
company determines that the standby charge is $4,800 and Shelley drives the car a total of 22,000 kilometres for
business use and 12,000 for personal use over the course of the year, what is her taxable benefit for the year?

Correct

The correct answer:

$7,200

Your answer:

$7,200

Solution:

If an employee is allowed to use an employer's vehicle for personal use, he or she may incur a taxable benefit. The
amount of the taxable benefit is calculated as:

a standby charge plus

an operating cost benefit minus
any reimbursement the employee makes to the employer

The operating cost benefit is based on the number of kilometres the employee drives the car for personal use.
Shelley drives 12,000 km for personal use for an operating cost benefit of $3,360, calculated as (12,000 x $0.28). She
reimbursed her employer a total of $960, calculated as (12,000 x $0.08) and her standby charge was $4,800. So,
Shelley has a taxable benefit of $7,200 for the year, calculated as (standby charge + operating cost benefit – amount
she reimbursed her employer) or ($4,800 + $3,360 – $960).

3 Sven is a highly skilled and well-paid, mechanic for a private corporation. It is time for Sven's annual performance
and salary review. He is already in the top marginal tax bracket so, he asks his employer about the possibility of
receiving non-taxable benefits. What benefits would NOT be taxable to Sven?

1. The amount that his employer reimburses him for his tuition expenses for a long-distance MBA
education program.
2. The value of the personal financial planning services that the company provides free of charge to
all employees.
3. The premiums that his employer pays on Sven's behalf to a group life insurance plan.
4. The automobile allowance of $0.59 per kilometre that his employer pays Sven for using his
personal car for business purposes.

Correct

The correct answer:

4 only

Your answer:

4 only

Solution:

If a taxpayer takes a training course that maintains or upgrades her employment-related skills and the employer pays
for or reimburses her for the cost of that course, the taxpayer does not have a taxable employment benefit because the
training is considered to primarily benefit the employer. However, if the taxpayer's employer reimburses her or pays
directly for courses that are simply of personal interest or that provide or upgrade skills that are not directly related to
the taxpayer's job, those fees will be included in the taxpayer's income.

Retirement counselling services are not a taxable benefit but, general financial planning services are taxable.

As long as an automobile allowance is reasonable, it is not taxable. Currently, the reasonable amount prescribed by ITR
3706 is $0.59/km for most areas of Canada. Therefore, the automobile allowance that Sven's employer pays him for
using his personal car for business purposes is considered to be reasonable and will not be a taxable benefit.

4 Joanne travels extensively for business and has accumulated a large number of air miles as a result. Joanne has no
desire to travel during her vacation time so, she used her air miles to order a watch valued at $600 and a necklace
valued at $1,100 from the air miles catalogue. She gave the watch to her husband and kept the necklace for herself.
What was the amount of her taxable benefit?

Correct

The correct answer:

$1,700

Your answer:
$1,700

Solution:

When an employee accumulates frequent flyer points while travelling on employer-paid business trips and he or she uses
them to obtain air travel or other benefits for himself or herself or his or her family, the employee must include the fair
market value of that air travel or other benefits in his or her employment income.

Joan acquired frequent flyer miles as a result of her business travel and she used the air miles to purchase a watch and a
necklace. So, Joanne has a taxable benefit of $1,700, calculated as (value of watch + value of necklace) or ($600 +
$1,100).

5 Adam received a low-interest loan of $25,000 from his employer on January 1st. The loan is to be repaid
in equal annual installments at the end of each of five years, along with interest of 2.5%. Adam paid the
interest and the first annual installment on December 31. Suppose that the federal prescribed interest
rates for employees for the first year of Adam's loan were as follows:

1st Quarter = 5.0%

2nd Quarter = 5.5%

3rd Quarter = 6.0 %

4rth Quarter = 6.5%

What is the amount of Adam's taxable benefit during the first year?

Correct

The correct answer: $812.50

Your answer: $812.50
Solution:

If a taxpayer receives an interest-free or low-interest loan as a result of his employment or office, he is considered to
have received a taxable benefit. The value of that benefit is calculated as the amount of interest that he would have paid
if the loan had been made at the prescribed rate, minus the amount of interest that he actually paid in the year, or no
later than 30 days after the end of the year.

(Choice C) Adam paid the interest and the first annual installment on December 31. Adam's taxable benefit during the
first year of the loan was $812.50, calculated as (principal outstanding x (average annual prescribed rate - interest rate
charged)) or ($25,000 x (((5.0% + 5.5% + 6.0% + 6.5%) ÷ 4) - 2.5%)).

6 Simon is a financial planner and he is constantly warning his clients to be wary of the perks offered by
their employers because in many cases they are considered to be taxable benefits. Which of the
following individuals are NOT deemed to have received a taxable benefit?

1. Karl, who along with all of the other employees, was able to purchase a skidoo at 5% below his
employer's cost.
2. Taylor, whose employer gave her $12,000 to make up for the fact that she had to move as a result
of a transfer and she realized a loss of $12,000 on the sale of her house.
3. Celine, who is a member of her employer's group life insurance plan and her employer pays the
premiums.
4. Marge, who is a member of her employer's group disability insurance plan and her employer pays
the premiums on her behalf.
Correct

The correct answer: 2 and 4

Your answer: 2 and 4
Solution:

If a taxpayer is permitted to buy his employer's merchandise below cost, he will have a taxable benefit to the extent of
the difference between the fair market value of the merchandise and the price he paid for the merchandise. There is no
taxable benefit if the purchase price is at least equal to the employer's cost, as long as all employees can make use of
the same discount.

If a taxpayer receives a payment for moving expenses from her employer, that payment may be a taxable benefit to the
extent that it is in respect of a loss on the sale of her former residence, up to one-half of the amount that exceeds
$15,000.

If the taxpayer is part of a group life insurance plan and his employer pays the premiums, those premiums are a taxable
benefit to the extent the taxpayer does not reimburse the employer either directly or through deductions from his pay.

If the taxpayer is part of a group disability plan and the employer pays the premiums on her behalf, those premiums are
not considered to be a taxable benefit.

(Statement 2 is false.) Taylor's employer reimbursed her loss of $12,000 that she incurred as a result of the move. So,
Taylor does not have a taxable benefit because the amount did not exceed $15,000.

(Statement 4 is false.) Marge's employer pays the premiums for her group disability plan on Marge's behalf. So, Marge
does not have a taxable benefit. However, if the employer pays the premium, any payments the employee receives from
the plan will be taxable.

7 When Linda was promoted to vice president of marketing, she had to relocate from Halifax to Toronto.
When she sold her house in Halifax, she realized a loss of $48,000, for which her employer reimbursed
her. What is the resulting taxable employment benefit for Linda?

Correct

The correct answer: $16,500

Your answer: $16,500
Solution:

If a taxpayer relocates because of employment and her employer pays her moving expenses, some of these amounts
may constitute a taxable employment benefit. If the employer covers the loss on the sale of a former residence, the
taxpayer will realize a taxable benefit of one-half of the amount that exceeds $15,000.

(Choice B) Linda's employer covered her loss of $48,000, which is in excess of $15,000. So, Linda will realize a taxable
employment benefit of $16,500, calculated as ((reimbursed loss - $15,000) ÷ 2) or (($48,000 - $15,000) ÷ 2).

8 When Victoria accepted a senior management position with a company in British Columbia, she had to
move from Ottawa to Vancouver. When she sold her house in Ottawa, she realized a loss of $11,000.
However, the house did not sell until two months after Victoria had moved to B.C. During that time she
incurred $6,000 in costs relating to property taxes, heat, hydro, property insurance, and grounds
maintenance costs in an effort to sell the house. Her new employer reimbursed her for the loss and the
expenses. What is the resulting taxable employment benefit for Victoria?

Correct
The correct answer: $1,000
Your answer: $1,000
Solution:

If a taxpayer relocates because of employment and his or her employer pays the moving expenses, some of these
amounts may constitute a taxable employment benefit. If the employer covers the loss on the sale of a former
residence, the taxpayer will realize a taxable benefit of one-half of the amount that exceeds $15,000.

Any payment or reimbursement by an employer in excess of $15,000 made in respect of mortgage interest, property
taxes, heat, hydro, property insurance, and grounds maintenance costs to keep up the old residence after a move, when
all reasonable efforts to sell have not been successful, will also be considered a taxable benefit.

The reimbursement for the loss was under $15,000 so no taxable benefit was incurred for that amount. However, the
reimbursement for Victoria's carrying costs were $6,000 and thus over the $5,000 limit. For that payment she will incur
a taxable benefit of $1,000.

9 Sonya is a member of her employer's group disability plan. Her employer deducts the full amount of the
premium from the after-tax amount of her paycheque and remits it to the insurance company on her
behalf. Sonya became disabled this year and began receiving benefits from the plan. Which of the
following statements are TRUE?

1. Sonya had a taxable benefit each time her employer paid the premium, but it was reduced by the
amount that was deducted from her pay.
2. Premiums that Sonya's employer pays to the group disability insurance plan are not a taxable
benefit to Sonya.
3. The disability benefits that Sonya received from the group plan are taxable because the premiums
are not a taxable benefit.
4. The disability benefit is not a taxable benefit because Sonya paid the premiums.

Correct

The correct answer: 2 and 4

Your answer: 2 and 4
Solution:

If the employer pays the premium to a group plan, the premium is not a taxable benefit. However, if the employer pays
the premium, any payments the employee receives under the plan will be taxable. If the employer deducts the amount
of the premium from the employee's paycheque and remits it on her behalf, the employee is in effect paying the
premium with after-tax dollars, so that any benefits that she receives under the plan will not be taxable.

(Statement 2 is true.) So, premiums that Sonya's employer pays to the group disability insurance plan are not a taxable
benefit to Sonya.

(Statement 4 is true.) Sonya's employer deducted the premiums from Sonya's after-tax paycheque and remitted it on
her behalf. So, Sonya effectively paid the premiums with after-tax dollars, so any disability benefits that she receives
under the plan will not be taxable.

10 Simon is a financial planner and he often advises those of his clients who are in the highest marginal tax bracket to
ask their employers for non-taxable benefits instead of more taxable income when negotiating their compensation.
Which individual has received a taxable benefit?

Correct

The correct answer:

Darryl, whose employer allows him to use the new company car for personal use as long as he pays the employer $0.50
for each personal kilometre driven. Darryl used the vehicle to transport himself and his family 80 kilometres to and from
his son's wedding.

Your answer:

Darryl, whose employer allows him to use the new company car for personal use as long as he pays the employer $0.50
for each personal kilometre driven. Darryl used the vehicle to transport himself and his family 80 kilometres to and from
his son's wedding.

Solution:

If an employee is allowed to use his or her employer's vehicle for personal use, the employee may incur a taxable
benefit. The amount of the taxable benefit is calculated as:

a standby charge plus

an operating cost benefit minus
any reimbursement the employee makes to his employer

The operating cost benefit is based on the number of kilometres the employee drives the car for personal
use. Currently, the operating cost benefit is calculated as $0.28 per kilometre.

Darryl will incur a taxable automobile benefit equal to a standby charge, plus a $0.28 per kilometre operating charge,
less the $0.50 per kilometre that he reimburses his employer. As the standby charge is usually a few thousand dollars,
even if it is hardly ever driven, the fact that Darryl paid a fee in excess of the per kilometre operating charge will not be
sufficient to reduce the taxable benefit to $0. So, Darryl has received a taxable benefit.

11 Veronica's employer requires her to use her car for business purposes and does not pay her an
allowance with respect to her use of her personal vehicle. Veronica drove her car a total of 12,000
kilometres for personal use and 3,400 kilometres for business use last year. Which of the following
statements are FALSE?

1. Veronica can only claim a deduction for the business use of her personal car from her employment
income if her employer fills out a Declaration of Conditions of Employment, specifying that she is
required to use her own car.
2. Veronica's motor vehicle expense deduction can include an amount for capital cost allowance.
3. Veronica can claim a deduction of 28.33% of her total motor vehicle expenses from her
employment income.
4. Veronica's motor vehicle expense can include an amount for her car insurance.

Correct

The correct answer: 3 only

Your answer: 3 only
Solution:

If an employee uses his personal motor vehicle for his employer's benefit, he can deduct a portion of his total motor
vehicle expenses from his employment income, provided that (ITA 8(1)(h.1)):

his employer requires him to travel away from the place of employment on business purposes
his employer requires him to pay for his own motor vehicle expenses and verifies this by filling out form T2200,
Declaration of Conditions of Employment (ITA 8(10))
he has not, and is not entitled to, receive a non-taxable allowance related to the use of that motor vehicle
the expenses are applicable to the earning of income from the office or employment
The amount of the deduction is calculated as his total motor vehicle expenses for the year, prorated for the number of
total business kilometres travelled during the year in comparison to the total of business and personal kilometres
travelled during the year. Motor vehicle expenses include total operating expenses (including leasing charges, fuel,
maintenance, repairs, car washes, licenses and insurance), capital cost allowance and interest on loans used to acquire
the vehicle.

(Statement 3 is false.) As long as her employer verifies that she is required to use her personal car for business
purposes by filling out the appropriate form, Veronica can claim a deduction of 22.08% of her total motor vehicle
expenses, calculated as (3,400 ÷ (3,400 + 12,000)). So, Veronica can not claim a deduction of 28.33% of her total
motor vehicle expenses from her employment income.

12 When the electricity market was deregulated, Susan got a sales position with an energy services
company, which required her to go door-to-door trying to sign people up with the company. She
received a base hourly wage, plus a commission for each customer that she signed up. She was required
to provide her own transportation, and to complete all paperwork in her home office. Which of the
following costs is an amount that Susan can NOT deduct from her employment income?

Correct

The correct answer: a portion of the mortgage interest related to her home office
Your answer: a portion of the mortgage interest related to her home office
Solution:

All commissioned salespersons can deduct the full amount of their sales expenses, which include business cards,
advertising costs, computer leasing costs, and more. Commissioned salespersons with a home office can deduct a
reasonable portion of home maintenance expenses (e.g., utilities, cleaning materials or services, minor repairs, rent),
plus a portion of property taxes and home insurance. However, a commissioned salesperson cannot claim a portion of
mortgage interest or capital cost allowance on her home.

(Choice C) Susan is a commissioned salesperson who is required to work from a home office. So, Susan cannot deduct a
portion the mortgage interest related to her home office.

13 Terry works for a large civil engineering company and they recently sent him to a conference in the
United States regarding new developments in design technology. His company paid his registration fee
of $2,200, which covers all of the conference sessions and most meals. It also paid $1,200 for his airline
ticket and $600 for hotel accommodations. However, Terry was required to pay for his own cab rides
and any meals that he consumed above those provided by the conference registration. Terry spent a
total of $84 on cabs and $120 on food. How much can Terry deduct from his employment income as
result of this trip?

Correct

The correct answer: $144

Your answer: $144
Solution:

An employee can deduct those travelling expenses that he incurred personally and that were not reimbursed by his
employer, as long as he did not receive a non-taxable travel allowance. However, food and beverage expenses can only
be deducted if he is away from the employer's base of business for more than 12 hours and even then, he can only
deduct 50% of the cost.

(Choice C) Terry was required to pay for his own cab rides and extra meals, and he was away from home for more than
12 hours. Therefore, he can deduct the full cost of his cab rides and 50% of his meal expenses. So, Terry can deduct
$144 from his employment income, calculated as (cost of cab rides + (cost of meals x 50%)) or ($84 + ($120 x 50%)).
14 Helen is a commissioned salesperson and last year she earned $42,000 in employment income and
$78,000 in commission income. Her employer requires her to provide her own office and pay for all of
her own office supplies and expenses, including travel and motor vehicle expenses. Because Helen has a
very small home, she decided to rent a small office at $500 per month. She also had the following
expenses:

Advertising and Promotion: $2,600

Leasing costs for fax machine: $400

Leasing costs for computer: $1,860

Deductible portion of cost of wining and dining clients: $1,200

Motor vehicle expenses: $2,200

Total $8,260

How much can Helen deduct as a sales expense?

Correct

The correct answer: $14,260

Your answer: $14,260
Solution:

A commissioned salesperson can deduct all amounts she expends to earn her employment income, including the cost of
office rent and supplies and motor vehicle expenses, as well as many expenses that are not deductible by non-
commissioned employees, such as advertising and promotion costs, the cost of entertaining clients, or the cost of leasing
office equipment.

(Choice D) Helen can deduct $14,260 from her employment income as a sales expense, calculated as ((monthly rent ×
12) + advertising and promotion costs + fax leasing costs + computer leasing costs + deductible portion of meal
expenses + motor vehicle expenses) or (($500 x 12) + $2,600 + $400 + $1,860 + $1,200 + $2,200).

15 Stuart is a commissioned salesman for a distributor of medical supplies and he is required by his
employer to work out of his home as evidenced by a Declaration of Conditions of Employment. Stuart
earned $34,600 in commission income last year. Stuart owns his own home and last year he made total
mortgage payments of $22,600 of which $14,500 was attributed to interest. Stuart has converted one of
the spare bedrooms into his office and it is used for this purpose exclusively, even though Stuart only
works 5 days per week. Stuart's house has a total of 10 rooms. The undepreciated capital cost of the
house at the beginning of the year was $240,000 and it falls into a CCA class with a prescribed rate of
4%. Stuart also paid the following amounts last year:

Property Taxes $3,800

Utilities $2,900
Insurance $780
Cleaning and Maintenance $600
Total $8,080

How much can Stuart deduct as a workspace in home expense?

Correct

The correct answer: $808

Your answer: $808
Solution:

Commissioned salespersons who are required to work from home can deduct a portion of home maintenance expenses,
which for commissioned salespersons include fuel, maintenance or utilities, plus property taxes and insurance. However,
it does not include mortgage interest or capital cost allowance. The deductible expenses are prorated based on the
portion of the home that is dedicated to the workspace.

(Choice B) Stuart can deduct 10% of his allowable home expenses, calculated as (number of rooms devoted to
workspace ÷ number of rooms in home) or (1 ÷ 10). His allowable home maintenance expenses include his property
taxes, utilities, insurance and cleaning expenses, but do not include his mortgage interest or CCA. So, Stuart can deduct
$808, calculated as ((property taxes + utilities + home insurance + cleaning expenses) x deductible portion) or (($3,800
+ $2,900 + $780 + $600) x 10%).

Since Stuart uses the spare bedroom exclusively for office use, he need not take into consideration that he only works
five days of the week. If he also used the room for personal use, he would have to prorate his deduction according to
personal use and office use.

16 Andy works for Canmax Inc., a Canadian-controlled private corporation. Two years ago in June, his
employer sold him an option to purchase 100 shares for $25 per share for a premium of $1 per share at
a time when the shares were trading at $26. Andy decided to exercise his option last year when the
shares were valued at $33, and he sold his shares this year for $38. What statement is TRUE?

Correct

The correct answer: This year, Andy had a taxable employment benefit of $700.
Your answer: This year, Andy had a taxable employment benefit of $700.
Solution:

Taxpayers who have exercised employee stock options in a CCPC do not have to report a taxable employment benefit
until the year that they dispose of the shares. The taxable benefit is the difference between:

the fair market value of the shares when the employee acquires them
the amount he actually pays for the shares (i.e., the exercise price of the stock option) plus the amount he paid
for the option, if any

Because Andy is employed by a CCPC, he does not have to include a taxable employment benefit in his income until this
year, which is the year in which he disposed of the shares. So, this year Andy's the deemed employment benefit is $700,
calculated as [(FMV - (exercise price + cost of option) x number of shares] or [($33 - ($25 + $1)) x 100].

17 Ramone works for a Canadian-controlled private corporation. Four years ago, Ramone's employer sold
him the option to purchase 1,000 shares at $15 per share. The option cost $1 per share. In January of
the following year, Ramone exercised the option when the shares were trading at $22 per share.
Ramone sold his shares in October of last year, for $38 per share. When Ramone sold his shares, what
was the ACB of the shares?

Correct

The correct answer: $22

Your answer: $22
Solution:
When a taxpayer exercises an employee stock option in a Canadian controlled private corporation, he does not realize a
taxable employment benefit until he disposes of the shares. The taxable benefit is the difference between:

the fair market value of the shares when the employee acquires them
the amount he actually pays for the shares (i.e., the exercise price of the stock option) plus the amount he paid
for the option, if any

The adjusted cost base of shares acquired via an employee stock option is calculated as:

the exercise price that the employee paid for the shares; plus
any amount that the employee paid to acquire the option; plus
the full amount of the taxable employment benefit that was included in income as a result of exercising the
option.

(Choice C) Ramone realized a taxable employment benefit of $6, calculated as (the fair market value when he exercised
his option - (the exercise price + the amount paid to acquire the option)) or ($22 - ($15 + $1)).

So, the ACB of Ramone's shares is $22, calculated as (the exercise price + the amount paid to acquire the option + the
taxable employment benefit) or ($15 + $1 + $6).

18 Hannah is an employee of a public corporation. Two years ago in March, her employer granted her the
option to acquire 1,000 shares in the company for $20 per share, which was the fair market value (FMV)
of the shares at the time that the option was granted. The option vested immediately. In November of
last year, the shares are trading at $35 per share, and Hannah is thinking about exercising her option.
What statement is TRUE?

Correct

The correct answer: Hannah could defer realization of the full taxable employment benefit until she sells the shares.
Your answer: Hannah could defer realization of the full taxable employment benefit until she sells the shares.
Solution:

As a result of the Federal Budgets of 2000, the stock option deferral that was previously available to CCPCs has been
extended to public corporations. There is no requirement to hold the option for any minimum period of time in order to
qualify for the deferral. In order to qualify for the deferral, the amount paid by the employee to acquire the shares
(including any amount that was paid to acquire the option) must not be less than the fair market value of the shares
when the option was granted. The annual limit on the specified value of the options available for deferral is $100,000 for
each year of vesting.

(Choice B is true.) Because Hannah's option was granted at an exercise price equal to the fair market value at that time,
it is eligible for the deferral. Hannah's options have a specified value of $20,000, calculated as ($20 x 1,000), well below
the $100,000 annual limit. So, Hannah could defer realization of the full taxable employment benefit until she sells her
shares.

19 When Blair completed his general T1 tax return, he determined he had taxable income of $68,000. However, he then
realized he also had to do an AMT calculation. Over the course of the year, Blair owned a rental property that had
resulted in a net rental loss of $10,000. He had a mortgage on the property and claimed an interest expense of
$8,000. Later in the year, he sold the rental property and realized a capital gain of $18,000. He also received
$14,000 in regular dividends from a Canadian-controlled private corporation. What is Blair's adjusted taxable income
for AMT purposes?

Incorrect

The correct answer:

$79,300
Your answer:

$80,500

Solution:

When calculating minimum tax, you start with the taxable income calculated under the regular method. Then you have
to add back certain deductions that were allowed on the T1 General Return, but that are not allowed for AMT purposes.
These include:

a portion of CCA claimed in certain film deals

losses from various tax shelters
carrying charges that were used to create or enhance a rental loss, or that were related to certain film deals,
flow-through shares or resource properties
some of the non-taxable portion of capital gains reported during the year, including gains eligible for exemption,
calculated as 30% of the realized capital gain for dispositions after October 17, 2000. (A different rate applies for
dispositions prior to this date)
employee home relocation deductions
employee stock option deductions

You also deduct the gross-up on dividends from taxable Canadian corporations. In the case of other than eligible
dividends (typically, from a CCPC), the deduction is 13.0435% of the taxable amount or grossed-up amount.

Blair has to start with his taxable income of $68,000 as per his T1 return and make several adjustments to determine his
adjusted taxable income for AMT purposes. First, he has to add in the carrying charges of $8,000 on his rental property
because the interest expense was used to increase a rental loss. Then, he has to add back another $5,400 because of
the capital gain he realized upon sale of that property, calculated as (capital gain x 30%) or ($18,000 x 30%). Next, he
must deduct 13.0435% of the grossed-up dividend or $2,100, calculated as [(dividend received x gross-up rate for other
than eligible dividends) x AMT rate for other than eligible dividends] or [($14,000 x 115%) x 13.0435%].

Therefore, Blair's adjusted taxable income for AMT purposes is $79,300, calculated as ($68,000 + $8,000 + $5,400 -
$2,100).

20 Chase has just completed his tax return and he has found out that under the AMT calculation his
minimum tax payable is $26,578 while under the normal rules, his basic federal tax payable was
$18,654. Which of the following statements is FALSE?

Correct

The correct answer: Chase has a minimum tax carry-over of $5,943.

Your answer: Chase has a minimum tax carry-over of $5,943.
Solution:

The minimum tax carry-over is any excess of the minimum amount over the amount that will be payable under the
normal tax system. A minimum tax carry-over can be used to reduce taxes payable under the normal tax system in any
of the following seven years. However, the taxpayer always has to pay at least the amount of the AMT for each of the
following years, so the carry-over cannot reduce the amount of tax payable below each of the following years' minimum
tax.

(Choice B is false.) Chase has determined that his minimum amount under the AMT system is $26,578 while under the
normal rules, his basic federal tax payable was $18,654. So, he has a minimum tax carry-over of $7,924, calculated as
(minimum tax under AMT system - basic federal tax under normal system) or ($26,578 - $18,654). So, Chase does not
have a minimum tax carry-over of $5,943.
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