What is Alternative Minimum Tax and How it Can Save You Money

You often hear people mention about taxable income. What are taxes anyway? Tax is simply the percentage (varies according to income) of your total income that you pay every year to the government. That is the simplest explanation of tax. Taxable income is the amount of income on which you actually pay income taxes.

You should pay taxes on your total income. Why is that? Take the time to review the two points being mentioned below.

You have to know that not all kinds of income are taxable

For example, you pay federal tax on the interest you earn on a bank savings account, but not on the interest you earn from municipal bonds. Some income like stock dividends and long-term capital gains is taxed at lower rates.

Do your math. Subtract deductions from your salary

Some deductions are available just for being a living human being that exists in its own entity. In 2010, a person who is single gets an automatic $5,700 standard deduction. Meanwhile, married couples filing jointly get $11,400. What about senior citizens and the handicapped? People who are over the age of 65 and those who are blind get even a slightly higher deduction.

Know about mortgage interest and property taxes. They are categorized as expenses. But you can also deduct from this category when itemized deductions exceed the standard deductions. When you save for retirement account (pay an amount of money to the account), you also get a deduction nevertheless.

Alternative minimum tax

Alternative minimum tax ('AMT') is the second tax system you are also paying for! This might be hard to believe at first for some people. This 'AMT' might raise your taxes even higher a little bit.

Why 'AMT' was established? Thanks to smart people who are continuously paying less taxes by getting a lot of deductions from various sources. But a lot of tax deductions also mean less money for the government. Therefore, the 'AMT' is imposed to tax a certain percentage on these savvy taxpayers.

Note that 'AMT' only applies to people who "escape" from taxes regularly. If you have a lot of deductions or exclusions from state income taxes, real estate taxes, certain types of mortgage interest and passive investments, you are most likely to be under scrutiny of 'AMT'.

What else does it do? It restricts you from claiming certain deductions and requires you to add back in income. Normally this added income is tax-free, like a municipal-bond interest. Again, you have to do your math and calculate your taxes again under the 'AMT' system and under other systems. Then you should pay correspondingly to whichever is higher.

Personal finance is important, but you might want to know more on something else, summer hats.

Find FREE reviews and deals on mens summer hats and find out why western felt hats can prevent sunburn for you.