Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she’s looking at questions on hobby losses, I bonds and Medicare premiums. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Hobby Loss or Business Loss

Question: I own a dog-breeding business, and for the past few years, I have reported losses from the business on Schedule C of my Form 1040. What are the odds that the IRS will audit my return?

Joy Taylor: The odds of an IRS audit are quite low for most people. In recent years, the IRS has audited significantly less than 1% of all individual tax returns, and we expect that number will remain low for the foreseeable future. However, there are some audit red flags that could increase the chance of drawing unwanted attention from the IRS. One of those is deducting a hobby loss. Filers who report multiple years of big losses on Schedule C of Form 1040, run an activity that sounds like a hobby, and have lots of income from other sources that the losses offset are prime IRS audit targets.

To deduct a Schedule C loss, you must show that the activity is a business. It needs to be conducted with continuity and regularity in a businesslike manner, and you must have a reasonable, good-faith objective of making a profit from it. The IRS’s regulations provide a safe harbor. If your activity generates profit in three out of five consecutive years (or two out of seven years for horse breeding), the law presumes you’re in business to make a profit unless the IRS establishes otherwise. The hobby-business analysis is trickier if you can’t meet the safe harbor. That’s because the determination of whether an activity is properly categorized as a hobby or a business is then based on each taxpayer’s facts and circumstances. The IRS and the courts generally look at the following nine factors (note that no one factor is determinative, but some are routinely given more weight):

• Expertise of the taxpayer and advisers
• Manner in which one carries on the activity
• Time and effort devoted to the venture
• Expectation that assets used in the activity may appreciate
• History of income and losses (the more years of large, consecutive losses, the harder it is to demonstrate a profit motive unless the activity is still in its start-up stage)
• Amount of occasional profits
• Success in carrying on other activities
• Elements of personal pleasure or recreation that one gets from the activity
• Whether the taxpayer has substantial income from other sources, such as wages, other business income, retirement income or investment income

For more information, here is an online story that I wrote on the hobby loss rules

2. I Bonds and College Education

Question: I have owned Series I bonds for many years. I heard that if I cash in the bonds and use the bond proceeds for higher education for my children, then I won’t have to pay tax on the interest when I cash my I bonds in. Is that true?

Joy Taylor: I bond buyers have a choice when they acquire the bonds. They can pay federal income tax each year on the interest earned or defer the tax bill to the end. Most people choose the latter, which is what I assume you did. Thus, you would generally report interest income on your Form 1040 for the year the bonds mature or when they are cashed in, whichever comes first.

One way to avoid paying federal income tax on accrued I bond interest is to cash in the bonds on or before the maturity date and use the proceeds to help pay for college or other higher education expenses for you, your spouse or your dependent. Note that there are lots of hurdles to jump over to be able to take advantage of this tax perk. Here are some of them:

• You must have purchased the bonds after 1989 when you were at least 24 years old.
• The bonds must be in your name only.
• The bonds must be redeemed to pay for undergraduate, graduate or vocational school tuition and fees for you, your spouse, or your dependent (grandparents cannot use this tax break to help pay for their grandchild’s college tuition unless the grandparents can, on their Form 1040, claim the grandkid as a dependent).
• Room and board costs aren’t eligible for the exclusion.
• The exclusion is subject to strict income limits. For 2025, it begins to phase out at modified adjusted gross income (MAGI) of more than $149,250 for joint filers and completely phases out at MAGI of $179,250. For all other filers, the phase-out range for 2025 is $99,500 - $114,500. These figures are adjusted for inflation each year, so they would be higher for 2026 and so forth. MAGI for this purpose starts with the AGI on line 11 of your Form 1040 (figured without taking into account any I-bond interest exclusion). Then you add back any tax breaks from working abroad, the exclusion for employer-provided adoption assistance and any deductions for student loan interest.

If the proceeds from all I bonds cashed in during the year exceed the qualified education expenses that you pay for the year, the amount of I bond interest you can exclude is reduced proportionally. You would use IRS Form 8815 to compute your MAGI and the amount of any I-bond interest exclusion that you would be entitled to.

3. Medicare Premiums and IRMAA

Question: How do I calculate MAGI to determine whether I owe an income-related monthly adjustment amount (IRMAA) on top of my basic monthly Medicare Part B and D premiums? Is the untaxed portion of Social Security benefits added back in for this purpose?

Joy Taylor: True to the complexity of the federal tax code, the definition of MAGI often differs, depending on what it is used for. MAGI for purposes of determining IRMAA for Medicare purposes is your adjusted gross income shown on line 11 of your Form 1040 plus any tax-exempt interest income. As a result, the untaxed portion of your Social Security benefits is not included in MAGI.

If you'd like to learn more, here is a link to an explainer I wrote on modified adjusted gross income (MAGI).

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter and The Kiplinger Letter can ask Joy questions about tax topics. You'll find full details of how to submit questions in The Kiplinger Tax Letter and The Kiplinger Letter. (Subscribe to The Kiplinger Tax Letter or The Kiplinger Letter.)

We have already received many questions from readers on topics related to inherited IRAs, Roth IRA conversions, responding to an IRS tax notice and more. We’ll answer some of these in a future Ask the Editor round-up. So keep those questions coming!

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

More Reader Questions Answered

• Ask the Editor: Questions on Trump's Big Beautiful Bill
• Ask the Editor: Questions on capital gains
• Ask the Editor: Questions on tax deductions and losses
• Ask the Editor: Questions on 529 plans
• Ask the Editor: Questions on amended returns

Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she’s looking at five questions on tax deductions and losses. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1: Theft loss

Q. I was a victim of internet fraud and lost a lot of money. Can I claim this loss on my Form 1040?

A. Depending on the circumstances, this might be a deductible theft loss that you can claim on Schedule A of your 1040 if you itemize. A deductible theft loss must be incurred in a transaction entered into for profit or in a trade or business. Personal theft losses not connected with these two factors aren’t deductible through 2025. The analysis is based on facts and circumstances.

The IRS released a legal memorandum in mid-March that can help with this analysis. In the memo, IRS lawyers addressed five scenarios involving common internet scams and ruled whether a victim could deduct a theft loss. In each fact pattern, the victim owned IRAs or taxable accounts and transferred funds from the accounts to the scammer or to new accounts that the scammer controlled. Essentially, individuals who were victims of kidnapping or romance scams can’t deduct their theft losses because they are personal. The result is more favorable for victims of scams in which the scammer convinced them that their existing account was compromised or that they could put funds into an investment with better returns.

You can read the IRS memo [opens PDF]. You can also read more on the subject in IRS Publication 547, Casualties, Disasters and Thefts. Additionally, I would suggest that you consult with a tax professional, such as a CPA, before making any decision as to the deductibility of your loss.
— Joy Taylor, Editor The Kiplinger Tax Letter

2: Leasing a car for business

Q. I am self-employed. I lease a car that I use 80% for business and 20% for personal use. Can I deduct my car lease payments on Schedule C of my Form 1040?

A. Yes. If you lease a vehicle for use in your business, you can opt to use actual expenses to figure your deductible expense. You can deduct the part of each lease payment that is for business. There’s also this oft-forgotten rule: If you lease a car worth more than a certain value ($62,000 in 2025), you must pay income tax for each year of the lease term on an amount shown in IRS tables. The extra income partially offsets the lessee’s tax deduction of the lease payments and is intended to approximate the squeeze on buyers from the cap on depreciation. Note that you don’t add the amounts to your income when filling out your tax return. Instead, you reduce the size of your deduction for the lease payments on the vehicle.

Here’s a simple example.
You’re self-employed and in 2025, you lease a car for use in your business that is valued at $71,000. You must reduce the deduction for the lease payments on Schedule C of your Form 1040 each year by the amount shown in Table 3 of IRS Revenue Procedure 2025-16 [opens PDF]. If you use a leased car in business 80% of the time, you can only deduct 80% of the lease payments, and you would include 80% of the numbers in Table 3 of Revenue Procedure 2025-16 as a reduction to your deductible lease payments.

IRS Publication 463, Travel, Gift and Car Expenses, delves into these rules in more detail.
— Joy Taylor, Editor The Kiplinger Tax Letter

3: Qualified Business Income (QBI) deduction

Q. The 20% qualified business income deduction is set to expire after 2025. Do you think Congress will extend this tax write-off?

A. Yes, it’s quite likely that the qualified business income (QBI) deduction will be extended if Congress is able to pass its large tax, border security and energy bill this year.

Self-employed people, independent contractors and owners of LLCs, S corporations and other pass-through entities can deduct 20% of their QBI, subject to limitations for individuals with taxable income in 2025 of more than $394,600 for joint filers and $197,300 for single filers and head-of-household filers. (The 2024 amounts are $383,900 and $191,950.)

This deduction ends after 2025, unless Congress acts. It was first enacted in the 2017 Tax Cuts and Jobs Act to provide some federal income tax parity between C corporations, which are taxed at a 21% rate, and pass-throughs, in which the individual owners pay income tax on earnings up to a 37% tax rate. Republican lawmakers want to extend the QBI deduction. And they have lots of support from lobbying groups representing Main Street businesses.
— Joy Taylor, Editor The Kiplinger Tax Letter

4: Deduction for rental profit

Q. I own rental homes and generate a profit from them that I report on Schedule E of my 1040. I heard that I can get a tax deduction for 20% of the profit. Is that true?

A. It depends. Rental income reported on Schedule E of the Form 1040 may, in some cases, be eligible for the 20% qualified business income deduction (discussed above). The IRS’s regulations say the rental activity must generally rise to the level of a trade or business, a standard which is based on each taxpayer’s particular facts and circumstances. Alternatively, there is a safe harbor if at least 250 hours a year of qualifying time are devoted to the activity by the taxpayer, employees or independent contractors. Time spent on repairs, collecting rent, negotiating leases and tenant services counts. Taxpayers who use the safe harbor must meet strict recordkeeping requirements and attach an annual statement to their tax returns. Meeting the safe harbor will let you treat the rental activity as a trade or business for QBI purposes. Note that you would take the QBI deduction on line 13 of your Form 1040 after completing Form 8995 or 8995-A.
— Joy Taylor, Editor The Kiplinger Tax Letter

5: Home office deduction

Q. My employer closed its office, and I now work fully remote from home for that employer. Can I claim the home office deduction if I itemize on Schedule A of the Form 1040?

A. No. Prior to 2018, certain employees could deduct the cost of home office expenses as unreimbursed employee costs included in Schedule A miscellaneous itemized deductions, subject to the 2%-of-adjusted-gross-income threshold. But the 2017 Tax Cuts and Jobs Act repealed this group of tax breaks through the end of 2025. We don’t know yet whether this prohibition on deducting employee business expenses will get extended past 2025.

The home office deduction is still available to self-employed people or independent contractors who file Schedule C with their 1040 and use a room or space in their home or apartment exclusively and regularly as their principal place of business. If you are self-employed and qualify for the write-off, there are two ways to figure the deduction. You can allocate your actual costs on Form 8829. Or you can use a simplified option by deducting $5 per square foot of space used exclusively for business, up to 300 square feet, resulting in a $1,500 maximum write-off.
— Joy Taylor, Editor The Kiplinger Tax Letter

We have already received many questions from readers on topics related to inherited IRAs, gifts, qualified charitable contributions and more. We’ll answer some of these in a future Ask the Editor round-up. So keep those questions coming!

Subscribers of The Kiplinger Tax Letter and The Kiplinger Letter can ask Joy questions about a tax topic. You'll find full details of how to submit questions in The Kiplinger Tax Letter and The Kiplinger Letter. (Subscribe to The Kiplinger Tax Letter or The Kiplinger Letter.)

Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.

Read more from our Ask the Editor Series

• Ask the Editor, April 25, 2025: 529 plans.
• Ask the Editor, April 18, 2025: Amended returns.
• Ask the Editor, April 11, 2025: IRAs, RMDs and PTPs.
• Ask the Editor, April 4, 2025: The new tax bill, estate tax, and muni bonds.

Tis’ the season for giving, and your donations can actually give back to you by lowering your tax bill.

With a charitable donation, you can gift money or goods to a tax-exempt organization and reduce your taxable income on your federal tax return. Generally, you can deduct from 20% to 60% of your adjusted gross income through donations. However, there are some limitations.

For instance, cash donations to your company-sponsored fundraiser or department store may not be eligible. You can only deduct qualifying donations from an IRS-recognized tax-exempt organization or 501(c)3.

Here are some places you can donate this holiday season.

1. Animal rescues or shelters

If you’re interested in donating to an animal shelter or sanctuary, you can do local research and look up registered 501(c)3 organizations in your area. You can also verify if they are a registered tax-exempt organization by calling them, or by using the IRS tax-exempt organization search tool online.

Some shelters serve as life-long homes for disabled or senior animals, while others focus on rehabilitation and rehoming for adoption. Here are some examples.

Goats of Anarchy

Goats of Anarchy is a farm animal sanctuary dedicated to the rescue and rehabilitation of goats with disabilities. The registered 501(c)3 charity has been operating for about 7 years and is located on a 30-acre property in Hampton, New Jersey.

Almost 240 animals call the sanctuary their home including goats, sheep, alpacas, equines, cows, pigs, farming birds, more than 30 barn cats, and a handful of dogs.

You can give Goats of Anarchy a one-time donation, sponsor your favorite animal, or even donate stock to support the animals at the sanctuary. If you’re in the neighborhood, you can even volunteer to help out the team for a regular shift at least once a week.

Best Friends Animal Sanctuary

Best Friends is the nation’s largest no-kill animal sanctuary. The group started by rescuing dogs and cats from high-risk shelters in Utah, and today has several chapters around the country including in Los Angeles, CA, Salt Lake City, UT, New York City, Northwest Arkansas, and Houston, TX

The organization currently has a network of more than 4,200 animal welfare, shelter partners, and community members across the country.

Some of their partner rescues were impacted by Hurricanes Helene and Milton earlier this year, but you can donate or adopt by visiting their website bestfriends.org.

2. Thrift stores

If you’re doing some spring cleaning this winter, your clothes, furniture, books, or appliances can be donated to 501(c)3 thrift stores. While Goodwill and the Salvation Army may come to mind, you can do some research and donate to a smaller local thrift.

For example, in New York City, Housing Works has several stores across the city and all proceeds go towards funding and legislation to ensure all persons living with HIV/AIDS have access to housing, healthcare, treatment, and prevention.

Housing Works accepts cash donations online, thrift and book donations at your local shop, and can even arrange furniture pickup.

3. Toy drives

If you’d like to donate toys this holiday season, you can get in touch with local toy drives in your state or city. Don’t know where to start your search? Well, your local children’s hospital, church, public library, or neighborhood group may give you a lead.

Some fire departments, like FDNY Firezone, are registered 501(c)3 organizations with a funding bank specifically for toys. If you’d like to donate, it’s often asked that gifted toys aren’t wrapped for security reasons.

If you’re looking to donate to a bigger organization, the Marine Toys for Tots Foundation accepts online cash donations or you can drop off a toy at a local chapter. Local campaigns are celebrated each year in over 800 communities across all 50 states, including the District of Columbia, Puerto Rico, and the Virgin Islands.

4. Food drive

As it gets colder outside, many families like to participate in food drives to give those in need a warm meal. If you’d like to participate or donate to a 501(c)3 organization, you can research your state food bank or pantry.

• For instance, Feeding Florida has 9 chapters across the state that help serve 2,400 community-based partner agencies.
• The organization helps feed 2.9 million Floridians facing hunger, including over 800,000 children.

No Kid Hungry

Another organization that accepts donations is No Kid Hungry, you can contribute by giving a one-time or monthly donation online.

All proceeds go to help feed children at school, at home, or during the summer months — when some kids are often the hungriest due to lack of school meals.

5. Charitable foundations

If you have a specific cause you’d like to donate to, like awareness of climate change, medical research, or a local school district, you can do so.

For example, St. Jude Children's Research Hospital is a 501(c)3 that accepts monthly or one-time donations to help families front bills for treatment, housing, or food, while their children get medical attention.

The American Civil Liberties Union (ACLU) Foundation is another non-profit organization you can donate to. All proceeds go toward defending and advancing civil liberties via litigation, education, and lobbying.

Building Homes for Heroes is an IRS-recognized 501(c)3 that builds and modifies mortgage-free homes for first responders, injured veterans, and their families.

As mentioned, your local public schools, libraries, and hundreds of other deserving organizations may have a registered 501(c)3 fund where you can donate cash or non-monetary gifts to support their initiatives for those in need.

How to deduct donations on your tax return

As with all tax records, you should keep all documentation that supports your charitable donations. This may include acknowledgment letters or bank statements.

To claim charitable donations on your tax return, you must itemize deductions on Schedule A attached to your IRS Form 1040. As mentioned, your limit on monetary donations is 60% of your adjusted gross income.

Whether you donated cash or gifted a non-cash donation, you must keep a record or written documentation from the qualified organization that includes the following information:

• Date of contribution
• Name of organization
• The amount of cash donations and description (but not value) of non-cash contributions
• Whether the charity gave you goods and services in return for your donation

Additionally, if you’ve donated property worth $500 or more, you must submit a Form 8283 with your federal income tax return.

If you have any questions about how to keep track of your charitable contributions, you can always ask your certified public accountant, trusted tax professional, or financial planner. They’ll be more than happy to help you as you seek ways to give during the holidays or year-round.

Related Content:

• How Charitable Donations Can Reduce Your Taxes
• Art Donation Tax Scam Targets Wealthy Filers
• Charitable Donations: What To Know About Scams and Taxes Before You Give

Getting the right tax advice and tips is vital in the complex tax world we live in. The Kiplinger Tax Letter helps you stay right on the money with the latest news and forecasts, with insight from our highly experienced team (Get a free issue of The Kiplinger Tax Letter or subscribe). You can only get the full array of advice by subscribing to the Tax Letter, but we will regularly feature snippets from it online, and here is one of those samples…

If you earn income from rental properties you may be eligible to claim a nice tax break: The 20% qualified business income (QBI) deduction is for self-employed individuals and owners of pass-through entities, such as LLCs, partnerships and S corporations. These individuals can deduct 20% of their QBI. The write-off also applies to some landlords with Schedule E rental income. There are lots of special rules and restrictions, most of which apply to people with taxable incomes, before the QBI deduction, of more than $383,900 on joint returns and $191,950 for all other returns. The QBI write-off is temporary. It ends after 2025 unless Congress extends it. 

There are two ways to qualify for the 20% QBI write-off for rental income. 

1. The first is if the rental activity rises to the level of a trade or business.
For this purpose, IRS regulations refer to the standard under tax code Section 162, the statute that generally governs the deductibility of trade or business expenses. 

There is no statutory or regulatory definition of a Section 162 trade or business. Instead, this determination is based on a taxpayer’s specific facts and circumstances. Some relevant factors are:

• The type of property (commercial or residential)
• Lease terms
• The extent of day-to-day involvement by the lessor or his or her agents
• The significance and type of ancillary services provided under the lease, and 
• The number of rentals.

Here are some best practices to treat your rental as a business: Keep expense receipts. Insure your realty. Keep separate bank accounts. And track time and services performed. 

2. A second way to qualify rental income as QBI is to meet an IRS safe harbor.
At least 250 hours must be devoted to the rental activity by the taxpayer, employees or independent contractors in a year. 

Time spent on the following counts: tenant services, repairs, property management, advertising, collecting rents, negotiating leases and supervising workers. 

Hours put in for driving to and from the property, arranging financing and constructing long-term capital improvements aren’t included. 

If you own multiple rental properties, you can treat each property separately or aggregate similar rental activities into commercial or residential categories. Those who use the safe harbor must meet strict recordkeeping requirements and attach an annual statement to their returns, as detailed in Rev. Proc. 2019-38. 

Contemporaneous records must detail hours, dates, and descriptions of the services and the people who performed them. If the services are done by contractors or employees, the taxpayers must keep logs of the work done by them, as well as proof of payment. 

Note: The safe harbor doesn’t apply to property leased under a triple net lease or if the owner’s personal use exceeds the greater of 14 days or 10% of the days rented. 

How rental income is reported
Treating rental income as QBI doesn’t change how you report that income. Real estate rental income is usually reported on Schedule E of the 1040. Also, the rental income generally isn’t subject to self-employment tax. If you qualify, you’d take the QBI write-off on Form 1040, line 13 and attach Form 8995 or 8995-A.

This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe. 

Getting the right tax advice and tips is vital in the complex tax world we live in. The Kiplinger Tax Letter helps you stay right on the money with the latest news and forecasts, with insight from our highly experienced team (Get a free issue of The Kiplinger Tax Letter or subscribe). You can only get the full array of advice by subscribing to the Tax Letter, but we will regularly feature snippets from it online, and here is one of those samples…

If you made a qualified charitable distribution (QCD) from your IRA in 2023, reporting it on your 1040 or 1040-SR can be tricky. 

Individuals 70½ and older could transfer up to $100,000 in 2023 from a traditional IRA directly to charity. The cap for 2024 is $105,000 because the Secure Act 2.0 retirement law provides for annual inflation indexing of the $100,000 original cap, starting this year. These charitable gifts can count as all or part of your required minimum distribution (RMD). But you’re not taxed on them, and they are not added to your adjusted gross income. 

If you did a QCD in 2023, the 2023 Form 1099-R that you received this year won’t reflect the QCD. It will show only the total amount of distributions made from the IRA in 2023 because IRA custodians lack firsthand knowledge to discern whether a particular payout from a traditional IRA meets the QCD rules. 

When filling out your 2023 Form 1040 or 1040-SR, include on line 4a the total amount of distributions reported on Form 1099-R. Then you subtract the amount that was transferred directly to charity and report the remainder (even if it’s $0) on line 4b. Write “QCD” next to line 4b so the IRS knows why the numbers don’t match. If using tax software, a drop-down box for line 4b should give you a choice to click QCD. 

If you itemize on Schedule A, be sure not to deduct the QCD amount. That would be double-dipping.

Similar rules apply to tax-free rollovers from IRAs. Again, the 1099-R will show the figure rolled over from the IRA as part of total distributions. On your 1040, include the full distribution amount on the 1099-R on line 4a. Subtract the rollover and report the remainder, if any, on line 4b. Write “Rollover” next to line 4b. 

This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe. 

Time is running out if you haven't already filed your 2021 federal tax return. For most people, the tax return filing deadline is April 18 this year (residents of Maine and Massachusetts get one extra day). So, for all you tax procrastinators out there, it's time to get moving. One of the first things you should do is collect and organize your tax records. If you're going to file your own 1040, you should also check out tax software options. If you need more time to file your return, request a tax filing extension (although you'll still have to pay any tax you expect to owe). And, no matter when you fill out your 2021 tax return, you first want to familiarize yourself with the tax law changes that may impact it.

Many (but not all) of the new items on the 2021 1040 form come from the American Rescue Plan Act, which was enacted last March. This Covid-relief bill made changes to the child tax credit, child and dependent care credit, earned income tax credit, and more. Other changes stem from the expiration of earlier Covid-related provisions that expired at the end of 2020. There are a few modifications to some of the main 1040 schedules, too. And, of course, there are the normal inflation-based adjustments that occur every year.

There are many reasons why you should know and understanding these changes up front. First and foremost, it very well may result in a larger tax refund or a smaller tax bill. You're also likely to get through your return faster if you're already aware of any new twists and turns. If someone else prepares your 1040, it will be easier to catch any errors when you review the return. But since "Tax Day" is right around the corner, you don't have much time left to get up-to-speed on what's new and changed for your 2021 tax return. So take a look at our list below and study up now so you know what to look for before tackling your 1040.

"Tax Day" is the day that federal personal income tax returns are due. It was delayed the past two years because of COVID-19. In 2020, Tax Day was pushed back to July 15, and last year it was moved to May 17. This year, however, the tax return filing deadline is moved back to its normal spot on the calendar…well, sort of.

Federal income tax returns are normally due on April 15. But this year most 2021 tax returns aren't due until April 18. That's because of a holiday in the District of Columbia. If you live in Maine or Massachusetts, your federal return isn't due until April 19, thanks to a local holiday in those states. Victims of certain recent natural disaster can wait even longer to file their return.

There are some subtle, but important, changes to the 1040 form itself for 2021 tax returns. Generally, they're needed to account for changes to the tax laws that are discussed below. For instance, the line on page 1 of the 1040 used for reporting the $300 deduction for charitable cash contributions was moved down on the form so that the deduction no longer impacts your federal adjusted gross income (AGI). This is important because your federal AGI is used to calculate several other tax breaks and obligations. It's also used by many states as the starting point for determining your state income tax liability.

Lines 19 and 28 on page 2 of the 1040 form were also adjusted to account for the fact that the child tax credit is fully refundable for the 2021 tax year. Line 27 was also modified and expanded (including a new check box) to satisfy changes to the earned income tax credit. (See more about changes to the child tax credit and earned income credit below.)

The idea of having a postcard-size tax form has been totally abandoned, too. We see this in the expansion of Schedules 1, 2, and 3 that go with the 1040 form. For 2020 returns, each of these schedules fit on one page. Now, for 2021 tax returns, they're each two pages long. The extra length is due to various additions to income, "above-the-line" deductions, extra taxes, and less common credits now getting their own line on these forms instead of being lump together as an "other" item to include.

Approximately 90% of all taxpayers claim the standard deduction instead of itemized deductions. Fortunately, the standard deduction amounts you'll use on your 2021 tax return are larger than last year, thanks to the annual adjustment for inflation. For the 1040 form you'll complete this year, married couples filing a joint return can claim a $25,100 standard deduction. That's a $300 increase over the 2020 tax year amount. For each spouse 65 years of age or older, you can tack on an additional $1,350 ($1,300 for 2020).

Single filers can claim a $12,550 standard deduction on their 2021 tax return ($12,400 for 2020). That jumps to $14,250 if you're at least 65 years old ($14,050 for 2020).

For head-of-household filers, the standard deduction for 2021 tax returns is $18,800 ($18,650 for 2020), plus an additional $1,700 if they're at least 65 years old.

Regardless of their filing status, blind people can add an additional $1,350 to their 2021 standard deduction ($1,700 if they're unmarried and not a surviving spouse).

The tax rates you'll see on your 2021 tax return are the same as they were last year: 10%, 12%, 22%, 24%, 32%, 35% and 37%. However, the income ranges that apply to each tax rate bracket have changed. Use the tables below to find the appropriate tax bracket for your 2021 return. It's based on your filing status and taxable income (Line 15 of your 1040 form).

Remember, though, that the tax rate associated with the bracket you fall into doesn't apply to all your income. It only applies to the amount of your taxable income that's within the bracket's range. So, for example, if you're single with $50,000 of taxable income in 2021, only the last $9,475 of your taxable income is taxed at the 22% rate ($50,000 - $40,525 = $9,475). The rest is taxed at either the 10% or 12% rate.

2021 Tax Brackets for Single Filers and Married Couples Filing Jointly

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2021 Tax Brackets for Married Couples Filing Separately and Head-of-Household Filers

If you hold on to a capital asset (e.g., stocks, bonds, real estate, art, etc.) for at least one year, any gains from the sale of the asset are taxed at a lower capital gains rate – either 0%, 15%, or 20%. The same rates apply to qualified dividends. Which rate applies to you depends on your taxable income.

For your 2021 federal income tax return, the 0% rate applies if you're single with taxable income up to $40,400 ($40,000 for 2020), a head-of-household filer with taxable income up to $54,100 ($53,600 for 2020), or a married couple filing a joint return with up to $80,800 of taxable income ($80,000 for 2020).

The 20% rate kicks in at $445,851 of taxable income for single filers ($441,451 for 2020), $473,751 for head-of-household filers ($469,051 for 2020), and $501,601 for joint filers ($496,601 for 2020).

If your taxable income falls between the 0% and 20% thresholds for your filing status, then the 15% rate applies.

As mentioned above, the $300 deduction for cash contributions to charity no longer affects your federal AGI. There's also another important change to this deduction for 2021 tax year returns – married couples can now deduct up to $600. For 2020 returns, married couples who filed jointly could only deduct $300. However, one deduction is allowed per person now, which means each spouse can deduct up to $300 on a joint 2021 return.

Note that this deduction is only available if you claim the standard deduction. It also expired at the end of 2021, so you won't be able to claim it on your 2022 return.

Several significant upgrades to the 2021 earned income tax credit (EITC) were made by the American Rescue Plan Act. The biggest changes will allow more childless workers to claim the EITC on their 2021 tax return. For one thing, the minimum age for claiming the credit without a qualifying child is lowered from 25 to 19 (except for certain full-time students). Workers over the age of 65 can claim the credit on their 2021 return, too. The maximum credit available for workers without a qualifying child also jumps from $543 to $1,502. Expanded eligibility rules for former foster youth and homeless youth were put in place for the 2021 tax year as well.

While the modified rules listed above for childless workers only apply for the 2021 tax year, the American Rescue Plan Act made a few other changes to the EITC that are permanent. For example, the $3,650 limit on a worker's investment income is bumped up to $10,000, and the cap will be adjusted for inflation each year going forward. In addition, certain married couples who are separated can now claim the credit on separate tax returns. And certain workers who can't satisfy the EITC identification requirements for their children can now qualify for the credit as a childless worker.

Finally, as with the 2020 EITC, you can use your 2019 earned income to calculate your 2021 EITC if it's more than your 2021 earned income. Since this can increase or decrease your EITC, calculate the credit using both your 2019 and 2021 earned income to see which method will save you the most money.

To calculate your EITC, complete the worksheets associated with Lines 27a, 27b, and 27c of Form 1040 in the instructions for Form 1040. If you have a qualifying child, also complete Schedule EIC and attach it to your 1040 form.

As with the earned income tax credit, the American Rescue Plan Act made major improvements to the child tax credit for the 2021 tax year. For instance, the credit amount for 2021 tax returns was increased from $2,000-per-child to $3,000-per-child six to 17 years of age and to $3,600-per-child five years old and younger. However, the extra $1,000 or $1,600 is phased out for single filers with a federal AGI above $75,000, head-of-household filers with a federal AGI above $112,500, and joint filers with a federal AGI above $150,000. The credit is further reduced under pre-existing rules for single and head-of-household filers with a federal AGI above $200,000 and married couples filing jointly with a federal AGI above $400,000.

Any child tax credit claimed on your 2021 return is also fully refundable for most parents, even if you don't have any earned income (normally, the credit is only partially refundable – up to $1,400-per-child – and you must have at least $2,500 of earned income). Children who are 17 years old also qualify for the 2021 credit (child normally must be 16 or younger to qualify). Finally, unless you opted-out of the payments, families received 50% of their estimated 2021 child tax credit amount in advance through monthly payments sent between July 15 and December 15 last year.

To calculate the child tax credit allowed on your 2021 tax return, you must subtract the monthly payments you received last year from the total credit that you're otherwise entitled to claim for the 2021 tax year. (The IRS will send you a Letter 6419 showing the amount paid to you in monthly payments.) If the total child tax credit amount is more than your combined monthly payments, you can claim the excess amount as a credit on your return. However, if the total credit amount is less than your payments, you might have to pay back the extra child credit payments.

Use Schedule 8812 to reconcile the advance payments you received last year with the actual child tax credit you're entitled to claim on your 1040 form, and to see if you need to pay back any payments (they will be paid back in the form of an additional tax calculated Part III of the schedule).

For more information about claiming the 2021 credit, see Child Tax Credit FAQs for Your 2021 Tax Return.

Parents benefiting from the child tax credit enhancements may be able to cut their 2021 tax bill even further because of big changes to the child and dependent care credit made by the American Rescue Plan Act. For example, the maximum credit is increased from 35% to 50% of eligible expenses for the 2021 tax year. Plus, the credit percentage won't be reduced for families making less than $125,000 a year (instead of $15,000 per year), and all taxpayers earning less than $438,000 can claim at least a partial credit on their 2021 return.

The 2021 credit applies to more child or dependent care expenses, too. The credit percentage is applied to as much as $8,000 of eligible expenses for one child/disabled person and up to $16,000 of expenses for two or more (the amounts are usually $3,000 and $6,000, respectively). That means the total credit amount can be as high as $4,000 if you have just one child/disabled person and $8,000 if you have more ($1,050 and $2,100, respectively, for 2020).

The child and dependent care credit for the 2021 tax year is also fully refundable for most people (it's usually a nonrefundable credit). Form 2441 is used to calculate the credit.

See Your Child Care Tax Credit May Be Bigger on Your 2021 Tax Return for details.

The American Rescue Plan Act improved the premium tax credit for 2021 and 2022 to lower premiums for people who buy health insurance through an Obamacare exchange (e.g., HealthCare.gov) on their own. The credit amount was increased for eligible taxpayers by reducing the percentage of annual income that households are required to contribute toward their health insurance premium. The law also allowed the credit to be claimed by people with an income above 400% of the federal poverty line.

For certain people who purchase health insurance through an exchange, an estimated premium tax credit amount is paid in advance to the insurance company. If advance payments are made on your behalf, you must reconcile the credit and the advance payments when you file your tax return. If the advance payments are greater than the actual allowable credit, the difference (subject to certain repayment caps) usually must be paid back. However, the American Rescue Plan Act eliminated the repayment requirement – but only for the 2020 tax year. As a result, excess advance payments made in 2021 will have to be repaid when you file your 2021 tax return.

Use Form 8962 to calculate your premium tax credit and reconcile it with any advance payments. Also make sure you submit Form 8962 with the rest of your 2021 tax return.

The nonrefundable credit for expenses related to the adoption of a child is a little larger for the 2021 tax year. For 1040 forms filed this year, the credit can be worth up to $14,440 ($14,300 for 2020). Plus, the full credit is available for a special-needs adoption, even if it costs less.

The credit begins to phase out if your modified AGI is over $216,660 and it's eliminated altogether if your modified AGI reaches $256,660 ($214,520 and $254,520, respectively, for 2020). To claim the credit, complete Form 8839 and report the credit amount on Line 6c of Schedule 3. Also submit Form 8839 with the rest of your 2021 tax return.

The income tax exclusion for company-paid adoption aid was also increased from $14,300 to $14,440 for the 2021 tax year.

The alternative minimum tax (AMT) was originally designed to hit only wealthier Americans. However, the AMT exemption amount wasn't always adjusted annual for inflation – but it is now. For the 2021 tax year, the AMT exemption jumped from $113,400 to $114,600 for married couples filing a joint return and from $72,900 to $73,600 for single and head-of-household filers.

The phase-out ranges for the AMT exemption are adjusted for inflation each year, too. For 2021 tax returns, the exemption is gradually reduced and can ultimately be eliminated if alternative minimum taxable income (AMTI) on a joint return is between $1,047,200 and $1,505,600 ($1,036,800 and $1,490,400 for 2020). For single and head-of-household filers, the 2021 phase-out range is $523,600 to $818,000 of AMTI ($518,400 to $810,000 for 2020). The 2021 range for married people filing a separate return is $523,600 to $752,800 ($518,400 to $745,200 for 2020).

In addition, the 28% AMT tax rate doesn't kick on 2021 tax returns until you hit $199,900 of AMTI. That's an increase over the 2020 threshold, which was AMTI of $197,900 or more.

Use Form 6251 to calculate your AMT and file the form with your 2021 Form 1040.

Say goodbye to the tuition and fees deduction, which was worth up to $4,000 per year. It was repealed starting with the 2021 tax year.

On the bright side, the phase-out thresholds for the lifetime learning credit were increased. They're now the same as the phase-out amounts for the American Opportunity credit. So, beginning with 2021 tax returns, the lifetime learning credit is gradually reduced to zero for joint filers with a modified AGI from $160,000 to $180,000 ($118,000 to $138,000 for 2020) and single filers with a modified AGI between $80,000 to $90,000 ($59,000 and $69,000 for 2020). If you're claiming either the lifetime learning credit or the American Opportunity credit, you must first complete Form 8863 and then attach it to your 1040 form.

The phase-out ranges are also higher in 2021 for the exclusion of interest on Series EE and I savings bonds redeemed to help pay for tuition and fees for college, graduate school, or vocational school. For 2021 tax returns, the exclusion starts to phase out for joint filers with a modified AGI exceeding $124,800 and for other people with a modified AGI of $83,200 or more ($123,550 and $82,350, respectively, for 2020). The exclusion is totally phased-out for joint filers with a modified AGI of $154,800 or more and for other taxpayers with a modified AGI of at least $98,200 ($153,550 and $97,350, respectively, for 2020). You must compete Form 8815 to claim the exclusion and then report the exclusion amount on Line 3 of Schedule B.

The recovery rebate credit is back, but with one important change. As you may recall, this credit made its first appearance on the 2020 Form 1040 and was available for people who didn't receive a first or second stimulus check, or who didn't receive the full stimulus check amount they were entitled to.

For 2021 tax returns, the credit is for people who didn't receive a third stimulus check (or didn't receive the full amount). Those payments were for up to $1,400, plus an additional $1,400 for each dependent in your family. Similar to the monthly child tax credit payments the IRS sent last year, your third stimulus check was an advance payment of the recovery rebate credit. As a result, when you file your 2021 return, you must reduce the recovery rebate credit you're entitled to claim by the amount of your third stimulus check. (The IRS will send you a Letter 6475 showing the amount of your third stimulus check.) For most people, your third stimulus check payment will equal the 2021 recovery rebate credit allowed. If that's the case for you, the credit will be reduced to zero. But if your third stimulus check was less than the credit, your recovery rebate credit will equal the difference. And what if your third stimulus check was more than your 2021 recovery rebate credit? You get to keep the difference!

Use our Third Stimulus Check Calculator to see you how large your third stimulus check should have been.

Two tax breaks that encourage saving for retirement were tweaked for the 2021 tax year. In both cases, the changes are the result of annual adjustments for inflation.

The first retirement-related change for 2021 tax returns is to the deduction for contributions to a traditional IRA. If either you or your spouse was covered by an employer retirement plan, your IRA deduction may be reduced (potentially to zero), depending on your filing status and income. The income levels that trigger a reduction for 2021 returns have been adjusted. For married couples filing a joint return, the deduction is gradually phased out if you're modified AGI is between $105,000 and $125,000 (between $104,000 and $124,000 for 2020 returns). For single and head-of-household filers, the phase-out range is from $66,000 to $76,000 ($65,000 to $75,000 for 2020).

If only one spouse is covered by a retirement plan at work, the deduction is reduced if the couple's modified AGI exceeds $198,000, and it's totally eliminated if their modified AGI hits $208,000 ($196,000 and $206,000, respectively, for 2020). (NOTE: If you made any nondeductible contributions to a traditional IRA for 2021, report them on Form 8606.)

The second change is to the "Saver's Credit," which encourages lower- and middle-income people to save for retirement. The credit is allowed for either 10%, 20%, or 50% of the first $2,000 ($4,000 for joint filers) you contribute to retirement accounts, depending on your filing status and income. The lower your income, the higher the percentage you can use to calculate the credit. For 2021 tax returns, single filers, married people filing a separate return, and qualified widow(er)s can claim a 50% credit if their AGI is $19,750 or less ($19,500 for 2020). They can claim a 20% credit if their AGI is from $19,751 to $21,500 ($19,501 to $21,250 for 2020), and the 10% credit is available if their AGI is from $21,501 to $33,000 ($21,251 to $32,500).

For married couples filing a joint return, the 50% credit is available if their AGI doesn't exceed $39,500 ($39,000 for 2020), the 20% credit is available if their AGI is from $39,501 to $43,000 ($39,001 to $42,500 for 2020), and the 10% credit is available if their AGI is from $43,001 to $66,000 ($42,501 to $65,000 for 2020).

The 50% credit can be claimed by head-of-household filers with an AGI of $29,625 or less ($29,250 for 2020), while they can claim the 20% credit with an AGI from $29,626 to $32,250 ($29,251 to $31,875 for 2020) and the 10% credit with an AGI from $32,251 to $49,500 ($31,876 to $48,750 for 2020).

To claim the credit, complete Form 8880 and send it to the IRS with your 1040 form.

For 2021 tax returns, standard mileage rate for business driving is 56¢ a mile – that's less than the 57.5¢ per mile for 2020. The rate for medical travel and military moves also dropped for the 2021 tax year from 17¢ to 16¢ a mile.

The mileage rate for charitable driving doesn't change from year-to-year. So, it stayed put at 14¢ a mile for 2021 returns.

Self-employed taxpayers can claim some tax breaks that other people can't. And some of those tax breaks are tweaked for 2021 tax returns. For instance, the sick or family leave credits self-employed people could claim on their 2020 tax return if they missed work for Covid-related reasons was extended for 2021 – but not for the full year. For 2021 returns, the credits are only available for qualified absences through September 30, 2021. In addition, the family leave credit can only be claimed for 50 days missed from January 1 to March 31, 2021, but it can be claimed for up to 60 days missed from April 1 to September 30, 2021. Self-employed people should use Form 7202 to calculate the sick and family leave credits they're entitled to claim on their 2021 1040 form.

The income threshold for limits on the 20% deduction for qualified business income were also adjusted for the 2021 tax year. The taxable income threshold is $329,800 for married couples filing a joint return, $164,925 for married people filing a separate return, and $164,900 for all others ($326,600 for joint filers and $163,300 for all others for 2020 returns). Use Form 8995 or Form 8995-A to figure your qualified business income deduction.

Self-employed people who are wining and dining clients can take advantage of another perk for both the 2021 and 2022 tax years. The deduction for business meals at a restaurant is increased from 50% to 100%. This deduction is claimed on Line 24b of Schedule C.

If a self-employed person had a Paycheck Protection Program (PPP) loan forgiven in 2021, the canceled debt is not taxable income and doesn't have to be reported on Form 1040. However, if you have tax-exempt income resulting from the discharge of a PPP loan last year, you must attach a statement to your 2021 tax return that includes certain information related to your PPP loan (see the instructions to Form 1040 for details). You should also write "RP2021-48" at the top of the statement.

Unfortunately, there are also a couple of negative changes that may increase the 2021 tax bill for some self-employed taxpayers. First, none of the self-employment taxes owed for the 2021 tax year can be deferred as they could on 2020 returns. In fact, half of any 2020 tax deferred had to be paid by the end of 2021, while the rest is due by the end of 2022. Second, the cap on deductible business losses is back after being suspended for the 2018 to 2020 tax years. For 2021 tax returns, the inflation-adjusted limit is $262,000 ($524,000 for married couples filing a joint return). Form 461 is used to calculate a self-employed taxpayer's limitation on business losses.

The $10,200 exemption for unemployment compensation in effect for the 2020 tax year is no more. Under the American Rescue Plan Act, which authorized the exemption for families with a federal AGI less than $150,000, the tax break was for one year only.

As a result, any unemployment compensation you received last year will be fully taxed on your 2021 tax return. Report the benefits on Line 7 of Schedule 1.

If you're paying for long-term care insurance, you might be able to deduct a portion of your premiums – and the deduction maximums, which are based on age, are higher for the 2021 tax year. Taxpayers age 71 or older can deduct up to $5,640 per person on their 2021 tax return ($5,430 for 2020). If you're 61 to 70 years old, you can deduct as much as $4,520 of your premiums ($4,350 for 2020). Anyone 51 to 60 years old can write-off up to $1,690 ($1,630 for 2020). For people 41 to 50 years of age, the max is $850 ($810 for 2020). And, finally, the maximum deduction is $450 if you're 40 or younger ($430 for 2020).

Long-term care insurance premiums are only deductible as medical expenses for most people, which means they must itemize deductions on Schedule A to claim the tax break. However, self-employed people can deduct their premiums on Line 17 of Schedule 1 without having to itemize.

Before the 2021 tax year, canceled or forgiven student loan debt was considered taxable income. However, from 2021 to 2025, most canceled student loan debt that was incurred for a post-secondary education is tax-free. Therefore, you shouldn't report qualified student loan debt that was canceled last year on Line 8c of Schedule 1.

The IRS has also told lenders and student loan servicer providers not to file Form 1099-C or submit payee statements for qualified student loan debt that's discharged, canceled, or otherwise forgiven through 2025. So, if you do receive a 1099-C form reporting discharged student loan debt that you believe is not taxable, contact the lender or loan service provider that issued the form and ask them to send a corrected form.

Americans working abroad may be able to exclude all or a portion of their foreign-earned income from taxable income on their U.S. tax return. For 2021 returns, the maximum exclusion amount is $1,100 higher than it was for the 2020 tax year – it jumped from $107,600 to $108,700.

In addition to the foreign earned income exclusion, taxpayers living abroad may also be able to claim an exclusion or deduction for their foreign housing. For the 2021 tax year, the maximum foreign housing exclusion is generally $15,218 ($15,064 for 2020), although it can be higher in certain high-cost areas.

Use Form 2555 to figure both your foreign earned income exclusion and foreign housing exclusion/deduction.

Fixing errors on your tax return will be less of a hassle going forward. For the first time, taxpayers are now able to file Form 1040X, the document used to amend tax returns, electronically with commercial tax-filing software.

Taxpayers amend their federal tax returns for all kinds of reasons—for failing to report some income, for example, or because of an overlooked deduction that would have lowered their tax bill. But in the past, you had to submit the form by mail. You could use tax software to fill out the form but had to print it out and mail it in.

"E-filing has been one of the great success stories of the IRS, and more than 90% of taxpayers use it routinely," IRS Commissioner Chuck Rettig said in a statement. "But the big hurdle that's been remaining for years is to convert amended returns into this electronic process."

While taxpayers generally have up to three years from the date they filed their original return (or two years from the date they paid any tax due) to amend a return, e-filing will initially be limited to 2019 tax returns, the IRS says. If you want to amend an earlier return on Form 1040X, you'll still have to print it out and mail it in.

The IRS has some bad news if you were hoping for more time to file your tax return. Due to COVID-19, the original due date for filing 2019 returns was already postponed from April 15 to July 15, 2020. However, several groups were pressuring the IRS to allow even more time to file returns and pay taxes this year. But the IRS shot down that idea and announced that there will not be another delay. So, you still only have until July 15 to get your taxes done and pay any tax due.

If you can't meet the July 15 deadline for whatever reason, you can request an automatic extension of time to file until October 15 by filing Form 4868 by July 15. While this will give you more time to file your return, it does not give you more time to pay any tax due. You still have to estimate your tax liability on the extension form and pay any amount due by July 15 to avoid penalties and interest.

You can also get an extension by paying all or part of the tax you owe using Direct Pay, the Electronic Federal Tax Payment System (EFTPS), or a credit or debit card. Make sure you indicate that the payment is for an extension. When getting an extension by making a payment, you don't have to file a separate extension form and will receive a confirmation number for your records.

If you're facing hardships, including those related to the coronavirus pandemic, and can't pay the tax you owe, pay what they can now and look into the various IRS payment options for the remaining balance. They include setting up a payment plan, an "offer in compromise," or requesting a temporary collection delay. Another option is to take out a loan to pay the taxes due, since loan costs could be lower than the combined IRS interest and penalties.

Finally, don't forget about your state tax return. The due date for your state return could be different than the July 15 deadline for federal returns. Check with your state tax agency to double check the tax due date where you live.