There is no set limit to the amount of tax-free income you can earn during the year; rather, it depends on your personal financial situation, your filing status, the number of dependents you claim and the amount of deductions you take. However, the Internal Revenue Service guarantees most taxpayers a minimum amount of tax-free income each year.
Minimum Tax-Free Income
For a majority of people who pay income taxes who are not a dependent to another taxpayer, the minimum amount of tax-free income they can claim is equal to the standard deduction plus one personal exemption, which is the same for all taxpayers. The amount of your tax-free income will depend on your filing status since this is the only variable affecting how much your standard deduction is. The 2011 standard deductions, for example, are $5,800 for a single taxpayer, $8,500 for head of household filers and $11,600 for married filers.
Dependent Tax-Free Income
As a dependent, you cannot claim a personal exemption since another taxpayer who provides a significant amount of your financial support already claims it for you. As a result, the minimum amount of tax-free income that the IRS automatically provides you is equal to your standard deduction only. Your standard deduction can never be more than that available to a single taxpayer, but in most cases it’s less. The maximum standard deduction you can claim is equal to the amount of income you earn from providing services plus $300. Therefore, if you earn $2,000 this year from a part-time job, your maximum standard deduction is $2,300. However, if you have unearned income, meaning you don’t provide services for it, such as interest and dividends, the maximum standard deduction you can claim is $950.
Additional Tax-Free Income
In addition to the standard deduction and exemptions, there are other ways you can maximize the amount of tax-free income you receive by claiming other deductions. However, you must qualify to claim each deduction you take. For example, you may be able to reduce your taxable income for the student loan interest you pay during the year, but only if you use the loan funds for school-related expenses and have income that doesn’t exceed IRS thresholds. Itemizing deductions is also a good way to receive more tax-free income, but if you do itemize, you forfeit the standard deduction. Typical expenses you can itemize include the donations you make to charity and medical expenses you incur.
Alternative Minimum Tax
The IRS uses an Alternative Minimum Tax calculation as one of the few limitations on the amount of tax-free income you can earn. The AMT generally applies only to taxpayers who earn a significant amount of income, but pay minimal income tax as a result of all the deductions they claim. To insure that some taxpayers pay at least something each year, these high-earners must recalculate their income tax liability using an alternative calculation that disallows a specific number of deductions.