Income Tax Deductions and Alternative Minimum Tax
Income Tax Deductions
There are a variety of expenses you can deduct from your taxable income, and thereby pay less income tax. Though by no means a comprehensive survey of acceptable deductions, here are a few you should consider:
- Mileage. You can deduct expenses for mileage when you use your vehicle for business purposes. The amount you are allowed to deduct for each mile changes yearly (check this document for the current and past IRS rates). In order to take this deduction, it is important that you track and document your millage throughout the year. An estimate of the number of miles you traveled is not sufficient. You can easily track your mileage by keeping a notepad and pen in your car, or by using mileage tracking software available for most PDAs.
- Medical Expenses. If your medical expenses total more than 7.5% of your adjusted gross (pre-tax) income in a given year, then deductions for some medical expenses will be allowed. Allowable medical expenses include costs related to the diagnosis, cure, treatment, or prevention of a specific, documented disease. General wellness expenses, such as well checkups or regular dental exams, are not deductible.
- Child Tax Credit. If you have a child, you may be able to use the Child Tax Credit to reduce the amount of taxes you owe. For each child, you can reduce your taxes by $1,000 if all of the following conditions are met:
- You claimed the child as a dependent on your income tax return,
- The child is your son/daughter, adopted child, grandchild, foster child, sibling, step sibling, stepchild,
- The child is 17 years old or younger, and
- The child is a U.S. citizen or resident alien
There are conditions that apply however. If you earn more than $110,000 (married filing jointly), $55,000 (married filing separately), or $75,000 (single or divorced) there is a sliding scale for the child tax credit so that the amount of credit you can take advantage of is reduced as you earn more money. Also, your credit cannot exceed the total amount of taxes you owe or the alternative minimum tax.
Alternative Minimum Tax
The Alternative Minimum Tax (AMT) is adjustment some people are required to pay in addition to regular taxes. The idea behind the AMT is to ensure that high-income filers are not able to use loopholes and special deductions to avoid paying taxes. The AMT has a separate tax table that lists how much tax you should pay based on your adjusted income. If the amount of tax due listed on the AMT table is less than what the regular tax table lists, the AMT does not apply. If the AMT chart figure is larger than the tax you owe, however, you will have to pay the higher amount. So, even if you are able to reduce you taxes through deductions and credits, there is a threshold below which you cannot reduce your taxes based on your income.