Category: Taxes

The Alternative Minimum Tax (AMT) is a parallel tax system that ensures high-income taxpayers pay at least a minimum amount of tax, even if they have large deductions or credits under the regular tax system. You calculate your taxes twice — once under regular rules, once under AMT rules — and pay whichever is higher. Most middle-income taxpayers don’t owe AMT, but certain income situations and deductions can trigger it.

A Brief History of the AMT

Congress created the AMT in 1969 after discovering that 155 high-income taxpayers owed zero federal income tax that year due to various deductions and loopholes. The AMT was designed to close those gaps. For decades, it was not indexed to inflation, which caused it to creep down and hit millions of middle-class taxpayers who were never its intended targets.

The 2017 Tax Cuts and Jobs Act dramatically raised the AMT exemption amounts and phase-out thresholds, sharply reducing the number of people who pay it. For 2025, fewer than 300,000 taxpayers are expected to owe AMT — down from over 5 million before 2018.

How AMT Is Calculated

The AMT uses a different income calculation called Alternative Minimum Taxable Income (AMTI). Key differences from regular taxable income:

• The standard deduction and personal exemptions are replaced by a flat AMT exemption
• Most itemized deductions are added back (state and local taxes, medical expenses below a higher threshold, miscellaneous deductions)
• Certain income items are added back (like the spread on exercising incentive stock options)

After calculating AMTI, you subtract the AMT exemption, then apply the AMT rate: 26% on AMTI up to $239,100 (2025), and 28% above that. If this AMT calculation results in more tax than your regular tax, you pay the difference as AMT.

2025 AMT Exemption Amounts

These exemptions are indexed to inflation annually. Once your income exceeds the phase-out threshold, the exemption reduces by $0.25 for every $1.00 of additional income.

Who Is Most Likely to Owe AMT in 2026?

After the 2017 tax law changes, the AMT primarily affects:

• Very high earners: Incomes well above the phase-out thresholds where the exemption has been fully reduced
• Incentive stock option (ISO) holders: Exercising ISOs creates an AMT adjustment equal to the spread (fair market value minus exercise price), even though you haven’t sold the shares yet. This is one of the most common AMT triggers for employees at tech startups and public companies.
• People with very large state and local tax (SALT) deductions: SALT deductions are added back for AMT purposes. However, the $10,000 SALT cap under regular taxes has significantly reduced the AMT impact for most filers.
• Certain depreciation deductions: Some accelerated depreciation allowed under regular taxes must be recalculated under slower AMT depreciation rules

Incentive Stock Options and AMT: What You Need to Know

If you have stock options at your employer, understanding the AMT is critical. When you exercise ISOs:

• Under regular tax: no income recognized at exercise (tax deferred until you sell)
• Under AMT: the “spread” (FMV minus exercise price) is treated as income in the year of exercise

A large ISO exercise can trigger significant AMT even if you don’t sell the shares. This is especially dangerous when you exercise ISOs in a company whose stock later drops — you owe AMT on paper gains that no longer exist.

If you have ISOs, model your AMT exposure before exercising. A tax advisor familiar with stock compensation is worth the cost.

AMT Credit

When you pay AMT, you earn an AMT credit that can offset regular taxes in future years when your regular tax exceeds your AMT. This is important for ISO exercises — the AMT paid when you exercise can be recovered as a credit when you sell the shares and pay regular capital gains tax. The credit doesn’t eliminate the cash flow problem (you owe AMT now and recover it later), but it reduces the long-term cost.

How to Know If You Owe AMT

Tax software calculates AMT automatically and shows you whether you owe it. If you use a tax professional, they handle this. You can also fill out IRS Form 6251 (Alternative Minimum Tax — Individuals) manually. The quickest check: if your regular tax after credits exceeds your tentative minimum tax (line 7 on Form 6251), you don’t owe AMT.

Bottom Line

Most Americans don’t owe AMT under the current law — the 2017 tax reform dramatically raised the thresholds. But if you have high income, exercise incentive stock options, or have large specific deductions, run the AMT calculation before filing. ISO holders in particular should model their AMT exposure before exercising options, as the tax can be substantial even on paper gains.

Nobody wants to pay more in taxes than they have to. The good news: there are plenty of legal ways to reduce what you owe. These strategies work whether you are a salaried employee, a freelancer, or a small business owner.

1. Max Out Your 401(k) or IRA

Every dollar you put into a traditional 401(k) or IRA lowers your taxable income for the year. In 2026, the 401(k) contribution limit is $23,500 ($31,000 if you are 50 or older). The IRA limit is $7,000 ($8,000 if you are 50 or older).

If your employer offers a match, contribute at least enough to get the full match. That is free money on top of the tax savings.

2. Contribute to an HSA

A Health Savings Account (HSA) gives you a triple tax advantage: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. In 2026, you can contribute up to $4,300 for self-only coverage or $8,550 for family coverage.

You must be enrolled in a high-deductible health plan (HDHP) to qualify.

3. Claim Every Deduction You Are Entitled To

Most people take the standard deduction — $15,000 for single filers and $30,000 for married filing jointly in 2026. But if your itemized deductions exceed those amounts, itemizing saves you more.

Common itemized deductions include:

• Mortgage interest
• State and local taxes (up to $10,000)
• Charitable contributions
• Medical expenses above 7.5% of your adjusted gross income

4. Use a Flexible Spending Account (FSA)

If you have access to a Flexible Spending Account through your employer, use it. FSA contributions come out of your paycheck before taxes, reducing your taxable income. You can use the funds for medical expenses, dental care, and vision costs.

The 2026 FSA contribution limit is $3,300. Watch the use-it-or-lose-it rules — most plans require you to spend the balance by year end.

5. Harvest Tax Losses

If you have investments that have lost value, selling them lets you claim a capital loss on your return. Those losses offset capital gains dollar for dollar. If losses exceed gains, you can deduct up to $3,000 against ordinary income and carry the rest forward to future years.

This strategy is called tax-loss harvesting and works best in taxable brokerage accounts.

6. Give to Charity the Smart Way

Cash donations are deductible, but donating appreciated stock is even better. You avoid paying capital gains tax on the appreciation and still get to deduct the full market value. Many large brokerages make this easy with a few clicks.

If you are 70.5 or older, a Qualified Charitable Distribution (QCD) from your IRA lets you give up to $105,000 directly to charity without counting it as taxable income.

7. Time Your Income and Deductions

If you expect to be in a lower tax bracket next year, consider deferring income to January. If you expect to be in a higher bracket next year, pull income forward into this year. The same logic applies to deductions — bunch them into the year where they give you the most benefit.

8. Deduct Home Office Expenses

If you are self-employed and use part of your home exclusively for business, you can deduct a portion of your rent or mortgage interest, utilities, and internet. The simplified method allows a deduction of $5 per square foot up to 300 square feet.

Employees working from home for a company generally cannot claim this deduction under current tax law.

9. Deduct Business Expenses If You Are Self-Employed

Freelancers, contractors, and small business owners can deduct ordinary and necessary business expenses. Common deductions include:

• Software subscriptions
• Marketing and advertising
• Professional services (accountant, lawyer)
• Business-use portion of your vehicle
• Business travel
• Health insurance premiums

Keep receipts and a mileage log. The IRS standard mileage rate in 2026 is 70 cents per mile for business use.

10. Contribute to a 529 Plan

529 contributions are not deductible on your federal return, but many states allow a state income tax deduction for contributions. If you have kids or grandkids you plan to help with college, this is worth checking for your state.

11. Convert to a Roth When Your Income Is Lower

A Roth IRA conversion moves money from a traditional IRA to a Roth. You pay taxes on the converted amount now, but all future growth and withdrawals are tax-free. Converting in a low-income year — after retirement, between jobs, or early in your career — minimizes the tax hit.

12. Work With a CPA Before Year End

The best tax moves happen before December 31, not when you are filing in April. A CPA or tax advisor can help you model different scenarios, catch deductions you missed, and time moves to minimize your bill.

The fee for tax planning often pays for itself many times over in savings.

Bottom Line

Lowering your tax bill is not about loopholes — it is about using the tools the tax code already gives you. Max out your retirement accounts, use tax-advantaged savings accounts, track your deductions, and time your income strategically. Start now rather than waiting until filing season.

Self-employed workers pay both the employee and employer sides of payroll tax — a total of 15.3% on net earnings. But the tax code offers an unusually long list of deductions that can significantly reduce your taxable income. Knowing which deductions apply to your business and keeping good records to support them is one of the most direct ways to reduce your tax bill legally.

The Self-Employment Tax Deduction

When you are self-employed, you pay self-employment tax (SE tax) of 15.3% on your net earnings — 12.4% for Social Security and 2.9% for Medicare. Employers who hire W-2 employees pay half of this tax on behalf of their employees. When you are self-employed, you pay both halves.

The good news: you can deduct 50% of your self-employment tax from your gross income. This deduction is taken on Schedule 1, not Schedule C, so it applies regardless of whether you itemize or take the standard deduction.

Home Office Deduction

If you use part of your home exclusively and regularly for business, you can deduct the business portion of home expenses. There are two methods:

• Simplified method: Deduct $5 per square foot of dedicated office space, up to 300 square feet ($1,500 maximum). No depreciation recapture when you sell your home.
• Regular method: Calculate the percentage of your home used for business (e.g., a 200 sq ft office in a 2,000 sq ft home = 10%). Deduct that percentage of rent or mortgage interest, utilities, insurance, and home depreciation.

The “exclusive use” requirement is strict — a room that doubles as a guest bedroom does not qualify. A dedicated room used only for business does qualify, even if it is not a separate office with a door.

Vehicle and Mileage Deductions

If you use your car for business, you can deduct the business portion of vehicle costs using one of two methods:

• Standard mileage rate: For 2026, the IRS rate is 70 cents per mile for business use (verify current year rate at IRS.gov). Track every business mile with a mileage log — date, destination, and business purpose.
• Actual expense method: Deduct the business percentage of your actual car expenses — gas, insurance, maintenance, depreciation. Requires more recordkeeping but may yield a larger deduction for high-cost or heavily-used vehicles.

Commuting from home to a regular office is not deductible. Travel from your home office to client sites is deductible.

Health Insurance Premiums

Self-employed workers can deduct 100% of health insurance premiums paid for themselves, their spouse, and their dependents. This deduction is taken on Schedule 1 and reduces adjusted gross income — not just taxable income — which means it also reduces self-employment tax in some calculations.

The deduction is limited to the net profit from your business. You cannot deduct more than your self-employment income, and you cannot take the deduction for any month in which you were eligible for employer-subsidized health coverage (for example, through a spouse’s job).

Retirement Plan Contributions

Contributions to a Solo 401(k) or SEP IRA are fully deductible as a business expense. Contributing $23,500 to a Solo 401(k) reduces your taxable income by $23,500. At a combined federal and state marginal rate of 35%, that is $8,225 in taxes saved. Self-employed workers who maximize retirement contributions often eliminate a significant portion of their federal income tax liability.

Business Equipment and the Section 179 Deduction

Normally, business equipment must be depreciated over multiple years. The Section 179 deduction allows you to deduct the full cost of qualifying equipment in the year it is purchased, up to $1,220,000 in 2026 (subject to annual IRS adjustments). Qualifying equipment includes computers, office furniture, machinery, and certain software.

Bonus depreciation (currently being phased down from 100%) may also allow you to immediately deduct a percentage of new equipment costs. Consult your tax professional for the current year rules as bonus depreciation rates change annually.

Business Travel and Meals

Business travel — flights, hotels, car rentals, and related expenses for trips with a primary business purpose — is fully deductible. Meals during business travel are 50% deductible. Business meals where you discuss business with clients, partners, or employees are also 50% deductible. Keep receipts and note the business purpose and who was present.

Purely personal meals, even if you eat alone and are away from home, are not deductible. Do not try to deduct your regular lunch.

Professional Services and Education

• Accounting and tax preparation fees: Fully deductible, including the cost of professional tax software.
• Legal fees: Deductible for legal services related to your business operations.
• Professional development: Courses, books, conferences, and subscriptions that maintain or improve your professional skills are deductible. Education that qualifies you for a new profession is not deductible.
• Professional memberships and dues: Trade association dues and professional certification fees are deductible.

Marketing and Business Software

Advertising costs, website hosting, domain registration, marketing software, CRM tools, accounting software, and other digital tools used for business are fully deductible as ordinary and necessary business expenses. Keep records of what each subscription is for and confirm it is used exclusively or primarily for business.

Phone and Internet

If you use your phone and internet connection for both personal and business purposes, you can deduct the business-use percentage. If your phone is used 60% for business, deduct 60% of your monthly bill. For a home office that depends heavily on internet, a 50%–80% business-use percentage is commonly supported.

Qualified Business Income (QBI) Deduction

Self-employed workers who operate as sole proprietors, partnerships, or S corporations may be eligible for the Qualified Business Income deduction under Section 199A. This deduction allows eligible taxpayers to deduct up to 20% of qualified business income from their taxable income. The calculation can get complex for higher earners and service businesses, so consult a tax professional if your income exceeds the phase-out thresholds.

Recordkeeping Best Practices

Every deduction must be supported by documentation. Best practices:

• Keep separate business and personal bank accounts
• Use a dedicated business credit card for all business expenses
• Save digital copies of receipts — apps like Expensify or Dext work well
• Keep a mileage log (date, destination, business purpose, miles) for vehicle deductions
• Retain records for at least three years after the tax return filing date

Bottom Line

Self-employed workers have access to more tax deductions than most W-2 employees. The SE tax deduction, home office deduction, health insurance premiums, retirement plan contributions, and business equipment deductions can collectively reduce your taxable income by tens of thousands of dollars. Track every business expense, keep good records, and work with a CPA if your situation is complex — the cost of professional tax preparation for a self-employed person is itself a deductible business expense.

Your W-2 is the most important tax document most employees receive. It shows exactly how much you earned and how much was withheld from your paycheck for federal taxes, state taxes, Social Security, and Medicare. Understanding each box helps you file accurately and spot errors before they cost you.

When You Get It and What to Do First

Employers must send W-2s by January 31. If yours has not arrived by mid-February, contact your HR or payroll department. Check that your name, address, and Social Security number are correct. Errors here can delay your refund or cause IRS notices.

The Key Boxes Explained

Box 1 — Wages, Tips, Other Compensation

Your total taxable federal wages for the year. This is not your gross pay — it excludes pre-tax benefits like 401(k) contributions and health insurance premiums.

Box 2 — Federal Income Tax Withheld

How much was taken out of your paychecks for federal income tax. Compare this to your actual tax liability when you file. If Box 2 is higher, you get a refund. If it is lower, you owe the difference.

Box 3 — Social Security Wages

Wages subject to Social Security tax. Can be higher than Box 1 because it includes some pre-tax deductions that are excluded from federal income tax (like health insurance) but still subject to FICA.

Box 4 — Social Security Tax Withheld

Should be 6.2% of Box 3, up to the annual Social Security wage base. For 2025, that was $176,100. If you had multiple employers and this box exceeds the correct amount, you can claim a credit on your return.

Box 5 — Medicare Wages and Tips

All wages subject to Medicare tax. No income cap, unlike Social Security.

Box 6 — Medicare Tax Withheld

Should be 1.45% of Box 5. Earners above $200,000 (single) or $250,000 (married) also pay an additional 0.9%.

Box 12 — Various Codes

Codes report specific types of compensation or deferrals. Common ones: Code D = 401(k) contributions; Code W = employer HSA contributions; Code DD = employer-sponsored health insurance cost (informational only, not taxable income).

Box 13 — Checkboxes

“Retirement plan” checked means you participated in an employer plan, which may limit your IRA deduction if your income is above certain thresholds.

Boxes 15–17 — State Tax Information

State, employer’s state ID number, state wages, and state income tax withheld. You will use these to file your state return.

What If Your W-2 Is Wrong?

Contact your employer to issue a corrected W-2 (called a W-2c). Do not file your return with incorrect information — it can trigger audits and penalties. If the employer does not respond, contact the IRS.

Bottom Line

Your W-2 summarizes a year of earnings in one page. Read it carefully before filing, verify the numbers match your final pay stub, and keep a copy for at least three years.