Jacob, age 42, and Jane Brewster, age 37, are married and file a joint return in 2016. The Brewsters have two dependent children, Ellen and Sean, 10-year-old twins. Jacob is a factory supervisor; he earned $95,000 in 2016. Jane is a computer systems analyst and earned $103,000. In addition to their salaries, the Brewsters reported the following income items.
Interest income (Carmel Sanitation District Bonds) .................$22,000 (a)
Interest income (Carmel National Bank).................................... 8,500
Qualified dividend income (Able Computer Corporation) ..............12,000
Gambling winnings ............................................................6,500
Gift from Uncle Raymond to Jacob .......................................27,000
"Citizen of the Year" award (Jane) .......................................7,500 (b)
Gain on land sale ..........................................................14,000 (c)
a. The Carmel Sanitation District Bonds are private activity bonds that were originally issued in April 2013.
b. Jane was selected "Citizen of the Year" by the Carmel City Council. She used the award proceeds to pay down the family's credit card debt.
c. Jacob sold 5 acres of land to a real estate developer on October 12, 2016, for $100,000. He had acquired the land on May 15, 2009, for $86,000.
On April 1, 2016, Jacob exercised an incentive stock option granted by his employer. At the date of exercise, the fair market value of the stock was $18 per share and the exercise price was $10 per share. Jacob purchased 500 shares with the ISO exercise. As of December 31, 2016, the stock's fair market value had declined to $13 per share.
The Brewsters incurred the following expenses during 2016.
Medical expenses (doctor and hospital bills)....................... $28,000
Charitable contributions (cash) .....................................9,500 (d)
Real property tax on personal residence ..............................8,100
Mortgage interest-personal residence (reported
on Form 1098) ............................................................8,600
Mortgage interest-home equity loan ............................1,800 (e)
Investment interest expense ............................................3,500
Gambling losses ..........................................................6,800
d. In addition to their cash charitable contributions, the Brewsters contributed stock in Ace Corporation, which they acquired on February 9, 2006, at a cost of $6,500, to the Carmel Salvation Army, a qualifying charity. The fair market value of the stock was $11,000 on November 1, 2016, the date of the contribution.
e. The home equity loan was used to purchase the family's new minivan. Taking into consideration the above amounts, for 2016, the Brewster's AGI is $246,500. The following table presents a first draft of the Brewsters' 2016 AMTI calculation.
Regular taxable income .............................................................$177,950
Adjustments and preferences
Citizen of the Year award .............................................................(7,500)
Reduction in medical expenses (10% of AGI for AMT) ............................6,163
Real property taxes .....................................................................(8,100)
Mortgage interest .......................................................................10,400
Charitable contribution of stock (difference between
basis and FMV) .........................................................................4,500
Incentive stock option exercise .........................................................1,000
Gambling loss disallowed for regular tax purposes ..................................(300)
AMTI .....................................................................................$184,113
Exemption amount .......................................................................(83,800)
AMTI base............................................................................... $100,313
Review the AMTI calculation, and prepare a list, including explanations, of any errors in the calculation. An error could include a missing amount or an amount that should not have been included, an amount that enters the calculation in the wrong direction, or an amount that is computed incorrectly. You can presume that the Brewsters' AGI and taxable income amounts for the year are calculated correctly