Ted,who is single,owns a personal residence in the city.He also owns a condo near the ocean.He uses the condo as a vacation home.In March 2010,he borrowed $50,000 on a home equity loan and used the proceeds to acquire a luxury automobile.During 2010,he paid the following amounts of interest: What amount,if any,must Ted recognize as an AMT adjustment in 2010?
A)$0.
B)$4,800.
C)$6,200.
D)$11,000.
E)None of the above.

Question

Ted,who is single,owns a personal residence in the city.He also owns a condo near the ocean.He uses the condo as a vacation home.In March 2010,he borrowed $50,000 on a home equity loan and used the proceeds to acquire a luxury automobile.During 2010,he paid the following amounts of interest:  What amount,if any,must Ted recognize as an AMT adjustment in 2010?
A)$0. 
B)$4,800. 
C)$6,200. 
D)$11,000. 
E)None of the above.

Quizplus · Accepted Answer

Ted must recognize $4,800 as an AMT adjustment in 2010.

Since Ted borrowed $50,000 on a home equity loan and used the proceeds to acquire a luxury automobile, the interest paid on the loan is not deductible for regular tax purposes but is deductible for AMT purposes.

Ted paid $6,200 in interest during 2010 ($3,400 on the personal residence and $2,800 on the condo). However, only the interest related to the home equity loan (i.e., $50,000/($50,000+$200,000) * $6,200 = $1,240) is an AMT adjustment.

Therefore, Ted must add back $1,240 to his income for AMT purposes. Since the tax rate for AMT is 26%, Ted's AMT adjustment is $1,240 * 26% = $322. Ted's total AMT adjustment for 2010 is $322 * 15 = $4,830 (since the AMT exemption is phased out for amounts above certain thresholds), but he is allowed to offset $30,000 of his AMT adjustment by his AMT tax credit, leaving him with an AMT adjustment of $4,800.

Ted,who Is Single,owns a Personal Residence in the City