Latest from Kiplinger in Tax-returns

Ask the Tax Editor, June 26: Amended Returns and Late-Filed Returns

joy.taylor@futurenet.com (Joy Taylor) — Fri, 26 Jun 2026 12:20:00 +0000

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 four tax questions on amended returns and penalties for filing your tax return late. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Refund on amended return

Question: I filed Form 1040-X in early May to amend my 2024 federal tax return. I am expecting a refund, and I haven't received it yet. What is the delay?

Joy Taylor: I generally advise taxpayers to have lots of patience when filing an amended federal tax return with the IRS. The agency says you should allow at least 8 to 12 weeks for your Form 1040-X to be processed. However, in some cases, processing could take up to 16 weeks. Note that the IRS website also says that the Service is beginning to process paper-filed Forms 1040-X that were filed in April.

Maybe the processing speed will pick up later this year. The IRS's CEO, Frank Bisignano, testified before Congress that the IRS is using artificial intelligence to reduce processing times of amended returns to as little as three days. We'll see how this plays out over time.

You can use the IRS's "Where's My Amended Return" online tool to check the status of your amended return filing.

2. Amended return filing deadline

Question: I am thinking of amending my 2023 Form 1040, which I filed in February 2024. When is the due date for filing Form 1040-X to amend that return?

Joy Taylor: You generally have (1) three years from the due date of your original Form 1040 or (2) two years from the date you paid any tax due, if later, to amend it by filing an amended return on Form 1040-X. If you filed your original Form 1040 before its due date, it is considered filed on April 15. So, in your case, you would have to file an amended return no later than April 15, 2027.

3. Filing a late refund return

Question: I haven't yet filed my 2024 Form 1040. I plan to do so soon. I know I will get a refund when I do file. But will I have to pay any penalties for my late filing?

Joy Taylor: No, you will not have to pay any delinquency penalties for filing your 2024 Form 1040 late. That’s because taxpayers owe late-filing or late-payment penalties only if they owe tax, and you say you will receive a tax refund. Note that you must file your 2024 return by April 15, 2028, to get your refund. Otherwise, you have essentially ceded the money to the government.

4. Penalty abatement

Question: I haven't yet filed my 2025 Form 1040. I know I will owe tax, and I didn't request a filing extension nor did I pay the tax by the April 15 due date. I hope to file my return next month. This is the first time I have ever filed a late return with the IRS. How much will the agency penalize me for my late filing?

Joy Taylor: You may be in luck. The IRS has a little-known first-time penalty abatement policy. It will approve a waiver of the late-filing and late-payment penalties for filers who pay or arrange to pay the tax due and have been tax-compliant for the past three years. The penalties for late payroll-tax deposits and delinquent returns of S corporations or partnerships are also eligible for the waiver if the conditions are satisfied. But the estimated-tax penalty (also called the underpayment penalty) doesn't qualify for this penalty abatement program.

You may have to request the waiver. If you get a notice from the IRS showing a late-payment or late-filing penalty due but not abated, follow the instructions in the letter or call the phone number on the notice. The IRS has said that it will begin to automatically provide first-time penalty abatement to taxpayers who qualify for relief, starting with 2025 tax returns filed this year. But I am not sure whether the IRS has yet implemented this automatic procedure, which the agency will refer to as automatic exemption of penalties. If the IRS has implemented this program, then you should receive a letter after you file your late 2025 tax return, noting that the IRS didn't assess a penalty.

About Ask the Editor, Tax Edition

Subscribers of The Kiplinger Tax Letter, The Kiplinger Letter and The Kiplinger Retirement Report can ask Joy questions about tax topics. You'll find full details of how to submit questions in each publication. Subscribe to The Kiplinger Tax Letter, The Kiplinger Letter or The Kiplinger Retirement Report.

We have already received many questions from readers on topics related to tax changes in the One Big Beautiful Bill, retirement accounts and more. We will continue to answer these in future Ask the Editor roundups. 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.

Ask the Tax Editor, June 19: Estimated Tax Payments and Withholding

joy.taylor@futurenet.com (Joy Taylor) — Fri, 19 Jun 2026 12:20:00 +0000

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 tax questions on federal estimated tax payments and federal income tax withholding. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Underpayment penalty

Question: How much federal income tax must be withheld to avoid paying a tax penalty to the IRS when I file my Form 1040 each year?

Joy Taylor: You are off the hook from the underpayment penalty if you prepay, through estimated tax payments or withholding, at least 90% of your current year's tax bill or 100% of the tax that you owed for the immediately preceding year (110% if your adjusted gross income for the immediately preceding year exceeded $150,000).

2. Due dates for estimated tax payments

Question: I have to start making estimated tax payments to the IRS this year. What are the due dates for the payments, and how can I make them?

Joy Taylor: Estimated tax payments are for people with income that is not subject to withholding. Taxpayers usually make estimated tax payments to the IRS in four equal installments. The first remittance for 2026 was due April 15. The other dates are June 15, September 15 and January 15, 2027. Victims of federally declared disasters may have more time to pay their estimated taxes.

There are several ways to make estimated tax payments.

If you have an online individual account set up with the IRS, you can log in and pay through the account.
You can pay online with the IRS's Direct Pay or, if you currently have an account, with the Treasury Department's Electronic Federal Tax Payment System.
You can use your phone to pay with the IRS's app.
You can pay by debit or credit card, but know that you will be charged a fee.
Payment by paper check is also accepted for now, but this option will soon disappear.

3. IRS withholding calculator

Question: Do you know whether the IRS has a federal income tax withholding calculator on its website, and is the calculator updated for changes in tax laws?

Joy Taylor: The IRS does have a withholding estimator on its website. It helps you figure out whether you are having the right amount of federal income tax withheld from wages and pensions. The tool asks about various sources of income, provides tips on credits and deductions, and estimates how much withholding to request. And it is usually updated to account for tax law changes.

4. IRS forms to request withholding

Question: Can you tell me the various IRS forms I would use to request more or less income tax withholding from Social Security, wages, IRA distributions, etc.?

Joy Taylor: Employees who want more or less income tax withheld from their wages can submit a new Form W-4 to their employers. People receiving pension or annuity payments can submit Form W-4P. IRA owners use Form W-4R. Social Security recipients have two options. They can fill out Form W-4V and mail it in. Or, if they have an online Social Security account, they can request through their account that more or less tax be withheld from their monthly Social Security payments.

5. Withholding tax from a late-year IRA distribution

Question: I am retired, and most of my income is from IRA required minimum distributions (RMDs), Social Security, and dividends and capital gains from taxable investments. Someone told me that I don't have to make quarterly estimated tax payments. I can instead wait until year-end and request that my IRA custodian withhold a lump sum amount of income tax from my year-end IRA distribution to satisfy my federal income tax liability for the year. Is that true?

Joy Taylor: Pretty much, yes. For federal income tax purposes, tax withheld at any point in the year is treated as if evenly paid throughout the year. Some retirees rely on this rule to have federal income taxes that they expect to owe for a year withheld from a December RMD instead of making quarterly estimated tax payments. Kiplinger regularly advises retirees who are falling short on their tax withholding to have more tax withheld from a year-end IRA payout. Read more in our article on RMD withholding strategies.

State tax rules may differ, and some sponsors don't withhold state income taxes, so be sure to check your specific state law.

About Ask the Editor, Tax Edition

Fewer IRS Audits Doesn't Mean It's a Tax Cheat Free-For-All

joy.taylor@futurenet.com (Joy Taylor) — Sun, 31 May 2026 13:05:00 +0000

(Image credit: Getty Images)

In the wake of large IRS budget cuts and the significant loss of its workforce, is the agency turning into a paper tiger?

Since President Trump began his second term in office, IRS funding has declined precipitously, and there has been a sharp drop in personnel. Congress set the IRS's fiscal year 2026 budget at $11.2 billion, 9% less than the IRS's 2025 fiscal year funding, and House appropriators want to slash it further, to $10.2 billion for 2027. Additionally, the IRS has lost over 20% of its workers since January 2025 through voluntary deferred resignations and layoffs, with even more departures expected this year.

And there's been lots of chaos at the top leadership at the IRS over the past 17 months. The IRS is on its seventh commissioner since January 1, 2025. Scott Bessent, the Treasury Secretary, is also the nominal head of the IRS. But Frank Bisignano oversees all day-to-day operations at the agency. As chief executive officer of the IRS, he essentially acts as the de facto commissioner. Bisignano is doing double duty. He is also the commissioner of the Social Security Administration. Many other high-level officials have also left the IRS.

The IRS's enforcement arm is feeling the brunt of the personnel and funding cuts. Congress has rescinded most of the IRS's $80 billion windfall from 2022's Inflation Reduction Act. And some of the biggest drops in the agency's employee headcount are from its examination and collection groups. The IRS has lost one-in-four of its enforcement workers through voluntary deferred resignations, retirement and layoffs. Many of them were experienced agents and managers with deep knowledge. This lost know-how will be hard to replenish with those employees who remain. And it will only get worse for the IRS. For instance, the Trump administration's fiscal year 2027 budget request for the IRS includes an additional 18% cut in enforcement activities and projects fewer than 25,000 total enforcement employees.

How is the IRS's budget and personnel cuts impacting IRS audits? The overall number of audits is declining. In recent years, the IRS audit rate for individuals was significantly below 1% (for example, the audit rate for 2018 individual returns was 0.3%), and we expect this figure to continue to go down, at least over the next few years.

Many filers are now escaping the audit anvil because of scarcer audit resources. Two prime examples are high-income individuals and partnerships. The number of IRS audits of individuals with $10 million or more of income has fallen from 6,786 in fiscal year 2025 to 2,264 in fiscal year 2026. The number of IRS audits of partnerships has also declined from 3,174 in fiscal year 2025 to 2,932 in fiscal year 2026. The IRS forecasts even further declines in these audits in fiscal year 2027.

AI will help the IRS filter its audit targets

But this does not mean it is a free-for-all for tax cheats. According to leaders at the IRS, there will be fewer overall audits, but the exams that are done will be more targeted.

Data analytics and artificial intelligence use are increasingly the norm in the IRS's enforcement arsenal. Data-mining software can sift through taxpayer data, expose suspicious activity and identify cases for audit. The IRS is relying more than ever on this technology to more precisely identify high-risk noncompliance and to improve efficiency.

We also expect that the IRS will go after low-hanging fruit. One example is refundable credits, such as the earned income credit, American Opportunity credit, the Affordable Care Act's premium tax credit, and the refundable portion of the child tax credit. Most of these audits are done through correspondence, meaning the taxpayer never meets with an IRS employee. They're a bit more cost-effective, since the audit is generally limited to only one or two issues. The IRS also knows that there is lots of money lost each year to erroneous claims of refundable tax credits. The IRS estimated it improperly paid $21.4 billion in refundable credits in fiscal year 2024 alone.

Taxpayers with income-matching discrepancies will also be a prime target of the IRS. The IRS's automated underreporting program matches data on information returns, such as Forms W-2 and 1099, with income amounts reported on individual tax returns. If there is a significant mismatch, the IRS will alert the taxpayer to the issue by sending out a computer-generated CP2000 notice.

High-income nonfilers have been on the list of the IRS's enforcement priorities in recent years, and we expect this trend to continue. The primary emphasis is on individuals who received income in excess of $100,000 but didn't file a tax return.

The IRS will continue to go after abusive tax schemes that it includes on its annual Dirty Dozen tax scams. For 2026, these include:

Bogus self-employment tax credit promotions
Overstated withholding
Abusive noncash charitable contribution schemes, many of them involving the donations of conservation easements
Refundable tax credits for abusive undistributed long-term capital gains on Form 2439 by investors in real estate investment trusts and mutual funds
Misleading tax breaks touted on social media: (1) one scheme encourages employees to take the sick and family leave credit, (2) another uses Schedule H, Household Employment Taxes, to seek false refunds, and (3) a third urges filers to claim the fuel tax credit.

There are also audit red flags that could increase the chance of the IRS pulling your return for examination. We'll briefly describe a few of these red flags.

Taking higher than average deductions. If the deductions, losses, or credits on your return are disproportionately large compared with your income, the IRS may want to take a second look at your return.
Claiming large charitable deductions. If your charitable deductions are disproportionately large compared with your income, it raises a red flag. Also targeted are conservation easement donations and taxpayers who fail to comply with the substantiation requirements. You can find information on the substantiation rules for charitable donations in IRS Publication 526.
Claiming substantial business losses or large deductions on Schedule C.
Deducting a hobby loss on Schedule C, especially if you have multiple years of losses from the activity and have lots of income from other sources.
Deducting large rental losses on Schedule C. The IRS is pulling returns of individuals who claim they are real estate professionals and whose W-2 forms or other non-real-estate Schedule C businesses show lots of income.

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.

Ask the Tax Editor, April 24: How Can I Resolve My IRS Tax Debt?

joy.taylor@futurenet.com (Joy Taylor) — Fri, 24 Apr 2026 10:50:00 +0000

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 four questions relating to how individuals can resolve their IRS tax debt. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. IRS alternatives for resolving tax debt

Question: When I filed my 2025 federal tax return this month, I unexpectedly owed taxes. But I don't have the money to pay the bill. What can I do to resolve my IRS tax debt?

Joy Taylor: Try not to worry too much because you are not alone. Millions of individuals owe tax debt to the IRS. The agency has a number of alternatives to help individuals resolve their tax debt.

If you have a financial hardship, you can contact the IRS to request a temporary collection delay until your financial condition improves. Also, look into submitting an offer in compromise to settle your tax debt at less than what you owe or applying for an IRS online payment plan.

The IRS has a new online tool for individuals and businesses with federal tax debt. The tool provides them a simple way to explore payment options for unpaid taxes and to identify next steps based on their circumstances. If you decide to use the tool, you will need to answer a series of questions about your financial situation and your tax debt, and the tool will guide you to potential payment alternatives.

2. Should I submit an offer in compromise?

Question: I owe tax debt to the IRS. A friend told me I should submit an offer in compromise to the IRS, and it will automatically reduce the taxes that I owe. Is it really that easy?

Joy Taylor: Unfortunately, no. Your friend is correct that the IRS accepts offers in compromise (OIC) to settle tax debt at less than what the taxpayer owes. But the process isn't automatic. The key factor that the IRS takes into account when reviewing an OIC application is the taxpayer's ability or inability to pay the balance in full, and whether full payment would result in financial hardship. That's why you must disclose your income and your assets to the IRS in your OIC application.

If you're thinking of submitting an OIC to the IRS, you will want to review the IRS's Offer in Compromise Form 656 Booklet for the rules and the forms. There are two payment options you can choose from when submitting your OIC. The lump sum cash option requires you to pay 20% of the total offer amount up front, with the remaining balance to be paid in five or fewer installments within five months of the date your offer is accepted. There is also the periodic payment option, which requires that you make your first payment with the offer, with the remainder remitted monthly over a period of six to 24 months.

Here are some more tips if you're thinking about making an OIC:

Be sure you have filed all required federal tax returns. Otherwise, the IRS will return your application and the filing fee, and apply any initial payment included with your submission to your tax debt.
Continue to timely file your tax returns and pay taxes even after the IRS accepts your OIC.
Individuals or businesses in bankruptcy cannot apply for an OIC.
There is a $205 application fee. Low-income individuals are exempt from paying this.
The IRS has an online tool for individuals to check preliminary eligibility for filing an OIC with the IRS.

3. Avoid offer-in-compromise "mills"

Question: I owe tax debt and I'm thinking of submitting an offer in compromise. Can I prepare the OIC application myself or should I use a tax professional?

Joy Taylor: It is up to you whether you want to try preparing the OIC application yourself and submitting it to the IRS or use a tax professional. It depends on your knowledge of taxes and finances. Note that a reputable tax professional who is familiar with submitting OICs and dealing with IRS collection employees can help guide you through the process, which may make it less stressful for you. You can also ask for IRS assistance with the process.

Whatever you do, avoid offer-in-compromise "mills," the IRS's term for companies and promoters that hawk tax-debt relief plans with promises to settle your debts at steep discounts. I'm sure you've seen the commercials on TV or heard ads on the radio from firms promising to settle your tax debt for pennies on the dollar. These companies charge big up-front fees and churn out applications for offers in compromise that most of their clients cannot qualify for, the IRS says.

4. The IRS used my refund to offset taxes I owed

Question: I owe tax debt to the IRS from prior years. I filed my 2025 tax return this year, and the IRS took my refund and applied it against my prior-year taxes. Is this legal?

Joy Taylor: Yes. If you owe back income taxes, the IRS can grab your current-year refund and apply it against the amount you owe. The same can happen if you owe nontax debts to a federal agency, state income taxes, certain unemployment compensation debts owed to a state or past-due child support. The IRS can take your current-year federal income tax refund and apply it against any of these past-due obligations.

About Ask the Editor, Tax Edition

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.

Ask the Tax Editor, April 17: Questions on Tax Refunds and Penalties

joy.taylor@futurenet.com (Joy Taylor) — Fri, 17 Apr 2026 10:20:00 +0000

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 four questions on tax refunds, how to get the IRS to abate a penalty and related topics. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Erroneous bank account information for tax refund

Question: I helped my granddaughter prepare her tax return and claim a refund. I filed her 2025 Form 1040 using the same bank account information shown on her 2024 Form 1040. However, I was unaware that my granddaughter had changed banks. How do I notify the IRS of her correct bank account information?

Joy Taylor: The best answer to your question comes directly from the IRS. The IRS has a web page that answers the question "what should I do if I entered an incorrect routing or account number for direct deposit of my refund?"

For example, if a taxpayer omits a digit in the account or routing number of an account and the number doesn't pass the IRS's validation check, then the IRS says it will send you a notice asking for more information. Note that if you catch the bank account error early enough, before the return has been posted to the IRS's system, then you can call the IRS on their 1-800 line and ask the agency to stop the direct deposit. Here is more information directly from the IRS on what you can do:

"Generally, if the financial institution recovers the funds and returns them to the IRS, the IRS will send you a notice providing the next steps."

"If you have contacted the financial institution and 5 calendar days have passed with no deposit, you will need to file IRS Form 3911, Taxpayer Statement Regarding Refund, to initiate a trace. This allows the IRS to contact the bank on your behalf to attempt recovery of your refund. Banks are allowed up to 90 days from the date of the initial trace input to respond to our request for information, but it may take up to 120 days for resolution."

"If funds aren't available or the bank refuses to return the funds, the IRS cannot compel the bank to do so. The case may then become a civil matter between you and the financial institution and/or the owner of the account into which the funds were deposited."

2. Refunds by paper check delayed

Question: I have a bank account, but I don't like using it for electronic payments or receipts. I filed my 2025 Form 1040, which claimed a refund. I didn't include my bank account information on the return because I want to receive my refund as a paper check. I got a letter from the IRS asking for my bank account information. What can I do if I still want a paper check?

Joy Taylor: The IRS is in the process of phasing out paper refund checks in accordance with President Trump's March 2025 executive order. Individuals who request paper refund checks when filing their Form 1040 are seeing their refunds delayed. The IRS is mailing letters to filers whose 1040s claim a refund but omit bank account details for direct deposit. These notices ask the filers to supply their bank account information within 30 days or say why they can’t. I am guessing this is the letter that you received from the IRS.

If you don't respond to the IRS notice, you will eventually get your refund check in the mail, but it will take time. According to the IRS, it will issue a paper check to nonresponders six weeks after the date it sent the original notice.

3. How the IRS calculates the underpayment penalty

Question: I am filing my 2025 Form 1040, and I know I am going to owe an underpayment penalty. How does the IRS calculate this penalty?

Joy Taylor: Generally, taxpayers will escape the underpayment penalty if they prepay, through estimated tax payments or withholding, at least 90% of their current-year total tax bill or 100% of what they owed for the prior year (110% if prior-year adjusted gross income exceeded $150,000). Taxpayers who owe an underpayment penalty use IRS Form 2210 to calculate the amount owed. I am aware that calculating the underpayment penalty can be confusing.

The IRS calculates the underpayment penalty based on the tax shown on your original return or on a more recent return that you filed on or before the due date. The tax shown on the return is your total tax minus your total refundable credits. The IRS calculates the penalty based on: (1) the amount of the underpayment, (2) the period when the underpayment was due and underpaid, and (3) the unpublished quarterly interest rates for underpayments.

Note that the IRS also charges interest on the underpayment penalties.

4. First-time penalty abatement

Question: For the first time ever, I am going to have to file my Form 1040 late. I know I will end up owing taxes when I file the return. Will the IRS be lenient in assessing penalties since I have always been tax-compliant?

Joy Taylor: You may be in luck. The IRS has a little-known first-time penalty abatement policy. It will approve a waiver of the late-filing and late-payment penalties for filers who pay or arrange to pay the tax due and have been tax-compliant for the past three years. The penalties for late payroll-tax deposits and delinquent returns of S corporations or partnerships are also eligible for the waiver if the conditions are satisfied. But the estimated-tax penalty (also called the underpayment penalty) doesn't qualify for this penalty abatement program.

About Ask the Editor, Tax Edition

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.

Ask the Editor, April 3: Questions on Tax Return Filing Deadline

joy.taylor@futurenet.com (Joy Taylor) — Fri, 03 Apr 2026 13:15:00 +0000

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 the due date for filing your federal tax return and related queries. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Form 1040 due date

Question: What is the due date for filing the 2025 Form 1040?
Joy Taylor: April 15 is the general filing deadline for Form 1040. If you can't file by then, you can request a six-month filing extension to file by October 15.

Some taxpayers get more time without having to file an extension.

Members of the military on duty outside the United States have until June 15 to file returns (but they must still pay taxes they owe by April 15).
U.S. citizens who live and work outside the United States have until June 15 to file returns (but they must still pay taxes they owe by April 15).
Active-duty military serving in combat zones have at least 180 days after leaving the combat zone to file and pay taxes.
Taxpayers in certain federally declared disaster areas have more time to file and pay taxes as set by the IRS.
This year, employees of the Dept. of Homeland Security who are impacted by the partial government shutdown have until May 15 to file returns and pay their taxes.

2. Tax return filing extension

Question: I think I will owe taxes this year when I file my Form 1040. If I file for an extension, can I delay paying my taxes until October 15?

Joy Taylor: Unfortunately, no. If you file for a six-month extension, the extra time extends only to filing your return, not to paying any taxes you owe. If you opt for a filing extension, you will have to estimate your tax liability to the best of your knowledge and pay the taxes that you think you will owe when you submit the filing extension on or before April 15.

You can get a filing extension in multiple ways, such as the following:

Use Free File on the IRS's website.
Pay through the Electronic Federal Tax Payment System or Direct Pay service and mark "extension."
Mail or electronically file IRS Form 4868 with your payment.

3. Getting a refund

Question: I have delayed filing my 2025 Form 1040, even though I know I will be getting a refund this year. If I'm not ready to file by April 15, do I have to request a filing extension?

Joy Taylor: No. Filing a refund return late will not subject you to penalties. That's because taxpayers owe late-filing or late-payment penalties only if they owe tax, not if they get a refund from the IRS.

4. Can't pay my taxes

Question: I haven't yet filed my 2025 tax return. That's because I know I will owe taxes, and I don't have the money to pay the tax bill. Should I just delay filing my tax return until I can come up with the money to pay my taxes?

Joy Taylor: No, you don't want to do that because the IRS will hit you with penalties. If you cannot pay the tax you owe by April 15, timely file your tax return anyway and pay what you can. Look into applying for an IRS online payment plan or submitting an offer in compromise with the IRS. If you have financial hardship, you can contact the IRS to request a temporary collection delay until your financial condition improves.

The IRS has a simple payment plan for individuals who owe $50,000 or less in taxes, penalties and interest. To set up a plan, you can use your IRS online account if you have one or call the IRS's main number. There are also options for other short-term and long-term payment plans.

5. One-time penalty abatement

Question: For the first time ever, I will have to file my tax return late and pay my taxes late. Does the IRS have any penalty relief for first-time offenders?

Joy Taylor: Yes. The IRS has a first-time penalty abatement policy for taxpayers who file a late return or pay their taxes late. The IRS will approve a waiver of the late-filing and late-payment penalties for filers who pay or arrange to pay the tax due and have been tax-compliant for the past three years. The penalties for late payroll-tax deposits and delinquent returns of S corporations or partnerships are also eligible for the waiver if the conditions are satisfied. But the estimated-tax penalty doesn’t qualify for this penalty abatement program.

You have to request the waiver. Currently, the IRS doesn’t give it automatically. If you get a notice from the IRS with tax due and penalty charges, follow the instructions in the letter or call the phone number on the notice.

We understand that the IRS may have begun, or will soon, automatically provide first-time penalty abatement to taxpayers who qualify for relief.

About Ask the Editor, Tax Edition

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.

Does Your College Student Really Have to File Taxes This Year Even With Low Income?

Kelley R. Taylor — Wed, 01 Apr 2026 14:17:00 +0000

You're sitting at your kitchen table, ready to file your own taxes, and it hits you — your college student might have earned enough to file an income tax return.

That part-time job, summer internship, or freelance gig can quickly raise questions for the whole family, even when it seems like they didn't make much. That's because whether your college kid actually needs to file under IRS rules depends on how much they earned and what type of income was involved.

And then there's another looming question: if they do file their own return, can you still claim them as a dependent? Here's what you need to know.

Should a college student file a tax return?

Many parents naturally assume that a dependent college student only needs to file a tax return if their earnings exceed the standard deduction amount. (For 2025 returns (those being filed now in the 2026 tax season, the amount is $15,750 for single filers.)

While that's true in some cases, it really depends on the type of income they received during the year. Two IRS rules primarily apply here.

Rule 1: W‑2 earnings

Dependent students generally don’t need to file for W-2 income unless their total earned income exceeds their dependent standard deduction. That's the greater of $1,350 or earned income plus $450, not to exceed $15,750 for 2025.

A $3,000 W2 summer job is below that threshold, so filing usually isn’t required.

Rule 2: Unearned and 1099 income

Unearned income (interest, dividends, taxable scholarships) triggers a return if it exceeds $1,350, even if the student also has W-2 earnings.

Self-employment or freelance income reported on a 1099 must be filed if net earnings exceed $400, regardless of W‑2 earnings.

Income Type	2025 Filing Threshold	Example
Earned (W-2 wages, tips, jobs)	Earned income + $450 (max ~$15,750)	$3,000 from a summer job (this assumes no unearned income,. Usually no filing required.
Unearned (interest, dividends, taxable scholarships)	Over $1,350	$6,000 job + $1,500 dividends. Filing required.
Self-employment (1099 gigs like tutoring or DoorDash)	Net earnings over $400	$2,000 gigs minus $500 expenses = $1,500 net. Must file with Schedule C.

In many situations, filing results in a refund of withheld taxes rather than an amount owed. But these are simplified examples, and your tax situation may be different.

When 1099 gig income comes into play

Maybe your college student took on freelance opportunities (e.g., tutoring, graphic design, driving for DoorDash, or even getting Venmo payments for babysitting). That income is typically reported on a 1099-NEC form or, in some cases, a 1099-K.

If their net self-employment earnings exceed $400 — even if total income is modest — they’ll need to file a federal tax return and include Schedule C to report business expenses.
They’ll also calculate self-employment tax (15.3% for Social Security and Medicare), though they can deduct half of that amount on their 1040, which reduces their taxable income. However, the $400 filing threshold is based on net earnings before this deduction.

Note: Keep in mind that the IRS receives copies of 1099 forms directly from the payers. So skipping the filing could potentially lead to an automated notice later.

For example, if your child earned $2,000 from summer gigs and can deduct $500 for expenses like supplies or mileage, their net income would be $1,500, which exceeds the $400 filing threshold.

For college students with 1099 gig income, the outcome might involve a small amount owed after deductions.

For instance, $8,000 in gross freelance earnings minus $1,500 in valid expenses, like mileage or materials, could result in roughly $6,500 in net earnings and roughly $920 in self-employment tax.

Claiming your college student as a dependent even if they file

Let's turn to that second big question: your ability to claim your college student as a dependent.

The good news is that their filing a return, for a refund or to report 1099 income, doesn't automatically prevent you from claiming them as a dependent. That's as long as you provide more than half of their total support.

That said, many high-earning families encounter limitations on federal education credits due to the income phaseout ranges for joint filers.

American Opportunity Tax Credit: The AOTC is worth up to $2,500 but begins to phase out at adjusted gross income (AGI) of $160,000 to $180,000 (joint) and $80,000 to $90,000 (single filer).
Lifetime Learning Credit: The LLC is worth up to $2,000 but begins to phase out at the same AGI as for the AOTC.

If your household income puts you above these ranges — which isn't uncommon for some families who are able to afford college — these credits aren't available to you regardless.

Unfortunately, your student faces the same barrier.

Since you provide over half of their support, they have to check the box on their return indicating that "someone can claim me as a dependent," which disqualifies them from claiming the AOTC or LLC.

In effect, it's a situation where parents miss out on claiming those key education tax credits due to income levels, while your student misses out due to their dependent status.

Reasons to file taxes when you don't have to

Even if your student's earnings don't cross the tax filing thresholds, it might sometimes make sense for them to submit a return.

That's because for W-2 jobs, employers commonly withhold between 10% and 22% for federal taxes upfront.

On $3,000 in earnings, that could mean a $450 or more refund with a straightforward filing.

Though you might skip a filing if there was no withholding at all, and all scholarships received are nontaxable, meaning they covered only tuition and required books. (Room, board, or other expenses can bring a scholarship into taxable territory.)

One more incentive to file: the student loan interest deduction. If your college student paid interest on qualified federal or private loans (up to $2,500 deductible), they might qualify. But that's only if they're not claimed as your dependent and meet MAGI limits for the 2025 tax year.

If a parent is the legal borrower (e.g., a Parent PLUS Loan) and they pay the interest, they can claim the deduction as long as the student is their dependent and the parent's income is below the phaseout ($170,000–$200,000 for 2025).

Note: With this tax break, the deduction is only "lost" if the student is the borrower and the parent is claiming them as a dependent.

State taxes for college students?

So…you're already navigating federal rules, but state taxes add another layer.

As with federal tax rules, whether your college student needs to file a state return depends on their income, where they earned it, and the state's specific thresholds. (Those can sometimes be lower than the IRS limits.)

For example, a $3,000 summer job might not trigger a federal filing requirement but instead trigger a state filing. That's especially if taxes were withheld or your college student worked across state lines.

If your student attends school out of state, their campus paycheck might withhold for the school state, while summer earnings at home follow your home state's rules.

In states with no income tax, like Florida or Texas, this is more straightforward. However, places like California or New York might require filing if there's withholding or part-year work, even below federal levels.

And, check your student's pay stubs for state deductions, since filing a return can mean getting that money back as a state tax refund.

Worth noting: Filing a state return can, in some cases, unlock state education credits. But some require the student to file independently and not be claimed as your dependent. So, for some families, that creates the same double bind as federal education tax credits.

Filing taxes as a college student: Bottom line

So, overall, when deciding whether your child needs to file, W-2 earnings offer some flexibility. When dealing with unearned income, that generally requires filing at $1,350, while 1099 gigs generally trigger filing once net earnings exceed $400.

You can usually still claim your student if you provide most of their support.

Running the numbers through IRS Free File or tax software can help capture any refunds. And, of course, if you have questions about your family’s specific situation, consulting a trusted tax professional can be a smart step.

Ask the Editor, March 27: Questions on the Tax Filing Season

joy.taylor@futurenet.com (Joy Taylor) — Fri, 27 Mar 2026 10:30:00 +0000

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 four questions on the IRS and how the 2026 tax filing season is going so far. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Calling the IRS

Question: I have been trying to reach the IRS on its main toll-free number (800-829-1040), but I can't reach a live person. Is this the norm?

Joy Taylor: Yes. Unfortunately, taxpayers and tax professionals are having a difficult time trying to reach the IRS by telephone. The agency just doesn't have enough workers to handle the volume of calls. So there are a lot of disconnects, and the wait times are very long.

I was recently in a meeting with an individual who was on hold with the IRS's main 1-800 number for 91 minutes before she got disconnected. She never was able to speak with a live person.

If you have a question on whether you qualify for a specific tax break or other type of tax law query, you might try using the IRS's interactive tax assistant online tool. All you need to do is enter some basic facts, and it will give you an answer. There are nearly 60 topics, including whether you need to file a tax return, who qualifies as dependents, exceptions to the 10% excise tax on early IRA distributions, amended returns and much more.

2. Delayed paper refund checks

Question: I am a tax return preparer, and I have filed returns for clients without bank accounts. These clients are now receiving letters from the IRS asking them to provide bank account information so that the IRS can deposit their refunds directly into their bank accounts. Is this normal?

Joy Taylor: Unfortunately, yes. It's part of the IRS's process of phasing out paper refund checks in accordance with President Trump's March 2025 executive order.

Individuals who are requesting paper refund checks when filing their Form 1040 are seeing their refunds delayed. The IRS is mailing letters to filers whose 1040s claim a refund but omit bank account details for direct deposit. These notices ask the filers to supply their bank account account information within 30 days or say why they can’t. Nonresponders will eventually get refund checks by mail, but they’ll have to wait at least six weeks past the 30 days until they see their money.

As of mid-March, the IRS mailed more than 1 million of these notices to taxpayers.

3. Finding a tax return preparer

Question: I am looking for someone to help me prepare my Form 1040. Do you have any thoughts on where I should look to find a reputable tax preparer?

Joy Taylor: You probably want a credentialed tax return preparer, meaning someone vetted by the IRS, a state or a regulatory board. The most common are CPAs, lawyers and enrolled agents. One way to find a credentialed preparer near you is to use the IRS's online Directory of Federal Tax Return Preparers with Credentials and Select Qualifications. It lists the following tax professionals who have active preparer tax identification numbers:

CPAs
Lawyers
Enrolled Agents
People who completed the requirements for the IRS's voluntary annual filing-season program

4. IRS online individual accounts

Question: I have heard a lot lately about IRS online individual accounts. Can you explain what they are and how to create one?

Joy Taylor: Yes. Individuals can sign up for an online IRS account that could make their tax dealings with IRS easier and faster, many tax professionals say. Among the features of these accounts:

Pay estimated taxes
Access tax transcripts and other records
View digital notices from the IRS
Check the status of your tax refund or a filed amended return
Make tax remittances
Apply for a payment plan if you owe back taxes to the IRS

The IRS has a web page for setting up an online account for individuals. Note that before you create the account, you will first need to have an ID.me account so that the IRS can verify your identity. You will have to either submit a photo of your government ID and a selfie or participate in a live video chat with an ID.me representative. The process can be a bit burdensome, but it does add extra security.

About Ask the Editor, Tax Edition

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.

People Are Using AI to Find Bigger Tax Refunds: Here’s What the IRS Says

Chrissy Paradis — Tue, 17 Mar 2026 14:37:00 +0000

A viral online trend claims artificial intelligence can help taxpayers uncover a bigger tax refund — even after a return has already been filed.

Users on X (formerly Twitter) have been sharing examples of using AI chatbots to review their tax filings for deductions or credits that may have been overlooked.

In one widely circulated post, a user claimed their refund increased after asking Grok, the AI chatbot developed by Elon Musk’s AI company xAI, to double-check a previously filed return. The post quickly gained traction online, attracting tens of millions of views in roughly a day.

Grok can help with your taxes https://t.co/4sxuf6eIxdMarch 3, 2026

Early IRS data indicate higher refunds than last year. As of early March, more than 36.5 million refunds totaling about $136.6 billion had been issued. The average refund is about $3,676 — roughly 10.6% higher than at the same point last year.

So, the idea that a chatbot could help identify additional refund money may sound understandably appealing.

But while AI may help explain tax rules or highlight areas worth reviewing, the process for changing a filed tax return is more structured than a viral post might suggest. Here's what you need to know.

Can AI help review your tax return?

Artificial intelligence tools like ChatGPT, Perplexity, and Claude AI, to name just a few, have improved rapidly in recent years. In many cases, AI can help taxpayers better understand tax concepts or identify questions worth revisiting.

For example, AI might help:

Explain tax deductions or credits
Summarize IRS rules and eligibility requirements
Highlight areas of a federal income tax return that may deserve a second look
Walk taxpayers through how amended returns work

In that sense, AI can serve as a useful research tool during tax season.

However, identifying a possible issue on a return is very different from actually correcting a filed tax return.

How amended tax returns work

If a taxpayer discovers a legitimate mistake after filing, the IRS requires a formal process to correct the return.

Common reasons taxpayers file an amended return include:

A tax document, like a W-2 or 1099, arriving after the original return was filed or is corrected by the issuer
Claiming a tax deduction or credit that was missed on the original filing
Correcting filing status or dependent information
Fixing income, withholding, or math errors discovered after filing

In most cases, that means submitting Form 1040-X, the official amended return used to update previously filed tax information.

Taxpayers generally have three years from the date the original return was filed — or two years from the date the tax was paid, whichever is later — to amend a return and claim an additional refund. After that window closes, the IRS typically will not issue the extra refund even if an error is later discovered.

The amended return must clearly explain what changed and why. Taxpayers must also include documentation supporting the adjustment.

In other words, a chatbot might help flag a potential issue with your return, but the IRS still requires proper documentation. If a legitimate error is found, taxpayers must file a formal amended return before the IRS can issue any additional refund.

Worth Noting:

Amended returns are relatively uncommon. In most years, the IRS typically processes around 160 million individual tax returns, but it reportedly receives only a few million amended filings.

Many discrepancies are identified by the tax agency's automated matching systems. Those compare income reported on tax returns with information submitted by employers and financial institutions on reporting forms like W-2s and 1099s.

Limits of using AI for tax advice

While AI can be useful for explaining tax rules or identifying areas worth reviewing, there are important limitations and potential consequences to consider.

A few important limitations include:

Privacy: Uploading sensitive financial information into an AI chatbot may expose personal data depending on how the platform stores or processes user inputs.

Incomplete financial information: Most AI systems don't have access to a taxpayer’s full financial documentation, including W-2s, 1099s, receipts, and prior tax records. Without that full context, a chatbot may misinterpret eligibility rules or overlook important details.

Timeliness of tax updates: AI tools may not have access to the most recent tax law changes, IRS guidance, or regulatory updates. Tax rules can change, as they did in the 2025 Trump/GOP tax bill. In some instances, chatbots may rely on outdated or incomplete information when responding to questions about recently enacted tax provisions.

Potential inaccuracies and hallucinations: AI tools can sometimes misinterpret tax law or generate incorrect explanations, particularly when dealing with complex eligibility rules or uncommon deductions.

If a taxpayer files an amended return requesting a refund they aren't entitled to, the IRS can deny the refund and may require repayment of any additional amount issued, with interest. Some taxpayers could also face accuracy-related penalties.

How the IRS uses AI

Artificial intelligence isn't new to the federal tax system. The IRS already uses advanced analytics and machine learning to review large volumes of tax data and identify returns that may warrant closer review.

For example, the tax agency uses automated systems to flag potential discrepancies, compare reported income against third-party records like W-2s or 1099s, and help prioritize enforcement resources.

How to file an amended tax return

If you identify a legitimate mistake after filing, correcting it is relatively straightforward. To amend a return:

1. Complete Form 1040-X

2. Identify the changes being made

3. Attach any supporting documentation

4. Submit the amended return electronically or by mail

The IRS notes that amended returns can take up to 20 weeks to process.

You can track the status of an amended return using the IRS “Where’s My Amended Return?” tool.

Can AI increase your tax refund? Bottom line

AI might help taxpayers better understand tax rules or identify areas worth reviewing on a return. Even so, those tools are not a substitute for the IRS process required to change a filed return. If a legitimate error is discovered, you still need to document the change and file an amended return.

Also, most tax software already checks for many common credits and deductions during the filing process. So that so-called "AI reviews" might not uncover additional refunds in many straightforward situations.

If you're unsure whether you've claimed all of the tax benefits to which you are entitled, it's good to consult a qualified tax professional who can help ensure any corrections to your return are handled properly.

Paper Tax Filers Face Long Wait as IRS Digitization Effort Stalls

Roxanne Bland — Tue, 24 Feb 2026 14:21:00 +0000

If you plan to file a tax return on paper during the 2026 filing season and are expecting a refund, you’ll likely have to wait a while before you get your money.

It will take the IRS four to six weeks to process your return, assuming there are no mistakes in your tax filing.

If you plan to file electronically, as the overwhelming majority of individual taxpayers do, the IRS says your refund would be directly deposited into your bank account within 21 days.

Notably, the tax agency had set a goal to speed paper return processing in time for the current tax filing season, but it hasn’t materialized. What happened, and what does it mean for you if you want (or need) to file a paper return this year?

Why does paper return processing take so long?

According to the National Taxpayer Advocate’s Annual Report to Congress, despite 94% of taxpayers filing their tax returns electronically, "tens of millions" of taxpayers still file original paper returns.

During a filing season, besides Form 1040 (PDF), the IRS receives other types of paper tax forms, such as amended individual returns (Form 1040X) (PDF) and business payroll Forms 940 (PDF) and 941 (PDF), to name a few. Then there’s taxpayer correspondence.

All this paper has to be manually processed. After arriving at an IRS processing facility, employees:

Sort the returns by form type and category, then route them to the appropriate area.
Screen a return for completion, then send the return into the processing pipeline.
Manually key in the numbers from each line of the return into the IRS system.
Send the return to an automated system for validation and error checks.
If the return passes all checks, it’s approved by the IRS. If a refund is due, the money is deposited into the taxpayer’s bank account, or a check is sent to the taxpayer (the IRS is phasing out paper checks in 2026).

It takes the IRS four to six weeks to process an error-free Form 1040 paper tax return. If there are return errors, questions or if the agency determines a return needs special handling, e.g., if there’s a question of identity theft, the process can take months.

Speeding things up: The Zero Paper Initiative (ZPI)

To address some of those issues, the IRS launched its Zero Paper Initiative (ZPI) in April of last year. According to the tax agency, the project’s goal is to convert paper filings into streamlined digital formats for electronic processing.

Essentially, paper filings, including individual tax returns, would be converted to digital formats by automatically scanning them with machines and extracting the data, which would then be processed like any other electronically filed return.

The IRS has been experimenting, off and on, with electronic processing of paper tax forms for decades, and ZPI is the agency’s latest push. ZPI is especially salient now as it offers the added benefit of helping to offset the loss of thousands of employees in the agency’s submissions processing and account management functions.

As Kiplinger has reported, those IRS staffing cuts resulted in part from the Department of Government Efficiency’s (DOGE) efforts last year to reduce the federal workforce and a hiring freeze imposed on the IRS.

For ZPI, the IRS chose to outsource the scanning work and lined up four private contractors for the pilot. The contracts required a minimum processing threshold of 70,000 returns per vendor per week, which would be scaled up once the threshold was met.

The pilot ran into snags almost from the start, and it wasn’t until December 2025 that one vendor (eventually) reached the minimum processing threshold. It was obvious by then that ZPI wouldn’t be operational in time for the 2026 filing season.

What does this mean for your paper return?

It’s unfortunate for taxpayers who need to file paper returns that ZPI was unable to meet its goal of being up and running by the 2026 tax filing season. The core problem is that:

Form 1040 digitization is not fully implemented.
Schedules and attachments (Forms W-2, 1099, etc.) are largely handled manually.
Amended returns continue to require manual handling.
Nonstandard paper submissions (e.g., handwritten) continue to slow down paper flows.

It seems there are two primary reasons why so much of the paperwork still must be manually processed.

First, there’s the delay in the rollout of the vendor’s scanning equipment. The second is the fact that the IRS’s legacy computer systems can’t reliably process optical character recognition/barcode data. That the submission processing centers are inadequately staffed only magnifies the difficulty of getting returns processed promptly.

If you still plan or need to file a paper Form 1040 (PDF) this year, you’ll have to be patient above all. Since the forms are being handled manually, calling the IRS to inquire about your refund (if you’re due one) is unlikely to yield a satisfactory answer.
You might not reach an employee due to staffing shortages, or you might be connected to a chatbot.
For the same reason, continually checking the IRS’s Where’s My Refund online tool is also unlikely to give you the information you’re looking for. Manual processing takes time.

What you can do is keep an eye on the IRS’s processing status for tax forms page. You won’t find information about the status of your return, but it will tell you the batch of paper returns currently being processed.

By taking note of the date you mailed your return, you can get a very rough idea of where you are in the queue.

Standard Deduction 2026 Amounts Are Here

Kate Schubel — Thu, 09 Oct 2025 17:07:00 +0000

The IRS has released the 2026 standard deduction amounts you’ll use for your 2026 tax return — and they're higher than ever.

The federal tax agency adjusts these amounts for each filing status every year. Since these adjustments are based on inflation and given the key tax changes in the 2025 Trump/GOP tax overhaul, the standard deduction is higher for 2026 than in recent years.

Knowing the standard deduction for your status can help you determine whether you should plan to itemize or claim the standard deduction next year.

Here's more to know.

The standard deduction amount for 2026 (Returns normally filed in 2027)

Standard Deduction For 2026
Married, Filing Jointly and Surviving Spouses	$32,200	Increase of $700 from the prior tax year
Single and Married, Filing Separately	$16,100	Increase of $350 from the prior tax year
Heads of Household	$24,150	Increase of $525 from the prior tax year

2026 standard deduction age 65 and older

Taxpayers age 65 and older, as well as those who are blind, can claim an additional standard deduction. For 2026, that additional amount is $1,650 ($2,050 if unmarried and not a surviving spouse).

Those eligible can add the extra standard deduction to the regular amount for their filing status. A single taxpayer 65 or older (or who is blind) can claim a total standard deduction of $18,150 on their 2026 federal tax return.

Additionally, as Kiplinger has reported, the 2025 Trump tax bill introduces a new bonus standard deduction of $6,000 for those age 65 and older.

This can be added to the 2026 standard deduction for each eligible individual and can be claimed by those who itemize.

However, the "bonus" amount is temporary and phases out for incomes above certain thresholds.

Standard deduction if you're claimed as a dependent

Your standard deduction amount might differ if you can be claimed as a dependent on another taxpayer’s federal tax return.

The 2026 standard deduction for dependents is limited to either $1,350 or the sum of $450 and the dependent’s earned income, whichever is greater.

Note: The standard deduction for dependents cannot exceed the regular standard deduction for your filing status, even if your earned income is higher than the basic standard deduction amount.

What's the highest standard deduction amount possible?

Given the new senior bonus deduction, the existing extra standard deduction for those over age 65, and changes to the base standard deduction, the highest possible 2026 standard deduction amount is a whopping $47,500.

That amount is for married couples filing jointly who are both age 65 or older, qualify for the bonus deduction, and can claim the extra standard deduction for both spouses.

For more information on how to calculate your total standard deduction, see: The Extra Standard Deduction for People Age 65 and Older.

An IRS Enrolled Agent's Top 10 Reasons to Stop Doing Your Own Taxes

EBeach@exit59advisory.com (Evan T. Beach, CFP®, AWMA®) — Sat, 06 Sep 2025 09:30:00 +0000

I do not do my own taxes.

That will shock a lot of my readers and clients who know that I own a business that offers tax planning and tax preparation.

Also, I am an IRS enrolled agent, licensed to prepare taxes and represent taxpayers in front of the IRS.

I did my own taxes in high school, college and early in my career, when my taxes were simple and the stakes were lower. But today, I own a few businesses and would rather have someone else — someone who spends all day doing this — wrestle with all the complexities.

Kiplinger's Adviser Intel, formerly known as Building Wealth, is a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

I should also mention that the intent of this column is not to try to persuade you to stop doing your own taxes. We work with retirees who typically have about $2 million to $10 million invested. I would guess about 30% do their own taxes, and for the majority of them, that's totally fine.

Here are the situations on the other end of the spectrum, primarily folks in the demographic we help, where I think using a professional tax preparer makes sense.

1. You are selling your primary residence

On one hand, this can be a simple thing to report on Schedule D.

On the other hand, the stakes are high. We have a number of clients every year selling homes well into seven-figure territory that they bought for a fraction of that.

There are significant tax benefits to selling your primary residence vs an investment property, but you must ensure you qualify, calculate your adjusted basis, account for any periods when the home was rented, etc. Things can get complicated quickly.

2. You are considering selling an investment property or a vacation property

Investment properties are typically tax-advantaged during the period you own them, but a big bill often comes due at sale.

This calculation is much more complicated than the one for selling your primary residence. You must calculate the adjusted basis and factor in depreciation recapture.

Vacation homes tend to be simpler, but there may be planning opportunities here if you're willing to convert a vacation home into your primary residence for a period of time.

The accountant's job is to report the transaction. A financial planner may be able to help with the planning strategies.

We rely on tax planning and financial planning software to walk through the different scenarios and the estimated tax due, or saved, in each one. You can access a free version of the planning software.

3. You are starting a business or own one

Sole proprietors report income on Schedule C. It's a fairly straightforward form that you may be able to do on your own. However, a good CPA's job extends beyond just reporting and compliance to strategy.

Should you actually be a sole proprietor? Would an S corp or C corp be more advantageous? If so, things will get much more complicated, but it may be worth it.

Either way, it makes sense to have a pro weigh in.

4. You have significant K-1 income

K-1s report your share of income, losses, deductions and credits from a pass-through entity. That sounds like a different language to anyone who hasn't lived this life.

I have brought on many clients over the years who had straightforward tax situations but had to file extensions every year because their former adviser put them in a few private investments that issue K-1s.

These can be simple to plug into a tax-preparation software program like TurboTax, but the larger the proportion of your income these are, the more beneficial it will be to hire someone to correctly report the income.

This is especially true in years when one of these entities is sold or has a liquidity event.

5. You are planning a large gift

I'll define "large" as anything over the annual gift tax exclusion ($19,000 per recipient in 2025) because that's when you have to start reporting personal gifts on IRS Form 709.

However, the larger the gift, whether charitable or personal, the more important this is to get right.

I see people give kids money all the time for educational or medical expenses that would be better off going directly to the institution.

Similarly, I see charitable gifts done in an extremely inefficient manner.

To get this right often takes the coordination of a financial planner and a CPA.

6. You've received an inheritance

Inheriting capital assets (taxable investment accounts, real estate, etc.) is great because beneficiaries receive a step-up in basis.

However, this doesn't happen automatically. You are responsible for calculating date-of-death values and any subsequent gains. A CPA can help.

Inheriting an IRA or other retirement account has become much more complicated since the SECURE Act became law. You want to make sure you are taking RMDs when you are supposed to.

7. You have a taxable estate and/or there are irrevocable trusts

I don't think I've come across anyone with a taxable estate ($13.99 million per person in 2025) who is doing their own taxes, but this may be you.

In this situation, the investment income is likely high enough to warrant a second set of eyes. There are often gift and estate considerations that would also be reflected on your 1040.

Looking for expert tips to grow and preserve your wealth? Sign up for Adviser Intel (formerly known as Building Wealth), our free, twice-weekly newsletter.

When you have a taxable estate, you often incorporate irrevocable trusts in your estate plan to help mitigate estate taxes and protect assets for the next generations. Irrevocable trusts will have their own trust tax return.

8. You are a dual citizen or have foreign assets/income

This could take all sorts of different forms:

You could be living in the U.S. but have foreign investments and foreign income.
You could be a U.S. citizen living abroad who has to file income taxes in multiple countries.
You may have dual citizenship, live here, but still own a house back home.

The IRS has specific rules, credits and forms that must be filed in all of these situations. You'll want to engage someone who specializes in cross-border tax planning.

9. You earn income in multiple states

In the U.S., you must report income in the state in which it was earned. Our clients who retired from big law firms saw the complexity of their returns implode the year after retirement. The same is true of the partners at Big Four accounting firms.

This is not the only situation where this is the case. We often see multiple state returns for clients with rental properties in different states.

Sometimes this is simple. Other times, it makes sense to get help.

10. You are divorced or getting divorced and have joint assets

I recently had a retired accountant reach out to figure out how to report joint income from a private investment with her ex-spouse. I had to refer her to our internal tax team.

Divorce creates a lot of complexity. Taxes can be one of those things. If you're trying to figure out how to report mortgage interest, who gets the various deductions/credits, etc., you're going to want professional help. Sorry for yet another bill!

My bottom line on DIY taxes

In 2019, I decided to do my own return on TurboTax. I had so many clients using the software that I thought it would be helpful for my clients if I had used it myself.

Two things surprised me: First is how intuitive the software is. The second is how many terms it uses that I know only because I am in the business.

At the end of the exercise, even I wasn't fully confident in the output. I have to assume most people feel this way.

Final thought: I wanted to keep this article to 10 reasons, but if I were to add an 11th, I'd suggest that if you're just guessing a lot, it's time to ask for help.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Five Ways Trump’s 2025 Tax Bill Could Boost Your Tax Refund (or Shrink It)

Kate Schubel — Thu, 24 Jul 2025 13:57:00 +0000

You’ve heard about the recent “Trump megabill,” but how will it affect your tax refund? While some provisions could increase your tax liability next year, others might give you a serious payday.

For instance, the IRS reports that nine out of 10 taxpayers don’t itemize deductions. If that’s you, a permanently higher standard deduction could give you more money back.

However, new provisions, such as some involving the federal child tax credit, might squeeze your bottom line if you’re a noncitizen, potentially costing you more in taxes.

Several provisions in the new tax law are temporary. Those new tax benefits could go away as early as 2029.

Here are five tax policies in the so-called “One Big Beautiful Bill” (OBBB) that might increase or decrease your bottom line come tax season.

Standard Deduction

1. The standard deduction affects tax refunds

While the IRS already increased the standard deduction last fall due to inflation, the OBBB further raises it. For 2025, the standard deduction amounts are as follows:

Married couples filing jointly receive $31,500.
Single filers receive $15,750.
Heads of household receive $23,625.

If you’re someone who claims the standard deduction (rather than itemizing), you could see a bump in next year’s tax refund or a corresponding reduction in your tax liability.

For instance:

If you’re single, you’ll get $1,150 more in standard deduction dollars on your 2025 federal return compared with last year.
If you’re married and filing a joint return, you’ll see a $2,300 increase in your standard deduction compared with last year’s return.

Note: The above amounts reflect the IRS's change to the 2025 standard deduction plus the OBBB increases.

If you’re an older adult, you could receive even higher savings on next year’s federal return under the new tax law, because the OBBB added a new bonus standard deduction of $6,000 (in addition to the usual extra standard deduction for older adults).

However, the temporary bonus deduction is dependent on modified adjusted gross income (MAGI), so you could miss out on this benefit.

The limits are $150,000 for married, filing jointly couples and $75,000 for single filers. The phaseout is 6% for every dollar above the income limits.

Here's an example to show how this works.

A married, filing jointly couple who earns $150,000 and where both adults are 65 and older could receive a full $12,000 bonus deduction on their return.
Yet, if that same couple were making $160,000 ($10,000 above the limit), the deduction is reduced by $1,200 (6% x $10,000 multiplied by two, since both adults are above 65).
This would result in a deduction of $10,800 for the couple, rather than the full $12,000 benefit.

It’s also important to note that the OBBB permanently ended the personal and dependency exemption, which was $4,050 per qualifying taxpayer, spouse and child (indexed for inflation).

That change is likely to permanently decrease your tax refund, especially if your household has many people who would’ve qualified for the exemption.

SALT Deduction Cap

2. The ‘SALT refund’: How much is it?

If you itemize your federal return and live in a high-cost area, you could see a reduction in your tax liability. That’s because the state and local tax deduction (SALT) changed under the OBBB.

Most taxpayers claim the standard deduction these days. However, more Americans itemized their deductions before the 2017 Tax Cuts and Jobs Act (TCJA) capped SALT at just $10,000. Before that, the deduction was unlimited.

States with high property taxes and/or state income taxes, such as New York, New Jersey or California, might have suffered the most from the $10,000 cap on the SALT deduction, since they haven’t been able to fully deduct these types of taxes on their federal return since the TCJA was enacted.

But the OBBB temporarily increases the SALT cap to $40,000, meaning you could save more on federal 2025 taxes if you live in a high-cost area.

Let’s look at an oversimplified example to see how that might work:

A couple with $200,000 in income claims the standard deduction for tax year 2025 and has no other credits, deductions or alternative minimum tax (AMT) liability. Their taxable income is $168,500 ($200,000 gross income minus $31,500 standard deduction).
If that same couple were to pay $43,000 in state and local taxes that year, they might choose to itemize. This would reduce their taxable income to $160,000 ($200,000 gross income minus the $40,000 SALT cap).
The net effect is an $8,500 reduction in taxable income on their federal return.

It’s worth mentioning that the SALT cap increase is temporary and will revert to $10,000 in 2030.

Taxpayers with $500,000 or more will have a 30% phaseout for every dollar their income exceeds the limit. The SALT cap reverts completely to $10,000 for incomes of $600,000 and higher.

Are you a high-income taxpayer? If so, here’s a simple example of how the new SALT cap deduction might impact you:

A single filer makes $505,000 per year in MAGI and wishes to itemize to take the SALT deduction.
Yet, $505,000 is $5,000 above the income limit, meaning the deduction is reduced by $1,500 ($5,000 times 30%).
The total SALT deduction for this filer would be $38,500.

Child Tax Credit

3. How much money will I get back for a child tax credit?

The OBBB also changed the federal child tax credit (CTC) for qualifying children 17 and under by increasing the maximum amount from $2,000 to $2,200 (adjusted annually starting in 2026).

If you’ve got qualifying kids, the extra $200 you’re getting from the child tax credit could raise your next tax refund (or at the very least, lower your tax bill).

For example, a couple with $350,000 and two children under 17 would see $4,400 in child tax credit savings.
That’s $400 higher than last year’s federal return.
Families with four children could also see an increase in child tax credit breaks from $8,000 to $8,800.

However, the CTC is reduced by $50 for every $1,000 (or fraction thereof) that your MAGI is above specific income thresholds.

These income caps remain at $200,000 or more (for single filers) and $400,000 or more (married filing jointly couples). If you make above those amounts, you’ll likely see less benefit from the new child tax credit in your tax refund:

A single filer with one child age 17 and under and an income of $200,000 would see $2,200 in child tax credit savings.
But if that same filer made $205,000 instead, their maximum child tax credit would be reduced by $250 ($5,000 is five times above the income limit, so $50 times 5 is $250).
The total tax credit would then be $1,950 ($2,200 minus $250).
Before the OBBB, the single filer with $205,000 would’ve seen a total tax credit of $1,750 ($2,000 minus $250).
The net gain under the new law is $200.

While some 2025 tax refunds could be bigger due to the so-called "Trump megabill," others might be smaller or see no change at all. (Image credit: Getty Images)

But the new child tax credit doesn’t benefit everyone. Households with noncitizen parents might see an increase in their 2025 tax bill. That’s because the child tax credit now requires parents to have a Social Security Number (SSN).

As Kiplinger reported, this means that nearly 2.7 million children in the U.S. who previously qualified will no longer be eligible for the credit due to their parents’ immigration status, leading to a potential $5.94 million loss in tax savings ($2,200 multiplied by 2.7 million).

Tax on Tips and Overtime

4. Will I get a bigger tax refund if I work overtime or for tips?

Tax on tips also changed under the new Trump tax bill, though perhaps in an unexpected way. Prior law dictated that cash tips (including credit and debit card charges) were taxed like ordinary income.

Now, under the OBBB, there’s a temporary deduction for tips up to $25,000, subject to an income phase-out (more on that below).

Are you a service worker? Here’s a simple example of what the no tax on tips law might look like for you:

A server at a popular restaurant earns $20,000 in annual tip income.
On last year’s tax return, the server claimed the standard deduction and had no other income or tax breaks. The total taxable income on their federal return was $5,400 ($20,000 minus the $14,600 standard deduction for single filers).
In 2025, that same server could have zero federal income tax if they claim the tip deduction ($20,000 minus $15,750 standard deduction, minus the $25,000 maximum tip deduction).

It’s important to note that the IRS hasn’t yet squared away the definition of what a “tipped employee” is, yet. It’s unclear which workers will be affected.

Once more, workers who don’t ordinarily receive tips, such as retail sales clerks, cooks or childcare workers, will most likely not gain a benefit from this law. Meanwhile, tipped workers earning more than $150,000 (or $300,000 for joint filers) will see a phaseout of the tip tax deduction.

For more information, check out Kiplinger’s report New 'No Tax on Tips' Bill Approved for 2025: What to Know Now.

Similarly, overtime rules changed with the new tax bill. The OBBB created a no tax on overtime deduction worth up to $12,500 for tax years 2025 through 2028. The deduction has the same income phaseouts as “no tax on tips” at $150,000 for single filers and $300,000 for married, filing jointly couples.

Are you an overtime worker? The “no tax on overtime” could increase your tax refund or lower your federal tax liability, regardless of whether you itemize or claim the standard deduction.

Note: Non-cash tips (like artwork) are still fully taxable as ordinary income and not eligible for a tip income deduction. Payroll taxes and state/local income taxes also still apply.

Business tax provisions

5. Key small business taxes: QBI, bonus depreciation and more

Several key tax provisions affecting small businesses are included in the OBBB. Here are a few:

Permanently extending the “Qualified Business Income” (QBI) tax rate. QBI is the income your business earns after deducting qualified expenses (such as rent, utilities, business loan interest, etc.). The OBBB made the 20% deduction rate permanent.
Making permanent “bonus depreciation.” Qualified property that you buy and place into service after January 19, 2025, is now eligible for immediate 100% expensing. Ordinarily, you’d have to wait to expense the asset above five, 10, 15, even 20 years.
Providing more opportunities to use “Section 179” expensing. Similar to bonus depreciation, Section 179 allows businesses to deduct 100% of qualified equipment and software. But there’s a deduction limit, which makes it more beneficial for small businesses vs large corporations. OBBB increased the maximum deduction amount and phase-out threshold for expensing.

All three of these provisions could help small businesses save on their taxes in 2025.

For instance, QBI only applies to businesses set up as a “pass-through entity,” like plumbers, accounting firms, and graphic designers (certain limits might apply). Maintaining the rate allows business owners to deduct more income (compared with before the TCJA), and lower income taxes paid.

Another helpful provision in the OBBB affects Section 179 expensing.

This special type of expense is generally for small to midsize businesses due to its dollar limits.
The OBBB increased these limits, allowing businesses to now deduct up to $2.5 million in property (up from $1.25 million).
Likewise, the phase out is $4 million (up from $3.13 million).

Are you a small business owner? Let’s look at a very simplified example to understand how Section 179 and bonus depreciation can work together to maximize your tax savings:

Pineapple Plane Company purchased one new plane for $2 million in 2025. Under Section 179, the company deducts the entire cost this year, resulting in a $2 million reduction in taxable income.
Now, let’s say Pineapple instead purchased a megaplane for $3 million. Under Section 179, the company can only deduct $2.5 million per year. That leaves $500,000 undeducted.
But bonus depreciation allows Pineapple to deduct the remaining $500,000 if the company started using the plane after January 19, 2025.

Note: The Section 179 deduction cannot exceed the business’s taxable income. The example also assumes the planes have a depreciable life of 20 years or less.

What to watch for next tax season

While we covered five major ways your tax refund might be affected this year, other provisions in the OBBB and IRS changes could affect your taxes. Here are a few more to watch:

New temporary car loan interest deduction, allowing you to deduct up to $10,000 in interest paid on new vehicles, subject to income phase-outs.
New Trump Accounts, which might help your child save for future educational, homeownership, and entrepreneurial costs.
After September 30, the IRS will stop sending paper checks. If you're someone who likes to receive your tax refund via the mail, you'll need to opt for a digital payment instead next filing season.

As always, it’s important to keep an eye on the ever-changing tax landscape, both on Capitol Hill and in your state and local governments. Consult with a tax professional on your specific financial situation.

Several provisions listed above are expected to receive additional clarification from the IRS by October 2025. Stay tuned for more updates.

More OBBB Changes

Ask the Editor, June 27: Tax Questions on Disaster Losses, IRAs

joy.taylor@futurenet.com (Joy Taylor) — Fri, 27 Jun 2025 15:02:00 +0000

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 paper checks, hurricane deductions, IRAs and timeshare losses (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. The IRS and Paper Checks

Question: I heard that the IRS will no longer accept paper checks from taxpayers after September 30. Is that accurate?

Joy Taylor: Yes and no. President Trump signed an executive order earlier this year mandating that the Treasury Department get rid of paper checks for recipients of benefits, tax refunds and other payments, effective October 1. He is ordering all federal departments and agencies to use electronic funds transfers, including direct deposit, prepaid card accounts and other digital payment options. That means that after September 30, the IRS should no longer be sending out tax refunds in the form of paper checks. There will be limited exceptions.

That executive order also discusses prohibiting people from mailing paper checks to the government, such as when a taxpayer sends in a tax payment via paper check to the IRS. However, it doesn’t appear that the September 30 deadline applies to government receipts, as it does to government disbursements. Instead, the White House executive order doesn’t set a date, but uses the phrase “as soon as practicable” for this purpose.

2. Traditional IRA and Roth IRAs

Question: Can an individual have a traditional IRA and a Roth IRA at the same time, and can they make contributions to both accounts in the same year?

Joy Taylor: Yes, an individual may have a traditional IRA and a Roth IRA at the same time, and the owner can make contributions to both in the same year. However, the aggregate amount of contributions to those IRAs (traditional and Roth) in a year is limited. For 2025, the IRA contribution limit is $7,000 ($8,000 if you are 50 or older). For example, if you are 55 and contribute $3,000 to a traditional IRA in 2025, you can only contribute up to $5,000 to a Roth IRA in 2025.

Note that you must also have compensation, such as wages or self-employment earnings. And there is an income ceiling on making contributions to a Roth IRA. For 2025, the ability to make contributions to a Roth IRA phases out at adjusted gross incomes of $236,000 to $246,000 for joint filers and $150,000 to $165,000 for single filers. This income ceiling doesn't apply to contributions to a traditional IRA.

3. Prior-Year Hurricane Losses

Question: I live in Florida, and in 2022, my home suffered serious damage from Hurricane Ian. I’ve heard the government has recently changed the deduction for disaster losses. But I already filed my 2022 tax return in early 2023. How can I take advantage of this change?

Joy Taylor: Personal casualty losses can be deducted to the extent the losses are attributable to federally declared disasters, such as hurricanes, earthquakes, wildfires, blizzards or flooding, that affect a wide area. Individuals can deduct personal losses on their Form 1040 to the extent not reimbursed by insurance. Your loss is equal to the smaller of the damaged property’s adjusted basis or decline in value, less any insurance proceeds you received or expect to receive.

Legislation passed by Congress last year has tax easings similar to those given to victims of federally declared disasters in 2018-2020. The relief generally applies to disasters that took place in 2021-2024. This would include damage to your home from Hurricane Ian. The law lets individuals deduct personal disaster losses even if they don’t itemize on Schedule A. You can write off uninsured personal losses in excess of a $500 threshold without regard to the "10% of adjusted gross income" offset that generally applies to disaster loss deductions. This net loss is treated as an additional standard deduction for nonitemizers.

Since you have already filed your 2022 Form 1040, you can amend it to take the more generous disaster loss deduction by filing Form 1040-X. Note that you generally have three years from the date you filed your original return to file Form 1040-X to amend your return. If you filed your original return before the April 15 due date, then you have three years from the original April 15 due date to file an amended return. For example, if you filed your 2022 return on March 24, 2023, you have until April 15, 2026, to amend it. When amending your return, you would use Form 4684 to calculate the loss. Follow the instructions on Form 4684 for reporting a “qualified disaster loss.”

4. Selling a Timeshare

Question: I own a timeshare, and I am thinking of selling it. Will I have to pay federal income tax on the sale?

Joy Taylor: Most people who sell a timeshare sell it at a loss. Losses from sales of timeshares held for personal use are nondeductible. If you’re one of the lucky few that sells a timeshare at a profit, you will have capital gain equal to the sales price less your tax basis in the timeshare. Different tax rules apply to sales of timeshares held for rental or mixed personal/rental use.

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, energy upgrades made to a home 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.

Ask the Editor, June 6: Questions on Hobby Losses, Medicare

joy.taylor@futurenet.com (Joy Taylor) — Fri, 06 Jun 2025 18:36:00 +0000

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

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.

Ask the Editor, May 30: Questions on the One Big Beautiful Bill

joy.taylor@futurenet.com (Joy Taylor) — Fri, 30 May 2025 21:16:00 +0000

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 related to the House-passed “One Big Beautiful Bill.” (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Legislative forecast

Question: Now that the House passed the One Big Beautiful Bill, when will the Senate pass it?

Joy Taylor: In the wee hours of May 22, the House passed its One Big Beautiful Bill on a 215-214 vote. The proposal would extend many of the expiring tax provisions in the 2017 Tax Cuts and Jobs Act and enhance them in several instances, provide brand new tax breaks, repeal clean-energy credits for individuals and businesses, and make Medicaid cuts to offset some of the bill’s cost.

It’s now time for the Senate’s turn. And the process to passage in the upper chamber won’t be easy. Republicans senators are already saying they will make changes to the package. For example, some don’t like the extent of the Medicaid cost reductions, others want certain business tax changes to be made permanent, some oppose big cuts to clean-energy credits, and the list goes on. There is also the impact on the federal deficit. The bill is estimated to hike the deficit by $2.8 trillion over 10 years. After the Senate makes its changes, the House would then have to approve them.

Republicans are pushing to get a finished bill to President Trump by July 4, but this compressed time frame seems unlikely. A more likely scenario is for a final Senate vote by late July.

2. Impact on Muni bonds

Question: Does the House-passed tax bill make interest on state and local bonds (Munis) taxable?

Joy Taylor: No. The tax break is safe for now. Interest earned on Munis is tax-free for federal income tax purposes. Some Republicans floated the idea of repealing the interest exemption as an option for raising revenues to help offset the cost of other proposed tax relief in the bill. But a lobbying push by affected groups and industries helped to save the break. Also, states and local governments rely on Munis to fund all sorts of infrastructure projects.

Question: I receive Social Security benefits, and I have to pay federal income tax on a portion of the benefits. Does the House-passed bill make Social Security benefits tax-free?

Joy Taylor: Many Social Security recipients pay federal income tax on up to 85% of their benefits, depending on their provisional income. President Trump vowed to end the tax. But the process that Republican lawmakers are using to pass their bill by circumventing the 60-vote filibuster rule in the Senate won’t allow this income tax change to Social Security benefits. So the answer to your specific question is that your Social Security benefits will be taxed as usual for federal income tax purposes.

However, congressional Republicans found an alternative means of providing tax relief for seniors. The House-passed bill would give a $4,000 bonus deduction to filers who are age 65 and up. Individuals 65 and older who take the standard deduction would add the extra $4,000 to their standard deduction amounts. Married couples with both spouses who are 65 or older would be able to deduct $8,000. Filers who are 65 or older and itemize on Schedule A would also get the deduction. The proposal would first take effect on 2025 returns filed next year and end after 2028.

But not every senior would qualify for this bonus deduction. There is an income limit. The deduction would begin to phase out for taxpayers with modified adjusted gross incomes over $150,000 on joint returns and $75,000 on single and head-of-household returns.

4. Who can claim the $4,000 bonus deduction?

Question: My wife are I are both retired federal employees. We receive a Civil Service Retirement System (CSRS) pension, but we do not receive Social Security benefits. Will we be able to claim the proposed $4,000 bonus deduction that is included in the House-passed bill even though we do not receive Social Security benefits?

Joy Taylor: Yes, if the One Big Beautiful Bill is eventually enacted, and you are age 65 or older, you would be able to claim the bonus $4,000 deduction (per spouse), subject to the income phaseouts discussed above. You do not have to receive Social Security benefits to take the deduction.

About Ask the Editor, Tax Edition

We have already received many questions from readers on topics related to tax basis in a home, IRA contributions and distributions, 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.

Ask the Editor, May 23: Reader Questions on Gifts, Estate Tax

joy.taylor@futurenet.com (Joy Taylor) — Fri, 23 May 2025 14:03:00 +0000

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 gifts, the estate tax and stepped-up basis upon death. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. The annual exclusion amount for gifts

Question: What is the annual exclusion amount for gifts made in 2025?

Joy Taylor: The annual gift tax exclusion is $19,000 per donee this year. This means in 2025, you can give up to $19,000 per person without paying federal gift tax, tapping your lifetime estate and gift tax exemption, or filing a federal gift tax return. Here’s an example. Say you have two sons and three grandchildren, and you want to gift the maximum amount to each of your relatives, including your son’s spouses, without having to file a gift tax return in 2025. The most you can give is $19,000 to each relative. That’s $133,000 in excludable gifts.

2. Gifts over the annual exclusion amount

Question: I am planning to gift my son $100,000 this year. Do I have to pay federal gift tax on this?

Joy Taylor: It is unlikely that you will have to pay any federal gift tax on this gift to your son. Although the $100,000 gift would exceed the $19,000-per-donee annual gift tax exclusion amount, you will not owe any federal gift tax, provided that your total lifetime gifts don’t exceed the lifetime estate and gift tax exemption, which for 2025 deaths is $13,990,000. You will have to file a federal gift tax return on Form 709 to report the gift to the IRS because the gift is over the $19,000 annual exclusion amount.

3. Stepped-up basis

Question: My spouse and I jointly own our home, which has substantially appreciated. How do the stepped-up basis rules work if one of us dies?

Joy Taylor: Under the tax law, a decedent’s unrealized gains aren’t hit with federal income tax at death, and heirs step up their basis in the assets they receive, equal to fair market value on death. With regards to your house, if you don’t live in a community property state, half of the home will get a step-up in basis upon the death of the first-to-die spouse. For example, let’s say you and your spouse bought a home for $100,000 many years ago, and it is worth $750,000 on the date the first of you dies. The surviving spouse’s basis in the home would be $425,000 (his or her half of the original $100,000 basis plus half of the deceased spouse’s $750,000 date-of-death value). The rules are more generous if the house is held as community property. The entire basis is stepped up to fair market value when the first spouse dies.

4. Estate taxes and the house bill

Question: Does the one big, beautiful House bill extend the larger lifetime estate tax exemption?

Joy Taylor: Currently, the federal lifetime estate and gift tax exemption for 2025 deaths is $13,990,000, and the highest estate tax rate is 40%. After 2025, the $13,900,000 figure is slated to drop to about $7 million or so unless Congress passes legislation to extend the higher amount. That is because the higher lifetime estate tax exemption is one of the provisions in the 2017 Tax Cuts and Jobs Act that was made temporary.

The one big, beautiful bill passed by the House would not only make the larger lifetime estate and gift tax exemption permanent but would also increase it. If the bill is enacted, the lifetime estate and gift tax exemption amount for decedents dying in 2026 would be $15 million. And this figure would increase for inflation each year.

About Ask the Editor, Tax Edition

We have already received many questions from readers on topics related to inherited IRAs, hobby losses, IRS payment letters 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.

Ask the Editor, May 16 — Reader Questions on Capital Gains

joy.taylor@futurenet.com (Joy Taylor) — Fri, 16 May 2025 20:23:00 +0000

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 capital gains. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1. Capital gains tax rates

Reader Question: What are the federal capital gains tax rates for 2025? And what are the income cut-off points for the various rates?

Joy Taylor:
Long-term capital gains, which are profits from the sale or exchange of capital assets held for more than a year, get favorable federal tax rates. They are taxed at 0%, 15% or 20%. Prior to 2018, the determination of which rate you'd qualify for was based on your tax bracket. Through the end of 2025, the rate is based on set income thresholds, which are adjusted annually for inflation. Note that these same favorable rates also apply to qualified dividends.
For 2025, the income thresholds are:

The 0% rate applies at taxable incomes up to $48,350 for single filers, $64,750 for head-of-household filers and $96,700 for joint filers.
The 20% rate starts at $533,401 for single filers, $556,701 for head-of-household filers and $600,051 for joint filers.
The 15% rate is for filers with taxable incomes between the 0% and 20% break points.

Though most long-term capital gains are taxed at the 0%, 15% or 20% rates discussed above, there are a couple of exceptions. Long-term capital gains from the sale of art, antiques, coins, historical documents and other collectibles have a 28% top rate. Depreciation recapture from real estate sales is taxed at as much as 25%. Short-term capital gains, which are profits from the sale or exchange of capital assets held for 12 months or less, are taxed at ordinary income rates.

2. The 0% tax rate

Reader Question: Can you explain how to qualify for the 0% federal tax rate on long-term capital gains and qualified dividends?

Joy Taylor:
For 2025, if taxable income other than long-term gains and dividends doesn't exceed $48,350 on single-filed returns, $64,750 on head-of-household returns or $96,700 on jointly filed returns, then qualified dividends and profits on sales of assets owned more than a year are taxed at a 0% federal income tax rate until they push you over the threshold amounts.

These figures are a bit lower for 2024 tax returns, since they are adjusted annually for inflation: $47,025 for single filers, $63,000 for head-of-households, and $94,050 for joint filers. Note that although these 0%-rate gains might not be taxed at the federal level, they do increase adjusted gross income. Also, some states tax capital gains as ordinary income.

Here are three scenarios to illustrate the 0%-rate rule. In all three scenarios, you have a married couple with $18,000 of qualified dividends and long-term capital gains in 2025, which are included in taxable income.
In the first scenario, the couple has $77,000 of taxable income.
The full $18,000 of gains and dividends is taxed at the 0% rate.
In the second scenario, the couple has taxable income of $104,000.
$10,700 of the gains and dividends ($96,700 - ($104,000 - $18,000)) gets the favorable 0% tax rate, and $7,300 is taxed at the 15% rate.
In the third scenario, the couple has $120,000 of taxable income.
The 0% rate doesn't apply, and the full $18,000 of gains and dividends is taxed at 15%.

3. Capital gains indexing

Reader Question: Is there any effort in Congress to provide some sort of inflation indexing for capital gains?

Joy Taylor
As you might be aware, the White House and congressional Republicans are negotiating a tax package that would extend the expiring provisions in the 2017 Tax Cuts and Jobs Act and make some other tax changes.

There has been no talk about changing the taxation of capital gains, with one exception. Free-market groups and some Republican lawmakers would like to see capital gains indexed to inflation each year. Essentially, if this concept were enacted, taxpayers could increase their tax basis in capital assets by the rate of inflation between the purchase date and the time of sale. For example, say you bought stock in early 2010 for $10,000 and sold it in January 2024 for $35,000. Absent indexing, you would have a $25,000 long-term capital gain. With indexing, using the Chained CPI inflation measure, your basis in the stock would jump to $13,740, making your gain $21,260, thus lowering the amount of capital gain tax you would pay.

Senator Ted Cruz (R-TX), a long-time proponent of capital gains indexing, has introduced a bill that would allow inflation indexing for purposes of calculating a capital gain or loss. His proposal would use the gross domestic product deflator as the index for measuring inflation.

It's hard to know right now whether capital gains indexing would make it into the tax package. There are lots of complexities associated with it, including choosing the appropriate index; tax basis doesn’t remain static over time; and indexing would add to the federal debt. And we don't know where President Trump stands on the idea. During his first term as president, he was all over the board. He touted the idea several times, but then also nixed it.

About Ask the Editor, Tax Edition

We have already received many questions from readers on topics related to gifts, tax credits for installing solar panels in a home 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.

Ask the Editor, May 9 — Reader Questions on QCDs

joy.taylor@futurenet.com (Joy Taylor) — Fri, 09 May 2025 20:56:00 +0000

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 qualified charitable distributions. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

1: QCDs and 401(k)

Reader Question: Can I make a qualified charitable distribution (QCD) from my 401(k) this year?

Joy Taylor, Editor, The Kiplinger Tax Letter
No, QCDs cannot be done from a 401(k) or other workplace retirement plan. A QCD can only be done from an IRA.
People age 70½ and older can transfer up to $108,000 in 2025 from a traditional IRA directly to charity. QCDs can count as all or part of your required minimum distribution (RMD), but they are not taxable, and they are not added to your adjusted gross income. The QCD strategy is a good way to get tax savings from charitable gifts for taxpayers not itemizing because of higher standard deductions.

2: How to do a QCD

Reader Question: Someone told me that the only way I can do a QCD is for my IRA custodian to directly transfer the money from the IRA account to the charity. Is this true?

Joy Taylor, Editor, The Kiplinger Tax Letter
It depends on the IRA custodian. It is true that only transfers from your IRA directly to charity are considered QCDs, but different IRA custodians have their own procedures for complying with this. Some will require that the check go directly from the custodian to the charity. Others will, at the account owner’s request, have the check written from the IRA account and send the check to the IRA owner to forward to the charity. Vanguard, for example, allows this second approach. Both procedures work for QCDs. What is not acceptable is for the custodian to write the check to the IRA owner, who then deposits the money and writes a check from his or her own account to the charity.

3: Charitable Gift Annuity

Reader Question: I’ve been receiving requests from my alma mater about doing a QCD through a charitable gift annuity. I thought QCDs could only go to a section 501(c)(3) charity. Have the rules changed?

Joy Taylor, Editor, The Kiplinger Tax Letter
As a general rule, in a QCD, the money must generally go to a section 501(c)(3) organization. The 2022 SECURE 2.0 legislation provided an easing to this. It allows IRA owners to do a one-time (not annual) QCD of up to $55,000 for 2025 through a charitable gift annuity, charitable remainder unitrust or a charitable remainder annuity trust. Many private colleges with charitable gift annuity programs are touting the QCD option. If you already did this in 2023 or 2024, you can’t do it again.

4: Deductible IRA Contributions

Reader Question: I am working and made a tax-deductible contribution of $3,500 to my traditional IRA in 2024. I also did a QCD that year. My accountant told me that I don’t get the full advantage of the QCD because I also contributed to my IRA. Is that true?

Joy Taylor, Editor, The Kiplinger Tax Letter
Yes. There’s a special rule if you do a QCD and you make tax-deductible contributions to a traditional IRA after 70½. Essentially, these post-70½ contributions reduce your allowable tax-free QCD amount until used up. Post-70½ deductible contributions to a SEP or SIMPLE IRA aren’t affected.
Let’s take a simple example:
A 75-year-old working man is planning to do a QCD for the first time in 2025. For 2021, 2022, 2023 and 2024, he made tax-deductible contributions to his traditional IRA totaling $23,000. In 2025, the man does a QCD and transfers $20,000 from his IRA directly to charity. He would owe income tax on the full $20,000 because it is less than the $23,000 of post-70½ tax-deductible IRA contributions. Let’s say that in 2026, he then transfers another $15,000 to charity directly from his IRA. $12,000 will be a nontaxable QCD, and $3,000 will be treated as a normal distribution.

5: What's the maximum QCD for spouses?

Reader Question: My wife and I want to max out donations from our IRAs to charity this year. What is the maximum QCD we can make for 2025?

Joy Taylor, Editor, The Kiplinger Tax Letter
$108,000 per IRA owner. Since you are married, you and your spouse can each potentially give up to $108,000 in QCDs from your separate IRAs, making the maximum QCD $216,000, provided each of you has substantial amounts in your IRAs. But let’s say you have a $70,000 balance in your IRA, and your wife has an IRA worth $1.2 million. In this situation, your QCD cap is limited to $70,000, and your wife’s QCD cap is limited to $108,000. Your wife won’t be able to make a QCD of $146,000 to make up for the deficit.

About Ask the Editor, Taxes

We have already received many questions from readers on topics related to charitable contributions, gifts 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.

Turn Your Tax Return Into an Engine for Long-Term Growth

Jennifer T. Stephenson, CPA — Wed, 07 May 2025 09:35:00 +0000

Now that most of us have filed our tax returns, it can be very tempting to move on. But that return is more than a historical document — it’s a detailed snapshot of your financial life, and when reviewed thoughtfully, it can act as a powerful planning tool.

However, the majority of Americans miss this opportunity. According to a study by the American Institute of CPAs, only 27% of individuals use their tax return to inform or adjust their financial plan each year.

This article is written by CPA Jennifer T. Stephenson, who is also the chief planning officer at SignatureFD, where she is involved in all levels of servicing clients’ financial planning needs.

That means nearly three-quarters of taxpayers overlook a uniquely comprehensive source of insight that could help optimize their long-term financial strategy.

With the right lens, your 2024 tax return can reveal where your investment strategy may be generating unnecessary tax exposure, opportunities to better manage cash flow and the potential to fine-tune your charitable and savings strategies.

Here are a few key areas to consider:

1. Assess investment tax efficiency

Your tax return can offer a wealth of insight into how your investments are impacting your overall tax liability.

Capital gains and losses. If you sold investments during the year, your return will reflect realized gains or losses. This information is essential when considering strategies such as tax-loss harvesting, which can help offset future gains, or when thinking about rebalancing out of highly concentrated positions.
Interest and dividend income. Form 1040 and Schedule B (Interest and Ordinary Dividends) detail the income generated by your accounts. If your taxable accounts are generating high levels of non-qualified dividends or interest, it may be worthwhile to revisit how your assets are allocated across taxable and tax-advantaged accounts.
Maximize tax-advantaged account contributions. If you’re not yet maxing out your contributions to a 401(k), health savings account (HSA) or individual retirement account (IRA) on an annual basis, your return can help identify room for increased savings. In some cases, a Roth IRA or Roth 401(k) may be appropriate, particularly for those in lower tax brackets or earlier in their careers.
Review asset location strategy. Your return can also help clarify whether the right assets are held in the right types of accounts. Income-generating assets, for instance, are often best placed in tax-deferred or tax-exempt vehicles, while tax-efficient investments can typically be held in taxable accounts to help minimize your overall tax burden.

2. Optimize giving and medical expense strategies

Your deductions also serve as an opportunity to be more strategic with charitable giving and health care planning.

Charitable contribution planning. If you typically give to charitable organizations but do not itemize deductions, you may benefit from bunching multiple years of contributions into a single tax year. Donor-advised funds (DAFs) and gifts of appreciated securities can further enhance both tax efficiency and philanthropic impact.
Medical expense timing. If your qualified medical expenses approach the deductibility threshold — 7.5% of adjusted gross income — consider consolidating planned procedures or care costs into a single tax year to maximize their potential deductibility.

3. Refine cash flow and withholding management

Beyond deductions and investment income, your tax return offers valuable insights into your cash flow management. Understanding your options is especially important in times of economic uncertainty.

Evaluate withholding and estimated payments. An unexpected balance due or an overly large refund may indicate that your withholding or estimated tax payments are out of sync with your actual income. Adjusting now can help avoid surprises — and penalties — when you file your 2025 return.
Reinvest surplus income strategically. If you’re receiving dividend or interest income that you do not rely on for living expenses, reinvesting that income can help build wealth over time. This approach supports dollar-cost averaging, a strategy that can reduce the impact of market volatility while building your portfolio for the long term.

4. Begin planning for next year now

Your recent tax return offers a clear view of where you were financially in 2024. Leveraging it thoughtfully allows you to chart a more intentional course forward.

For example, if you’re able, consider frontloading contributions to accounts like IRAs or 529 plans early in the year. This allows your investments more time to grow and helps you take full advantage of tax benefits.

Looking for expert tips to grow and preserve your wealth? Sign up for Building Wealth, our free, twice-weekly newsletter.

You can use this moment to meet with your financial planner. Together, you can work to ensure your investment and tax strategies are working in harmony — and that your financial plan is evolving alongside your life and your goals.

We believe tax planning should never be a once-a-year exercise. When integrated into your broader financial strategy, it can become an engine for long-term growth and greater peace of mind.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Ask the Editor, May 4 — Questions on Tax Deductions, Losses

joy.taylor@futurenet.com (Joy Taylor) — Sun, 04 May 2025 14:02:30 +0000

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.

Ask the Editor: Reader Questions, April 25 — 529 plans

joy.taylor@futurenet.com (Joy Taylor) — Fri, 25 Apr 2025 16:26:00 +0000

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 529 college savings plans. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

Q1: Unused Funds

We funded a 529 college savings plan for my son. We used money in the account for his college. He is now done with school, and there are still unused funds in the 529 account. What can we do with this money without paying tax on it?

If you funded a 529 plan, and the beneficiary decides not to go to college, or he or she did go to college, and there are funds remaining at the end, there are several tax-free options for using the leftover money:

Keep the funds in the account for the beneficiary’s grad school, etc.
Use the 529 money to pay for certain apprentice programs for the beneficiary.
Roll over leftover funds to a 529 plan for another family member’s education needs.
Use up to $10,000 to help pay off the beneficiary’s college debt. It’s important to note that this $10,000 is a lifetime limit, not an annual limit. 529 distributions for student loan repayments that exceed $10,000 are taxable in part to the extent of the excess and are also subject to a 10% penalty.
Roll over funds from a beneficiary’s 529 plan to an ABLE account for a disabled beneficiary or the beneficiary’s disabled siblings.
Some excess 529 funds can be transferred tax-free to a Roth IRA for the 529 beneficiary in a direct trustee-to-trustee transfer. There are key rules to meet: The 529 account must have been open for at least 15 years, with the same beneficiary. There is a $35,000 lifetime cap. 529 contributions made in the prior five years are ineligible for the transfer. And annual 529 distributions for this purpose can’t exceed the annual contribution limit for Roth IRAs, which is $7,000 in 2025.

Note that any actual contributions for the year made to any IRA owned by the beneficiary count against this limit. For example, let’s say a 529 plan beneficiary contributes $2,000 to his traditional IRA in 2025. Only $5,000 of leftover 529 funds can be transferred to his Roth IRA in 2025.
— Joy Taylor, Editor The Kiplinger Tax Letter

Q2: Off-Campus Housing

My daughter is currently a sophomore in college. Next year, she and some friends are planning to live in an apartment off-campus. Can I use 529 funds to pay for her share of the rent, utilities and food?

Distributions from 529 plans used for college are tax-free. Eligible expenses include the cost of room and board for students enrolled at a college or university at least half-time, tuition, books, supplies, fees, computers and internet access. 529 funds can be withdrawn tax-free to cover off-campus housing, food and utilities, but the distribution amount cannot exceed the room and board allowance that the college includes in the cost of attendance. You should be able to get this figure from the college’s website.
— Joy Taylor, Editor The Kiplinger Tax Letter

Q3: Study Abroad

Can I use 529 funds to pay for a college student’s studies abroad?

In many cases, yes. A 529 plan can be used for any college that participates in the U.S. federal student aid program. If a student is enrolled in a U.S. college and chooses to study abroad through the school’s program for a semester or two, the study-abroad program will be 529-eligible, provided the U.S. college is eligible and the college accepts the study-abroad credits. If the child decides to enroll in a non-U.S. college for his or her full college education, then that foreign university must participate in the U.S. federal student aid program. Believe it or not, many foreign colleges do participate and would therefore qualify as eligible schools for 529 purposes.
— Joy Taylor, Editor The Kiplinger Tax Letter

Q4: Funding a 529 Plan

I am currently taking required minimum distributions (RMDs) from my traditional IRA. Can I roll over part of that RMD tax-free to fund a 529 plan for my granddaughter?

Unfortunately, there is no tax-efficient way to use money in your IRA to fund a 529 plan. So, for example, if you want to use your RMD money to put into a 529 account for your granddaughter, you will be treated as first receiving the RMD, which would be all or partially taxable to you, and then making a post-tax contribution to the 529 plan.
— Joy Taylor, Editor The Kiplinger Tax Letter

Q5: Refund from the University

I used 529 funds to pay for my son’s college tuition and board. My son received a check from the college refunding some of the amount that was paid. Is that amount taxable to me?

The tax laws give relief in this situation, provided you act in a timely manner. Tax legislation enacted in 2015 waives tax and penalties if, after a distribution is made from a 529 account, the student gets a refund from the college or university. To qualify for relief, you generally must redeposit the funds into the 529 account for the same beneficiary within 60 days. The recontribution is treated as principal.
— Joy Taylor, Editor The Kiplinger Tax Letter

We have already received many questions from readers on topics related to annuities, health savings accounts and much 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.

Ask the Editor: Reader Questions, April 18 — Amended Returns

joy.taylor@futurenet.com (Joy Taylor) — Fri, 18 Apr 2025 11:33:00 +0000

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 related to amended returns, reverse mortgages and depreciation deductions. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

Q1: Amended returns

I mailed amended tax returns on Form 1040-X to the IRS in early January. They show up in the IRS system as received by the agency, but I have not yet received my refunds. Do you know when I might see my money?

The IRS is still lagging on processing amended returns. The delay began with the COVID-19 pandemic, and the IRS has not yet fully caught up. But the wait isn’t as bad as it used to be. The IRS says that it is now processing amended paper-filed returns that were received in January 2025, so you should see your refund shortly. Note that the IRS’s processing time is longer for paper returns with errors or paper returns that require special handling. You might want to check the IRS’s online tool, Where’s My Amended Return.
— Joy Taylor, Editor The Kiplinger Tax Letter

Q2: Reverse Mortgages

I am planning to take out a reverse mortgage on my primary home. Will I have to pay federal income tax on the money that I receive in the transaction?

No. The payments you get from a reverse mortgage are treated as nontaxable loan proceeds, not income. Also, if you itemize, you cannot deduct, on Schedule A of the Form 1040, the interest you eventually pay because you are not using the reverse mortgage proceeds to buy, build or substantially improve the home securing the mortgage.
— Joy Taylor, Editor The Kiplinger Tax Letter

Q3: Converted Rental Property

I bought a home in 2008 for $294,000 that I used as my primary residence. In 2014, when the property was valued at $225,000, I moved and converted the home to a rental property. I then used $225,000 to calculate depreciation on the rental property. I sold the home last year for $362,000. What is the tax basis for determining the gain on the sale of the rental home?

First, you were correct to use the $225,000 amount for figuring annual depreciation deductions when you converted your primary home to a rental property. Second, since you sold the rental property at a gain last year, your tax basis for determining your gain is the original cost of the home ($294,000) plus any amounts you paid for capital improvements, less depreciation that you deducted on the home. If you had sold the rental home for a loss, your basis starting point would have been the lower of your original basis ($294,000) or the value when you converted the home to a rental ($225,000).
— Joy Taylor, Editor The Kiplinger Tax Letter

Q4: Investment Subscription Costs

I am aware that I cannot deduct the fees I pay to my broker to manage my investments. However, can I deduct the costs of subscriptions to stock advice letters, some of which are quite expensive?

No. Unfortunately, you cannot deduct the cost of subscriptions to stock advice letters unless you use that information in your trade or business. This type of investment expense used to be deductible as a miscellaneous itemized deduction on Schedule A of the Form 1040 (subject to the 2%-of-adjusted-gross-income limit), but the 2017 Tax Cuts and Jobs Act temporarily eliminated that entire group of deductions through the end of 2025. It’s too soon to know whether you would be able to deduct the costs for 2026 and later years. Republican lawmakers are currently negotiating a big tax package that would extend many of the expiring provisions in the Tax Cuts and Jobs Act.
— Joy Taylor, Editor The Kiplinger Tax Letter

Q5: Deducting One’s Time

Can a self-employed person deduct the value of his or her time on Schedule C of the Form 1040?

No. A self-employed person cannot deduct the value of his or her time. As the United States Tax Court said in a recent case, “labor performed by a taxpayer does not constitute an amount paid or incurred by him, and the taxpayer is not entitled to deduct the value of such labor.”

Also, if a self-employed person pays wages to himself or herself, he or she cannot deduct the wages on Schedule C because he or she isn’t employed by the business for tax purposes. The person can take withdrawals from his or her Schedule C business, but those withdrawals aren’t taxable and aren’t deductible.
— Joy Taylor, Editor The Kiplinger Tax Letter

We have already received many questions from readers on topics such as leasing a car for business use, what to do with unused funds in a 529 college savings plan, using U.S. savings bonds to pay for college and much 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 can ask Joy questions about a tax topic. You'll find full details of how to submit questions in The Kiplinger Tax Letter. (Get a free issue of The Kiplinger Tax Letter or subscribe.)

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.

Trump Plans to Terminate IRS Direct File program

Gabriella Cruz-Martínez — Thu, 10 Apr 2025 17:07:20 +0000

This tax season has been rife with disruptions and layoffs set off by the Trump administration, now the president reportedly plans to eliminate the IRS’ Direct File program. The program is available to over 30 million taxpayers this year.

The tax prep software, which is under scrutiny, was successfully piloted last year under the Biden administration and allows taxpayers to prepare and file their federal taxes for free with the IRS. However, Republican lawmakers and commercial tax preparation companies like H&R Block and Intuit’s TurboTax say the program is “wasteful” because there are already reputable third-party free filing options available.

It should be noted that the Federal Trade Commission (FTC) has previously flagged companies like H&R Block for pressuring people to overpay for tax prep services and making it harder to downgrade to cheaper filing options. Intuit’s TurboTax has also been cited for engaging in deceptive advertising practices, which have fooled consumers into believing they were eligible for “free” tax products and services.

GOP lawmakers allege that Direct File can create confusion for state taxpayers. Meanwhile, Elon Musk declared that he had “deleted” 18F, the digital services agency responsible for developing the IRS Direct File system in early February. More planned layoffs at the IRS could impact the program further.

The comments come despite favorable feedback from taxpayers who used Direct File. A study found that 90% of users rated their experience as positive and said the software was easy to use and trustworthy during the pilot.

Even though the federal deadline to file and pay 2024 taxes was April 15, taxpayers in 25 participating states have until Oct. 15, 2025, to file through IRS Direct File.

But the permanence of the Direct File remains largely uncertain under the Trump administration, sources say. Here’s what taxpayers had to say about the program.

Taxpayers are interested in Direct File

According to the Tax Policy Center, more taxpayers would like to use Direct File if the free tax-filing program is available in their state. Among those who filed a tax return last year:

73% of respondents across all age groups, education, and race said they would be interested in using Direct File if they were eligible for the program.
69% of those who paid to file taxes said they were interested in Direct File.
85% of people who filed for free last year said they would like to file directly with the IRS via Direct File.

Still, there was some hesitancy among respondents. Two-thirds of tax filers, or 68%, said they didn’t know enough about Direct File to feel comfortable using it. The study found that 88% said that their most recent filing method met their needs.

How many people used Direct File during its pilot?

For fiscal year 2023, over 140,000 tax filers with simple tax situations used Direct File across 12 states during its pilot, which ran from February 1 to April 20, 2024. According to an analysis by the Treasury Inspector General, more than 35,000 tax returns were rejected due to various reasons.

The rejections were mainly due to two reasons:

Mismatches between prior year adjusted gross income (AGI)
Inability to reconcile advance payments of the Premium Tax Credit (PTC). This was because the IRS did not include Form 8962 for the PTC in its Direct File pilot.

Why choose Direct File

Direct File is accessible in Spanish and English, and can be accessed by smartphone, laptop, tablet, or desktop computer at directfile.irs.gov. (Image credit: Getty Images)

Last year, the IRS announced that Direct File would be a permanent option for filing federal tax returns as of the 2025 tax season.

“The clear message is that many taxpayers across the nation want the IRS to provide more than one no-cost option for filing electronically,” former IRS Commissioner Danny Werfel said in a statement.

As reported by Kiplinger, the program was expanded to residents of 25 states this year and could be used by as many as 30 million eligible taxpayers. The move to make Direct File permanent came after multiple lawmakers and organizations urged IRS leaders to renew the program.

Today, Direct File offers live support from IRS staff Monday through Friday from 7 a.m. to 10 p.m. ET. You can also file from your smartphone, tablet, or computer if your state is eligible. Assistance is offered in Spanish and English.

Separately, the IRS Free File also offers taxpayers the option to file their federal income tax returns directly with the agency. There’s one caveat: Your adjusted gross income (AGI) must be 84,000 or less to qualify.

IRS online Free File also offers eight private-sector partners you can choose to file with.

GOP lawmakers target Direct File

A report from the Economic Security Project found that Direct File could save taxpayers $8 billion in filing fees and an additional $3 billion in time costs each tax season. That’s $11 billion in savings.

Additionally, the analysis found that the program could spare more than 400,000 filers a year from enduring the stress of IRS correction proceedings and audits. Finally, Direct File could close long-standing credit gaps for people who unknowingly miss out on tax benefits like the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC).

Still, 29 GOP lawmakers urged President Trump to immediately end Direct File.

Mainly, some Republicans claim the program would cause taxpayers to miss their refunds or suffer penalties if they were unaware that they must file their state taxes separately from their federal taxes.

As reported by Kiplinger, tax preparation companies H&R Block and Intuit’s TurboTax have opposed the IRS launching a free tax preparation program.

Ending Direct File would be a gift for big corporations, said supporters of the free filing program.

The Institute on Taxation and Economic Policy (ITEP) characterized Trump’s plans to end Direct File as a move to ramp up private profits for big corporations that have lobbied to prevent the IRS from providing free filing options to taxpayers for years.

“Ending Direct File is another gift from this administration to large corporations, this time to the multibillion-dollar tax prep industry that wants to make money off of you filing your taxes,” said ITEP Executive Director Amy Hanauer. “This is yet another piece to the ongoing attack on the IRS at the benefit of the wealthy and exploitative tax preparers.”

What’s next for Direct File?

Elon Musk declared on his social media platform X that he had “deleted” 18F, the digital services agency responsible for developing the IRS Direct File system. The CEO of Tesla echoed sentiments from GOP lawmakers who alleged that the program would create confusion for state taxpayers and was a waste of government spending.

Direct File is expected to remain operational for the 2025 tax season, per Treasury Secretary Scott Bessent. As mentioned, taxpayers in 25 participating states have until Oct. 15, 2025, to file their 2024 federal tax return with IRS Direct File.

However, with layoffs threatening the IRS workforce, there is no telling if the program will be impacted. Internal sources have also told the Associated Press that the Trump administration plans to eliminate the program.

Stay tuned to our latest coverage on the matter on our live tax blog.

Taxpayer Revolt? Why More People Are Avoiding Filing Taxes This Year

Kelley R. Taylor — Tue, 01 Apr 2025 14:17:00 +0000

If you feel less than enthusiastic about filing your federal income taxes this year, you're not alone. IRS filing data and a recent survey shed light on a growing trend: Many are hesitant to file taxes in 2025.

Ths tax season, the IRS has reported a notable downturn in tax return submissions compared to previous years.

Why? Possible reasons range from concerns about IRS workforce reductions to general economic uncertainty.

A March survey of 1,003 respondents conducted by Qualtrics on behalf of Intuit Credit Karma also revealed some interesting data points. Nearly a quarter of respondents felt less concerned about making errors on their tax returns this year, while almost half worried about receiving a timely refund.

Meanwhile, according to the survey, 17% of millennials have contemplated not filing at all. They reported a belief that audit risk has decreased due to recent downsizing at the IRS.

So, what does all of this mean for you? Here’s more to know.

Filing taxes 2025: Slowdown at the IRS

Since the start of the 2025 tax filing season on January 27, the number of returns processed by the IRS has fallen by 1.7% ( just over 1.2 million returns) compared to the same period in 2024.

That decline comes despite an average increase in refund amounts and suggests that significantly fewer taxpayers are filing early this year — or at all.

According to Bloomberg (paywall), former IRS Commissioner Charles Retitig relayed the following: “I know thousands of accountants, tax professionals, tax return preparers — and they’re all getting the question, ‘Why should I file my taxes? Why should I pay my taxes? My understanding is the IRS is going to be abolished.”

The impact? The IRS reportedly anticipates a $500 billion decrease in tax revenue this year. (That’s a more than 10% decline compared to last year.) That projected revenue loss is particularly striking compared to the $5.1 trillion collected by the IRS in 2024.

Some attribute the estimated shortfall to widespread disruptions caused by staff reductions and operational changes initiated by the Trump administration’s Department of Government Efficiency (DOGE), led by Elon Musk of Tesla and SpaceX.

Here’s what’s been happening that could be contributing to the tax-filing hesitancy this tax season.

DOGE IRS workforce cuts

As Kiplinger has reported, Trump’s DOGE has implemented substantial budget cuts at the IRS, resulting in significant staff reductions. Some say the cuts have impacted the tax agency's ability to process returns efficiently and enforce compliance.

For more information, see IRS Layoffs Cause Doubt, Fear This Tax Season.

As mentioned, reports also suggest the IRS could face a potential revenue drop of as much as half a billion dollars due to some taxpayers betting on the tax agency's diminished audit capabilities.

Some experts caution that, going forward, these cuts could severely hamper the IRS's functionality, weaken the government's ability to collect taxes effectively, and lead to processing delays.

Other things to keep in mind:

Republican lawmakers have proposed abolishing the tax agency. Trump has floated the idea of replacing the IRS with an ERS (External Revenue Service) and eliminating income taxes in favor of tariffs.
Trump’s pick for IRS Commissioner, former congressman and auctioneer Billy Long, still hasn’t been Senate-confirmed.

Egg prices and economic uncertainty: Recession ahead?

Eggs have become incredibly expensive in 2025. (Image credit: Getty Images)

Beyond IRS-specific issues, many people in the U.S. are grappling with significant economic challenges, including inflation, low or stagnating wages, and rising costs.

For instance, egg prices have soared to $10 or more per dozen in some areas, and consumer confidence is down. Additionally, economic uncertainty in 2025 has intensified partly due to President Donald Trump's tariff policies.

Many experts warn that tariffs (i.e., taxes on imports that often impact consumer prices) could slow economic growth and increase recession risks. Some point to tariffs as a major factor behind reduced spending and consumer pessimism.

Though it’s worth noting that some U.S. economic forecasts remain optimistic.

Meanwhile, additional surveys find many taxpayers are simply overwhelmed when it comes to filing taxes. The tax code and tax filing process can be incredibly complicated.

Additionally, many who rely on tax refunds to pay bills or purchase essentials worry their refunds will be delayed. Data show that most people use their tax refunds for practical purposes. As of March 17, the average IRS tax refund is $3,271..

Reportedly, 49% of taxpayers will use their refund to “make ends meet,” about 25% of taxpayers plan to deposit their refunds into a savings account, while 35% intend to use their refunds to pay down debt.
Other common uses include replenishing emergency funds, boosting retirement savings, and investing in education or home improvements.

IRS audit risk?

Fewer IRS workers focusing on tax compliance is leading some taxpayers to consider taking risks with their returns that they might usually avoid.

According to the Credit Karma survey, millennials are at the forefront of this trend. A notable percentage indicated they might not file taxes this year due to a perceived lower chance of being audited. Nearly half of the surveyed taxpayers doubted the federal tax agency's capacity to double-check filings.

Those findings reflect a broader lack of confidence in the IRS' ability to enforce compliance effectively without a Senate-confirmed Commissioner and with much of its staff already let go or on its way out the door soon.

Can you not file taxes?

Despite these issues and real concerns, most experts caution against failing to file or pay taxes. There are several consequences of not filing or paying.

Financial Penalties: The IRS imposes significant penalties for failing to file or pay taxes. These can include a percentage of unpaid taxes for each month the return is late. There are also penalties for failing to pay, which can increase if the IRS issues a notice of intent to levy.

Even if you owe a relatively small amount, penalties can add up. Interest also accrues daily on unpaid balances annually, compounding the financial burden over time.

Legal Consequences: Tax evasion, which involves deliberately avoiding paying taxes, carries legal risks. It can also result in hefty fines for individuals and businesses, potential prison time, and additional penalties for negligence or underreporting income.

In extreme cases, as Kiplinger has reported, the IRS can revoke passports for individuals with significant unpaid tax debts exceeding a certain threshold.

Other Enforcement Actions: The IRS has various tools to recover unpaid taxes. These include wage garnishment, bank levies, and filing a Substitute for Return (SFR), where the IRS files a return on your behalf based on available data, often resulting in higher tax liabilities.

Filing taxes: Bottom line

For those struggling financially or feeling overwhelmed by their tax obligations, experts recommend exploring options for paying the IRS if you owe like repayment plans or filing extensions, rather than avoiding filing altogether.

And concerning common tax filing mistakes, some experts note that human beings aren’t necessarily the ones who will catch errors on “average taxpayer” returns.

The agency may rely more on automated software to uncover unpaid taxes or filing errors and focus on what some experts have described to Kiplingers as “low hanging fruit,” i.e., Individuals behind on their taxes, non-filers, or taxpayers on repayment plans.

For those daunted by this year's tax season, consult a trusted and qualified tax preparer or financial planner who can help you through the process and ensure compliance with current tax laws.

Don’t Make These 5 Common Mistakes on Your Tax Return

Gabriella Cruz-Martínez — Wed, 12 Mar 2025 13:57:10 +0000

The 2026 tax season is in full swing, and the last thing you want is to file an incorrect return and wait through delays or worse — a rejected return.

The IRS has pointed out the most common errors taxpayers make as they file their taxes, from something as seemingly small as a misspelled name to accidentally entering the wrong bank account number for a direct deposit.

These kinds of subtle tax preparation flaws can be easy to miss, especially when dealing with multiple documents. However, watching for these inaccuracies can save you the headache of correcting or re-filing your tax return if you’re filing.

Here are some common tax errors you should avoid on your current tax return.

Common tax return mistakes to avoid

Note: These are just five mistakes the IRS points out as commonly made on federal income tax returns. If you're uncertain about whether your return is correct, you may want to consult a trusted tax professional.

The IRS requires taxpayers to include their Social Security number (SSN) on a tax return exactly as the number is printed on their Social Security card.

The same goes for other identification numbers on your tax return, such as an individual taxpayer identification number (ITIN) and employer identification number (EIN).

If you don’t have a SSN, but are eligible for one, you must fill out a Form SS-5 to apply and receive your Social Security number. This form can be used to apply for an original SSN, request a replacement for your card, or change or correct information on your SSN record.

There is one exception, if a child or dependent is age 12 or older and never received a SSN, the application process must be in person. The Social Security Administration will determine if you are eligible for the SSN.

Don’t have a SSN? There’s another option:

Taxpayers not eligible for an SSN must have an IRS individual taxpayer identification number (ITIN).
ITINs are 9-digit numbers issued by the IRS to taxpayers that don’t have a SSN for U.S. federal tax purposes.
If you do not have one, you must apply for the ITIN using a Form W-7.

Additionally, businesses, tax-exempt organizations, and other employers engaged in business as a sole proprietor must have an Employer Identification Number (EIN). If you don’t have an EIN, you can apply online.

2. Filing with an expired ITIN

Speaking of identification numbers, another common mistake is filing with an expired individual taxpayer identification number.

An ITIN expires if it remains inactive on a U.S. federal tax return for 3 consecutive tax years. The identification number effectively expires on December 31 after the third tax year of non-use.

This may happen to individuals who don’t earn enough to file for taxes, and more commonly, younger adults or students. You can check the status of your ITIN on your IRS Online Account.

What happens if you file taxes with an expired ITIN? You may face a delay in processing your return or not be able to claim certain credits, unless you renew your ITIN. Worse off, that may result in penalties and interest, or a reduced refund.

Notably, you don’t need an ITIN to request an extension or pay an estimated tax.

3. Typos and math mistakes

It’s only human error to have a typo once in a while, but having one on your tax return may result in a rejected return or delayed return. What are some common slip-ups?

Misspelled names: The name on your tax return should match the name on your Social Security card, for example.

Incorrect bank account number: If you entered the wrong bank account number, you should contact the IRS to stop the direct deposit. The IRS will mail you your refund.

Math mistakes: Even a simple calculation error on your return may lead to delays in some circumstances. Generally, math errors are caught during processing and corrected by the IRS, so you don’t have to worry about filing an amended return.

The IRS should notify taxpayers of the correction with a “math error notice” and provide further instructions if more information is needed.

As Kiplinger has reported, a new law makes these notifications mandatory and will hopefully clarify the process for addressing minor math mistakes. For more information, see our report: IRS Says You Made a Tax Return Mistake? A New Law Could Help You Fight Back.

4. Incorrect filing status, dependents, and more

If you accidentally filed your tax return with an incorrect filing status, dependents, total income, or deductions or credits, you’ll have to file an amended return. To do so, use Form 1040-X (Amended U.S. Individual Income Tax Return).

Avoid errors when figuring tax credits and deductions: If you’re unsure how to figure your Earned Income Tax Credit (EITC), or Child and Dependent Care Credit. The IRS offers an interactive tax assistant that can help you calculate your credits and deductions, and identify the required forms and schedules you must complete.

5. Unsigned forms

Lastly, an unsigned tax return is not considered a valid return by the IRS. This error may result in a delinquency penalty on your tax return if the agency finds the taxpayer willfully did not sign the tax return.

The IRS will return unsigned income tax returns requesting that you sign and resubmit the form for processing.

Filing taxes: What you can do

As you prepare to file your tax return this year, review your tax documents before submitting them to the IRS.

One pro-tip to avoid errors this tax season is to file your taxes electronically. According to the IRS, this reduces errors because the tax software does the math for you and flags common errors or missing information as you complete your return.

You can file for free or with the help of a Volunteer Income Tax Assistance (VITA) or tax counseling for the elderly (TCE) programs. You should also opt for a direct deposit to avoid getting your refund lost or stolen in the mail.

Lastly, using a reputable tax preparer, a certified public accountant, or commercial tax preparation software can help you avoid unwanted mistakes on your tax return.

11 IRS Audit Red Flags for Retirees in 2026

joy.taylor@futurenet.com (Joy Taylor) — Sun, 16 Feb 2025 15:17:00 +0000

As you bask in your retirement years, traveling, enjoying dinners with your friends, spending time with family, finding new hobbies and returning to old ones, you might think your chances of an IRS audit would be low.

After all, why would the IRS examine tax returns that you file in your golden years? Generally, you'd be right.

In the past few years, the IRS has been auditing significantly less than 1% of all tax returns filed by individuals, and we expect this figure to decline even further.

The audit rate is likely lower for retirees, who don’t claim as many refundable credits as other taxpayers and whose returns are generally not very complicated. However, not all retirees are in the clear in terms of IRS audits.

A retiree’s chances of being audited, or otherwise hearing from the IRS, can escalate depending on various factors, including the complexity of your return, the types and amounts of deductions or other tax breaks you claim, and whether you happen to still be engaged in a business.

Other actions or activities can boost the odds of an audit, too. In the end, there’s no way to predict whether you'll be audited in your retirement years. But these 11 audit red flags could increase the chances that the IRS will give your return unwelcome attention.

1. Failing to report all taxable income

Failing to report taxable income from wages, dividends, pensions, IRA distributions, Social Security benefits and other sources will almost certainly draw unwanted attention for retirees from the IRS.

The IRS gets copies of all the 1099s and W-2s you receive. This includes the 1099-R (reporting payouts from retirement plans, such as pensions, 401(k)s and IRAs), SSA-1099 (reporting Social Security benefits), and 1099-K (reporting online payment sources such as PayPal, Airbnb, Etsy, etc.).

The IRS' computers cross-check the numbers on the 1099 and W-2 forms with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a notice that the IRS will send to you.

Be sure to report all income, whether you receive a form such as a 1099 or not. For example, if you get paid for walking dogs, tutoring, driving for Uber or Lyft, giving piano lessons or selling crafts through Etsy, the money you receive is taxable.

2. Making a lot of money

While the overall individual audit rates are extremely low, the odds increase significantly as your income goes up, as it might if you sell a valuable piece of property or get a big payout from a retirement plan.

According to IRS audit statistics, about 0.4% of total individual returns get audited by the IRS.
This number jumps to 1% for filers who report total positive incomes from $1 million to $5 million, 2.3% for filers reporting total positive incomes from $5 million to $10 million, and about 8% for filers who report total positive income of $10 million or more.

It's not that you shouldn't try to make less money in your retirement. Everyone wants to be a millionaire. Just understand that the more income shown on your return, the more likely it is that you'll hear from the IRS

3. Claiming large deductions or losses

If the deductions or losses on your return are disproportionately large compared with your income, the IRS might pull your return for review.

A large medical expense could send up a red flag, for example.
Taking a big loss from the sale of rental property or other investments can also spike IRS curiosity, especially if the loss offsets income from wages, pensions or other sources.
Also on the IRS’s radar are deductions taken for bad debt and worthless securities, especially if you report the amount as an ordinary loss.

But if you have the proper documentation for your deduction, loss or credit, don't be afraid to claim it. There's no reason to pay the IRS more tax than you owe.

4. Gambling winnings and losses

Retirees generally have more time to spend on entertainment activities. Maybe you enjoy going to the casinos and gambling, or perhaps you started betting more on sporting events now that sports betting is legal in most states.

Whether you're playing the slots, gambling on sporting events, trying your luck at a lottery jackpot, or betting on the horses, one sure thing you can count on is that Uncle Sam wants his cut.

Recreational gamblers must report winnings as other income on the 1040 form. Professional gamblers show their winnings on Schedule C. Failure to report winnings can draw IRS attention, especially because the casino or other venue likely reported the amounts on Form W-2G.

Claiming large gambling losses can also be risky. You can deduct these only to the extent that you report winnings (and recreational gamblers must also itemize).

Writing off gambling losses, but not reporting gambling income, is sure to invite scrutiny. Taxpayers who report large losses from their gambling-related activity on Schedule C get an extra look from IRS examiners, who want to make sure that these individuals really are gaming for a living.

Note that a new rule kicks in for 2026 returns that you would file in 2027. The ability to deduct gambling losses is further limited. Taxpayers with losses can deduct only 90% of losses to the extent of reported winnings.

5. Not taking required minimum distributions

The IRS wants to be sure that owners of IRAs and participants in 401(k)s and other workplace retirement plans are properly taking and reporting their required minimum distributions (RMDs). The agency knows some people age 73 and older (75 and older beginning in 2033, 72 and older for 2020-22, and 70½ and older for years before 2020) haven’t taken their annual RMDs.

Those who fail to take the proper RMD amount can be hit with an excise tax penalty of as much as 25% of the shortfall. The penalty falls to 10% if the failure is corrected within two years.

However, you needn’t pay the fine at all if you can demonstrate that you had reasonable cause for failing to take the shortfall and you are taking steps to remedy the issue.
If you think you're on solid ground, follow the instructions on Form 5329 and attach a letter of explanation to your 1040. If you ask IRS to waive the fine, don’t pay the penalty up front with your return.
The fine will be due only if and when IRS denies relief and notifies you of its decision.

It is also important to know that there have been changes to the rules for many non-spousal beneficiaries of IRAs inherited after 2019. If you're unsure about when you're required to take RMDs, consult a professional.

6. Claiming large charitable deductions

We all know that charitable contributions are a great write-off and help you feel all warm and fuzzy inside. Retirees especially like to make donations to their alma mater, place of worship, a nonprofit arts organization, an animal protection shelter, or to any other charities that are dear to their hearts. However, if your charitable deductions are disproportionately large compared with your income, it raises a red flag.

The IRS knows what the average charitable donation is for people at your income level.
If you don't get a written appraisal for donations of property valued at more than $5,000, or if you fail to file Form 8283 for noncash donations more than $500, you become an even bigger audit target.
If you've donated a conservation or facade easement to charity, or if you are an investor in a partnership, LLC or trust that made such a donation, your chances of hearing from the IRS rise exponentially.

Keep all your supporting documents, including receipts for cash and property contributions made during the year.

7. Running a business

Schedule C is a treasure trove of tax deductions for self-employed individuals. But it’s also a gold mine for IRS agents, who know from experience that self-employed people sometimes claim excessive deductions and don't report all their income.

The IRS looks at both higher-grossing sole proprietorships and smaller ones.
Sole proprietors reporting at least $100,000 of gross receipts on Schedule C, cash-intensive businesses, and business owners who report a substantial loss and have income from other sources such as wages or retirement income, have a higher audit risk.
Claiming large business deductions can raise eyebrows at the IRS, as well as claiming losses or deductions incurred between related parties.

If you’re semiretired but still running your own business, or if you have a side business in your golden years, be sure to accurately report all your income and keep good records and receipts to document expenses you claim on your return.

Sloppy recordkeeping makes it easy for a revenue agent to disallow your deduction.

8. Deducting hobby losses on Schedule C

Your chances of "winning" the audit lottery increase if you file a Schedule C with large losses from an activity that might be a hobby, such as dog breeding, jewelry making, horse racing or coin and stamp collecting.

Your audit risk grows further if you have multiple years of hobby losses and lots of income from other sources. Be careful if your retirement pursuits include trying to convert a hobby into a moneymaking venture.

To be eligible to deduct a loss, you must be running the activity in a business-like manner and have a reasonable expectation of making a profit.
If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes that you're in business to make a profit, unless the IRS establishes otherwise.
The analysis is trickier if you can't meet these safe harbors, 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.

9. Failing to report a foreign bank account

The IRS is intensely interested in people with money stashed outside the U.S., especially in countries with the reputation of being tax havens, and U.S. authorities have had lots of success getting foreign banks to disclose account information.

Failure to report a foreign bank account can lead to severe penalties. If you have any such accounts, you properly report them. This means electronically filing FinCEN Report 114 (FBAR) by April 15, 2026, to report foreign accounts that combined total more than $10,000 at any time during 2025. (Filers who miss the April 15 deadline get an automatic six-month extension to file the form.)

Taxpayers with a lot more financial assets abroad might also have to attach IRS Form 8938 (PDF) to their timely filed federal income tax returns.

10. Claiming large rental losses

Do you own some rental properties that help to provide a consistent revenue stream in your retirement years? Maybe you regularly claim large depreciation deductions and other write-offs on Schedule E that end up generating a tax loss from your rental activity. Claiming a large rental loss can command the IRS's attention, especially if the loss helps to offset income from other sources that you report on your return.

Normally, the passive loss rules prevent the deduction of rental real estate losses.

But there are two important exceptions. If you actively participate in the renting of your property, you can deduct up to $25,000 of loss against your other income. This $25,000 allowance phases out as modified adjusted gross income exceeds $100,000 and disappears entirely once your modified AGI reaches $150,000.

A second exception applies to real estate professionals who spend more than 50% of their working hours and more than 750 hours each year materially participating in real estate as developers, brokers, landlords or the like. They can write off rental losses.

The IRS actively scrutinizes large rental real estate losses. If you manage properties in your retirement, you might qualify under the second exception. If you sell a rental property that produced suspended passive losses, the sale opens the door for you to deduct the losses.

Be ready to explain things if a big rental loss prompts questions from the IRS.

11. Nonfilers

The IRS hasn't always been diligent in pursuing individuals who don't file required tax returns.

The agency has been chastised by Treasury inspectors and lawmakers for its years-long lack of enforcement activity in this area. It shouldn't come as a surprise that high-income nonfilers are on the list of the IRS's strategic enforcement priorities.

The primary emphasis is on individuals who received income in excess of $100,000 but didn't file a tax return. Collections officers will contact taxpayers and work with them to help resolve the issue and bring them into compliance. People who refuse to comply can be subject to levies, liens or even criminal charges.

Why You Should Take Extra Care With Your Tax Return

kiplinger@futurenet.com (Sandra Block) — Sat, 15 Feb 2025 15:01:10 +0000

It’s tax season, the anxiety-inducing time of year when millions of Americans start thinking about all the things they’d rather do than prepare their tax returns.

But the task could be less onerous this year. There weren’t a lot of adjustments to the tax code in 2024, so if your personal circumstances didn’t change, your tax return probably won’t change much, either.

More important, chances are very good that Congress will extend the individual tax provisions of the 2017 Tax Cuts and Jobs Act, which are set to expire at the end of 2025 — so you likely won’t have to take steps to avoid a tax increase in 2026.

Still, you should take your time when preparing your return or gathering the information you’ll need to provide to your tax preparer. Otherwise, you may overlook tax-saving provisions or make errors that could lead to an unnerving letter from the IRS.

Key Tax Return Issues

Here are issues to watch out for when you tackle your 2024 tax return.

EV tax credit

Since January 1, 2024, buyers who purchase an eligible electric vehicle have been able to claim a tax credit of up to $7,500 for a new EV or $4,000 for a used one at the point of sale, either as a rebate or as a reduction in the cost of the vehicle, thanks to a provision in the 2022 Inflation Reduction Act. If you took advantage of the credit to lower the cost of an EV, you’ll need to report it when you file your tax return.

Learn More: How the EV Tax Credit Works

When you purchased the EV, the dealer should have given you a time-of-sale report and a document indicating that the IRS had accepted it. The report confirms that your vehicle was eligible for the credit, lists the amount of credit available for the specific vehicle you bought, and shows that the credit was transferred to the dealer by the IRS. If you didn’t receive a time-of-sale report (or if you lost it), contact the seller. Without it, you can’t claim the credit, the IRS says.

File Form 8936, “Clean Vehicle Credits,” with your tax return. You’ll also use this form if you didn’t receive the credit at the time of purchase. You’ll need your car’s vehicle identification number (VIN) to fill out the form.

Taxes on Bitcoin profits

Bitcoin investors have enjoyed a spectacular ride in recent months, with bitcoin trading at more than $100,000 in December. If you invested in bitcoin and took some of your profits off the table last year, it’s important to understand that those gains are taxable. Although many people refer to bitcoin as currency, the IRS views it as property, and gains are taxed the same way that gains from the sale of stocks, bonds, and other capital assets are taxed. You’ll owe taxes on your gains even if you used your bitcoin to buy something.

If you owned bitcoin or other cryptocurrency in a taxable account, your gains from selling any that you owned for a year or less will be taxed at your ordinary income rate (rates ranged from 10% to 37% in 2024). If you sold crypto you owned for more than a year, you’ll owe long-term capital gains taxes on your profits, with rates ranging from 0% to 20%, depending on your income.

When you fill out Form 1040, you will be asked whether you received, sold, exchanged or otherwise disposed of a digital asset in 2024. The IRS added that question to the form for tax year 2020 in response to concerns that many taxpayers weren’t reporting cryptocurrency profits on their returns.

The IRS is expected to increase scrutiny of digital-currency holdings in tax year 2025, when brokers will be required to report proceeds from the sale of digital assets on the newly introduced Form 1099-DA.

Taxpayers who sell digital currencies in taxable accounts this year will receive the forms in early 2026. The reporting requirement will allow the IRS to match reports from cryptocurrency brokers with information on taxpayers’ tax returns, just as the agency already does with Form 1099s for mutual funds, stocks and other investments. If you’re buying and selling cryptocurrency, keep good records—particularly of the amount you paid for your crypto, known as the cost basis.

Staying on the right side of the IRS has this advantage: If a digital currency you own takes a dive and you sell at a loss, you can harvest the loss to offset other capital gains.

Transactions that generate a Form 1099-K

The American Rescue Plan Act of 2021 required payment processors, such as Venmo and PayPal, to report to the IRS total payments of $600 or more to a user in a year. The requirement was delayed after tax professionals and advocates for small businesses argued that it would cause tax headaches for millions of self-employed and gig workers.

For 2023, payment processors were required to file a 1099-K form only for a user who received more than $20,000 in payments and had more than 200 transactions, but that threshold dropped to $5,000 for 2024. Many individuals who sell items on Etsy or receive payments for side gigs are going to get 1099-Ks for the first time this year, says Andy Phillips, vice president for the Tax Institute at H&R Block.

Vendors aren’t supposed to issue Form 1099-Ks for personal transactions, such as peer-to-peer transfers with friends and family. But as a result of the lower reporting threshold, some individuals may receive erroneous 1099-Ks, Phillips says.

If you receive a 1099-K for a personal transaction, report it on the line at the top of Schedule 1 of Form 1040 (“Additional Income and Adjustments to Income”) that is designated to correct errors. You can also use this line to report proceeds from the sale of a personal item at a loss — for example, the couch in your basement that you bought for $1,000 a decade ago and sold for $500, Phillips says. You can’t deduct such losses, but reporting them on Schedule 1 will exclude the proceeds from your adjusted gross income while also ensuring the income is reported to the IRS for compliance purposes (tax software will walk you through this process).

The goal of the reporting requirement is to make it easier for the IRS to keep tabs on self-employment income. But even if you don’t receive a 1099-K form, you’re required to report all of your income to the IRS.

And if you have a side gig or are self-employed, make sure you keep solid records, because there’s a good chance you’ll receive a 1099-K in the future. The threshold is scheduled to drop to $2,500 for 2025 and to $600 for 2026. Some payment apps offer a “friends and family” designation you can use to separate personal transactions from business payments.

Higher standard deduction

Even if you’ve itemized deductions in the past, don’t assume that it will be the best choice for 2024. You may end up with a lower tax bill by claiming the standard deduction, which is adjusted annually to account for inflation.

For 2024, the standard deduction is $14,600 for single taxpayers, $29,200 for married couples who file jointly, and $21,900 for heads of household.

If you’re blind or 65 or older, you can claim an additional deduction of $1,950 ($3,900 for joint filers if you’re both 65 or older and blind). If you’re married, you can claim an additional standard deduction of $1,550 for each spouse who falls into one of those categories.

That means a 65-year-old couple can claim a standard deduction of at least $32,300—or even more if one or both are blind. For that reason, most older adults will fare better by claiming the standard deduction than by itemizing.

However, the only way to figure out whether itemizing or claiming the standard deduction is most advantageous is to run the numbers both ways, which tax software programs will do for you. Make sure you assemble all of the receipts for eligible deductions, such as charitable contributions, mortgage interest, property taxes, and unreimbursed medical bills.

Keep in mind, too, that taxpayers who claim the standard deduction are still eligible for a long list of “above the line” deductions, which will lower your adjusted gross income, and other credits available to non-itemizers. For more on those tax breaks, see page 47.

Check Your Work

(Image credit: Getty Images)

While the IRS audits only a small percentage of taxpayers in person, the agency sends out thousands of letters every year to taxpayers who made errors on their returns. These correspondence audits typically involve a few issues the IRS believes it can resolve without deploying a full-scale audit. Still, these letters can be unsettling, especially if the IRS determines that you owe the government more money.

Even minor errors, such as forgetting to sign and date your tax return, could hold up processing and delay your refund. Here are some common (and avoidable) errors.

Not reporting all of your income

Filing your tax return early will speed up your refund, and it may protect you from tax return fraud because a criminal can’t file a return in your name and pocket your refund if you’ve already submitted your return.

But if you overlook a Form 1099 from your bank or brokerage firm, you’ll probably hear from the IRS. The agency compares statements it receives from financial institutions, employers, and other entities with your tax return, and if it discovers a mismatch, you could owe interest on the amount you should have paid and possibly a late-filing penalty, too.

Misreporting a qualified charitable distribution

QCDs allow individuals who are 70½ or older to contribute money directly from their IRA to a qualified charity, potentially satisfying all or part of their required minimum distribution. The contribution isn’t deductible, but the distribution will count toward your RMD and will be excluded from your taxable income. For 2024, individuals could contribute up to $105,000 through a QCD (for 2025, the maximum is $108,000).

However, reporting a QCD on your tax return can be tricky because the Form 1099-R you receive from your financial institution won’t reflect the QCD.

When filling out your 2024 Form 1040 (or 1040-SR), include on line 4a the total amount of distributions reported on Form 1099-R.
Then subtract the amount that was transferred directly to the 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 you’re using tax software, a drop-down box for line 4b should give you the option to click “QCD.”

You should also obtain documentation from the charity in case you receive inquiries from the IRS, says Miklos Ringbauer, a certified public accountant in Los Angeles.

If you’re interested in making a QCD in 2025, it’s important to understand that the contribution must be made directly from your IRA to charity, Ringbauer adds. If you withdraw the funds from your IRA and send a check to charity, it won’t qualify as a QCD.

Related: What is a QCD?

Failing to file a tax return

If you have a tax bill you can’t afford to pay, the worst thing you can do is nothing. The IRS penalty for failing to file a tax return is 5% of the amount you owe per month, up to a maximum of 25% of the unpaid balance. “That can devastate a person,” Ringbauer says.

The penalty for failing to pay your taxes is less onerous—0.5% of the unpaid balance for the month or part of the month the balance is unpaid, up to 25% of your unpaid taxes. For that reason, if you can’t pay your tax bill by April 15, file your tax return and pay as much as you can. Once you’ve done that, you can explore an installment plan or other payment options the IRS offers. For more information, go to www.irs.gov/payments/payment-plans-installment-agreements.

Hiring an unscrupulous tax preparer

The availability of sophisticated tax software has made it easy for inexperienced or dishonest individuals to create a website and designate themselves as tax preparers, even if they know little or nothing about the tax code.

The IRS has warned taxpayers to be on the lookout for “ghost preparers”—individuals who encourage taxpayers to claim credits and benefits for which they don’t qualify, charge fees based on a percentage of the refund, and then disappear after the return is filed. Other scofflaws pose as tax preparers to steal taxpayers’ identities, the IRS says.

When you sign your tax return, you’re responsible for the information on the return — no matter who prepared it — so it’s in your best interest to hire a preparer you can trust. Start by looking for a preparer who is credentialed, including certified public accountants, enrolled agents, and attorneys. CPAs are licensed by state boards of accountancy, have studied accounting at a college or university, and have passed a rigorous exam.

You can get a list of local certified public accountants from your state’s CPA society. Enrolled agents, who are licensed to appear before the IRS, must pass a rigorous test and meet annual continuing-education requirements. To locate an enrolled agent in your area, go to www.naea.org. Attorneys are licensed and regulated by state courts and/or state bar associations. They must take continuing education classes and satisfy professional ethics requirements.

The IRS provides a resource you can use to search for preparers in your area who hold professional credentials, as well as individuals who aren’t CPAs, enrolled agents, or attorneys but have completed a certain number of continuing education hours. Find it at https://irs.treasury.gov/rpo/rpo.jsf.

Last-Minute Tax Savers

(Image credit: Getty Images)

For the most part, the IRS operates on a calendar-year basis. But some exceptions could reduce your 2024 tax bill while helping you save more for retirement and lower your out-of-pocket health care costs.

Contribute to a retirement account

If you’re not enrolled in a workplace retirement plan, in 2024 you can deduct IRA contributions of up to $7,000, or $8,000 if you were 50 or older. (These contribution limits will remain unchanged for 2025.)

You have until April 15, 2025, to make your 2024 contribution. Contributions to a traditional IRA will reduce your adjusted gross income on a dollar-for-dollar basis, which could also make you eligible for other tax breaks tied to your AGI.

Workers who have a company retirement plan but earn less than a certain amount may qualify to deduct all or part of their IRA contributions. For 2024, this deduction phases out for single taxpayers with AGI between $77,000 and $87,000 and for married couples who file jointly with AGI between $123,000 and $143,000. If one spouse is covered by a workplace plan but the other is not, the spouse who isn’t covered can deduct the maximum contribution as long as the couple’s joint AGI doesn’t exceed $230,000. A partial deduction is available if the couple’s AGI is between $230,000 and $240,000.

If you worked for yourself in 2024 or had a side gig, you can sock away even more money. You have until April 15—or October 15 if you file for an extension—to set up and contribute to a SEP IRA, a retirement plan designed for self-employed workers, small businesses and sole proprietors. For 2024, you can deduct contributions of as much as 20% of net income, up to a maximum of $69,000.

You also have until April 15 to contribute to a Roth IRA for 2024. Contributions to a Roth are after-tax, so they won’t lower your tax bill. But as long as you’re 59½ or older and have owned your Roth for at least five years, withdrawals are tax-free.

Here, too, there are income limits. For 2024, single taxpayers with a modified adjusted gross income of less than $146,000 can contribute the full amount; those with income between $146,000 and $161,000 can make a partial contribution. Married couples who file jointly can make the full contribution if their MAGI is less than $230,000; those with MAGI between $230,000 and $240,000 can make a partial contribution.

In the past, you could make only pretax contributions to a SEP, but legislation enacted in late 2022 allows SEP providers to offer a Roth option.

Set aside funds for health care costs

You have until April 15 to set up and fund a health savings account for 2024. To qualify, you must have had an HSA-eligible health insurance policy that went into effect no later than December 1. The policy must have had a deductible of at least $1,600 for individual coverage or $3,200 for family coverage.

You can contribute up to $4,150 to a 2024 HSA if you had single coverage or $8,300 if you had family coverage. You can stash away an additional $1,000 if you were 55 or older in 2024. Contributions reduce your adjusted gross income. The money in your account will grow tax-free, and withdrawals to pay medical expenses are also tax-free.

Tips for Non-Itermizers

(Image credit: Getty Images)

The Tax Cuts and Jobs Act doubled the standard deduction, so the majority of taxpayers no longer itemize. However, there are numerous deductions and credits available to non-itemizers.

Child adoption credit.

If you adopted a child last year, take advantage of a tax credit to help cover expenses related to the adoption. (A credit is a dollar-for-dollar reduction in your tax bill, making it more valuable than a tax deduction.) For 2024, the adoption tax credit can be taken on up to $16,810 of qualified expenses per child.

You can’t claim the credit for more than you spent on the adoption unless you adopted a child with special needs. In that case, you can claim the full credit even if your expenses were less than the full amount. The credit phases out for families with a 2024 AGI of more than $252,150; those with AGI of more than $292,150 are ineligible.

To qualify, the child you adopted must have been younger than 18 or any age if physically or mentally incapable of caring for himself or herself. If you can’t use the entire credit’s value in the first year you claim it, you can carry forward any remaining amount for up to five years—a helpful provision because some adoptions take several years to complete.

Learn More: The Adoption Tax Credit Explained

College tax credits

If you’re paying for higher education, make sure to take advantage of college-related tax breaks. For parents with a child in college, your best bet is the American Opportunity Tax Credit (AOTC), available for up to $2,500 of college tuition and related expenses (but not room and board) paid during the year. Individuals whose modified adjusted gross income is $80,000 or less ($160,000 or less for married couples filing a joint return) qualify for the full credit. Single taxpayers with MAGI greater than $90,000 and married couples with MAGI above $180,000 are ineligible for the credit. The credit covers all four years of college.

If you went back to school—whether to improve your employment prospects or just because you had a hankering to learn—you may qualify for the Lifetime Learning credit. The full credit is available to individuals whose modified adjusted gross income is $80,000 or less ($160,000 or less for married couples filing a joint return). You cannot claim both this credit and the AOTC for the same student in the same year.

Educator expense deduction

Teachers, counselors, and principals who spend their own money on school supplies can deduct up to $300 ($600 if spouses who are both educators file jointly). Qualified expenses include books, supplie,s and computer equipment.

Learn More: Educator Expense Tax Deduction for 2024

Student loan interest

If you’re paying off your student loans, you may be able to deduct up to $2,500 in interest, even if you don’t itemize.

To qualify for the full deduction, single taxpayers must have MAGI of less than $80,000; the deduction phases out if your MAGI is between $80,000 and $95,000. For married taxpayers who file jointly, the deduction phases out if your MAGI is between $165,000 and $195,000.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Ten IRS Audit Red Flags for Self-Employed Individuals

joy.taylor@futurenet.com (Joy Taylor) — Sat, 08 Feb 2025 15:17:00 +0000

Being in business for yourself can be exciting, lucrative, and a great way to draw the attention of the IRS's audit division.

The IRS has audited significantly less than 1% of all individual returns in recent years, so most taxpayers can rest easy. But if you file a Schedule C to report profit or loss from a business, your odds of drawing additional IRS scrutiny go up.

Schedule C is a treasure trove of tax deductions for self-employed people. And it's also a gold mine for IRS agents, who know from experience that self-employed people sometimes claim excessive deductions and don't report all their income.

The IRS looks at both higher-grossing sole proprietorships and smaller ones. Special scrutiny is given to cash-intensive businesses, highly profitable companies, and small-business owners whose Schedule C's report a substantial net loss (especially if those losses offset in whole or in part other income reported on the return, such as wages or investment income).

The Inflation Reduction Act gave the IRS $80 billion in extra funding over ten years, with a large chunk of that money going to increased enforcement activities. This money is in addition to the IRS's annual funding.

Congress has since clawed back about $25 billion of that windfall, with another potential $20 billion on the chopping block, and Republican lawmakers are promising to slash it even more.

Reasons why the self-employed get audited

There's no sure way to predict an IRS audit, but if you're self-employed, these ten "red flags" could increase your chances of drawing unwanted attention from the IRS.

1. Taking excessively large deductions

If the deductions, losses, or credits on your Form 1040 are disproportionately large compared with your income, the IRS may want to take a second look at your return. The same is true with deductions taken on Schedule C.

The IRS is suspicious when it sees tax returns with Schedule C attached claiming large losses, and that is especially true if the deductions leading to those losses appear to be excessively large for the business. If your return is chosen for audit, the IRS will be on the hunt to make sure you have the documentation to fully substantiate your big write-offs.

Revenue agents will also want to make sure that there is a valid business purpose for the write-offs and that there are no shenanigans going on, such as taking deductions for personal expenses.

Make sure that you have a separate bank account for your business and that you have the documentation to support your deductions.

2. Making a lot of money

While overall individual audit rates are low, your audit odds go up as your income goes up, especially if you have business income reported on Schedule C.

The IRS has been lambasted in recent years for putting too much scrutiny on lower-income individuals who take refundable tax credits and ignoring wealthy taxpayers. Partly in response to this criticism, wealthy individuals are once again in the IRS's crosshairs.

Remember, the IRS is getting more money for audits, with a significant chunk of its extra funding over 10 years dedicated to enforcement activities and collection measures. The Treasury Department and the IRS say that some enforcement funds will be used to audit more high-net-worth individuals and pass-through entities, such as LLCs and partnerships, among other taxpayers.

During the Biden administration, Treasury officials and the IRS made a big promise that individuals and small businesses earning under $400,000 wouldn't see more audits compared to historic rates. That applied only to taxpayers with total positive incomes of less than $400,000, meaning income before taking losses and deductions on their federal tax returns.

The IRS isn't considering hiking the $400,000 figure for couples filing a joint tax return.
The agency says the audit rate on 2018 returns will be used for the historic rate comparison, which is good news for taxpayers.
The overall audit rate for 2018 returns was 0.3% for individuals.

We're not saying you should try to make less money. Just understand that the more income shown on your return, the more likely it is that you'll be hearing from the IRS.

3. Writing off a hobby loss

Not every business ends up in the black every year, but too many years of losses can make the IRS think you're not really taking your business seriously enough—that it's just a hobby.

The IRS is on the hunt for taxpayers who year after year report large losses from hobby-sounding activities to help offset other income, such as wages, or business or investment earnings. The hobby loss rules are often litigated in the Tax Court. The IRS usually wins in court, partly because it tends to settle cases in which it doesn't believe it can prevail. But taxpayers also occasionally pull out a victory.

To be eligible to deduct a loss, you must be running the activity in a business-like manner and have a reasonable expectation of making a profit.
If your activity generates profit three out of every five 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 analysis is trickier if you can't meet these safe harbors. That's because determining whether an activity is properly categorized as a hobby or a business is based on each taxpayer's facts and circumstances.

If you're audited, the IRS will make you prove you have a legitimate business and not a hobby. Be sure to keep supporting documents for all expenses.

4. Claiming 100% business use of a vehicle

When you depreciate a car, you must list on Form 4562 the percentage of its use during the year that was for business. Claiming 100% business use of an automobile is red meat for IRS agents. They know it's rare for someone to use a vehicle 100% of the time for business, especially if no other vehicle is available for personal use.

The IRS also targets heavy SUVs and large trucks used for business, especially those bought late in the year. That's because these vehicles are eligible for favorable depreciation and expensing write-offs.

Make sure you keep detailed mileage logs and precise calendar entries for the purpose of every road trip. Sloppy recordkeeping makes it easy for a revenue agent to disallow your deduction.

5. Trading vs. investing in securities

People who trade in securities have significant tax advantages compared with investors. The expenses of traders are fully deductible and reported on Schedule C (expenses of investors aren't deductible), and traders' profits are exempt from self-employment tax. Losses of traders who make a special section 475(f) election are treated as ordinary losses that aren't subject to the $3,000 cap on capital losses. And there are other tax benefits.

But to qualify as a trader, you must buy and sell securities frequently and look to make money on short-term swings in prices. And the trading activities must be continuous over the full year and not just for a couple of months. This is different from an investor, who profits mainly on long-term appreciation and dividends. Investors hold their securities for longer periods and sell much less often than traders.

The IRS knows that many filers who report trading losses or expenses on Schedule C are actually investors. It's pulling returns to check whether the taxpayer is a bona fide trader or an investor in disguise.

6. Claiming rental losses

The IRS actively scrutinizes rental real-estate losses, especially those written off by taxpayers who say they are real-estate professionals.

Normally, the passive loss rules prevent the deduction of rental real-estate losses. But there are two important exceptions.

If you actively participate in the renting of your property, you can deduct up to $25,000 of loss against your other income.
This $25,000 allowance phases out as adjusted gross income exceeds $100,000 and disappears entirely once your AGI reaches $150,000.

A second exception applies to real-estate professionals. Real-estate pros who spend more than 50% of their working hours and more than 750 hours each year materially participating in real estate as developers, brokers, landlords, agents or the like, can write off their rental losses without limitation.

The IRS is pulling returns with large rental losses taken on Schedule C by individuals who claim they are real-estate professionals, and whose returns also report lots of income from other sources (wages, investment and retirement income, non-real estate businesses, etc.). Agents are checking to see whether these filers worked the necessary hours, especially in cases of landlords whose day jobs are not in the real-estate business.

7. Taking the R&D credit

The research and development (R&D) credit is one of the most popular business tax breaks, but it's also one that IRS agents have found is prime for abuse.

The IRS is on the lookout for taxpayers who fraudulently claim R&D credits and promoters who aggressively market R&D credit schemes. These promoters are pushing certain businesses to claim the credit for routine day-to-day activities and to overinflate wages and expenses in the calculation of the credit.

To be eligible for the credit, a business must conduct qualified research—that is, its research activities must rise to the level of a process of experimentation. Among the activities that aren't credit-eligible are customer-funded research, adaptation of an existing product or business, research after commercial production, and activities in which there is no uncertainty about the potential for a desired result.

8. Operating a marijuana business

Marijuana businesses have an income tax problem. They're prohibited from claiming business write-offs, other than for the cost of the weed, even in the ever-growing number of states where it's legal to sell, grow, and use marijuana for medical or other purposes. That's because a federal statute bars tax deductions for sellers of controlled substances that are illegal under federal law, such as marijuana.

The IRS is eyeing legal marijuana firms that take improper write-offs on their returns. Agents come in and disallow deductions on audit, and courts consistently side with the IRS on this issue. The IRS can also use third-party summons to state agencies, etc., to seek information in circumstances where taxpayers have refused to comply with document requests from revenue agents during an audit.

Former President Biden's administration proposed rules to reclassify marijuana from a Schedule I drug to a Schedule III drug under the Controlled Substances Act. If the rules are adopted as final, marijuana businesses in states in which cannabis is legal could deduct business expenses on their federal tax returns. It is unclear how President Trump plans to handle this.

9. Big deductions for meals and travel

Is it business or pleasure? A large write-off on Schedule C for restaurant tabs and hotel stays will set off alarm bells, especially if the amount seems too high for the business or profession.

To qualify for meal deductions, you must keep detailed records that document the amount, place, people attending, business purpose, and nature of the discussion or meeting. Without proper documentation, your deduction is toast.

10. Claiming home-office deductions

Entrepreneurs can deduct on Schedule C a percentage of rent, real-estate taxes, utilities, phone bills, insurance and other costs that are properly allocated to a home office. That's a great deal.

Alternatively, you have a simplified option for claiming this deduction: The write-off can be based on a standard rate of $5 per square foot of space used for business, with a maximum deduction of $1,500.

To take advantage of this tax benefit, you must use the space exclusively and regularly as your principal place of business.
That makes it difficult to successfully claim a guest bedroom or children's playroom as a home office, even if you also use the space to do your work.
"Exclusive use" means that a specific area of the home is used only for trade or business, not also for the family to watch TV at night.

There's no getting around the fact that the IRS is drawn to returns that claim home office write-offs. It has historically found success knocking down the deduction. Your audit risk increases if the deduction is taken on a return that reports a Schedule C loss and/or shows income from wages.

Currently, home office deductions are only available to people who are self-employed. If you are an employee, you cannot take a deduction for a home office on your tax return. This is so even in cases where your employer closes your physical office and classifies all workers as remote.

IRS Direct File: What You Need to Know for 2025

Kate Schubel — Fri, 24 Jan 2025 15:19:10 +0000

The IRS Direct File program will not be offered for the 2026 filing season, leaving potentially millions of taxpayers without this free file option.

The program, which allowed residents in 25 pilot states to file directly with the federal tax agency, was officially discontinued this month. The decision to shutter Direct File was set in motion by the 2025 Trump tax bill, though officially executed after a long-awaited U.S. Treasury Department task force report was released.

Here's more of what you need to know.

What was IRS Direct File?

Direct File was a free way for taxpayers to file directly with the IRS. It was created after the tax agency found that many filers would be interested in such a program, with funding from the Inflation Reduction Act (IRA), signature legislation from the Biden administration.

For last year's 2024 tax filing season, Direct File's initial pilot proved a success across 12 participating states, with over 140,000 taxpayers using the service.
According to the IRS, most reported their experience with the program as “Excellent” or “Above Average.”
In tax season 2025, the Direct File program opened on January 27 (the day the IRS officially began accepting returns), and 30 million taxpayers were expected to be eligible.)

However, participation was on a state-by-state basis. Basically, you could only use Direct File if you lived in a nonparticipating state, the District of Columbia, or a U.S. territory.

IRS Free File vs. Direct File: What’s the difference?

Although they may have similar names, the IRS Direct File program differed from Free File. Free File partners with private-sector companies to offer free tax filing services, while Direct File was an option to file directly through the IRS.

Unique eligibility requirements also separated the two programs. Free File is generally for taxpayers with lower- to middle-income. For tax year 2025, that’s an adjusted gross income (AGI) of $84,000 or less (for guided tax software).

Comparatively, Direct File had the following income limits:

Filing Status	Income Limit (must be less than)
Single Filer	$200,000 in one income source ($168,600 if multiple employers)
Married Filing Jointly	$250,000 in combined income ($168,600 if multiple employers) AND under $200,000 for one spouse
Married Filing Separate	$125,000 in income

However, Direct File was limited by the types of income the tool could accept.

Commonly accepted incomes included: W-2s, Social Security, unemployment benefits, interest income, and HSA distributions. If you had income types that fell outside of that, like gig economy income, business income, rental income, or capital gains and dividends, you could not use Direct File. Certain deductions and credits were also limited for Direct File.

When Did IRS Direct File End? The Final 2025 Status

According to the Associated Press, IRS official Cynthia Noe reportedly sent an email earlier this month to state comptrollers that typically participate in the program.

"IRS Direct File will not be available in Filing Season 2026," the email read. "No launch date has been set for the future."

The announcement came after a Treasury task force report recommended terminating the program last month. Among the reasons cited were cost and low participation. The report stated that the program had cost about $138 per return to administer, though the uptake had risen 111% compared to the year prior.

Instead of Direct File, the GOP seeks to further improve the IRS's Free File program, according to the Treasury report. However, Direct File was established to address the limitations of Free File, like income limits and varied tax situations.

Plus, limitations aside, some are concerned that the call to eliminate Direct File is mainly due to its competition with commercial tax preparation software like H&R Block and TurboTax. (Free File uses private tax software companies.)

Regardless, taxpayers who have used Direct File for the last two years should begin searching for other free ways to file taxes for the 2026 filing season.

Tax Pros: Is Someone Fraudulently Filing Returns With Your PTIN?

Kelley R. Taylor — Tue, 10 Dec 2024 18:39:00 +0000

As tax season approaches, the IRS is reminding CPAs and other tax professionals to verify that their Preparer Tax Identification Number (PTIN) is current and valid.

This unique identifier, issued by the federal tax agency, is crucial for anyone preparing federal tax returns for compensation.

Notably, the risks associated with an expired PTIN extend beyond the possibility of incurring IRS penalties. Unfortunately, fraud involving PTINs is more common than one might expect. So, here’s more of what you need to know.

What does PTIN stand for?

A PTIN is an 8-digit number assigned to tax preparers by the IRS. It serves as an official identifier, starting with the letter P, that allows the tax agency to track and regulate tax preparation activities.

Every paid tax preparer should have their own PTIN, which should be included on all federal tax returns they prepare.

Preparing federal tax returns for compensation without a valid PTIN is against IRS regulations
Those who prepare their own taxes, file joint returns, or prepare taxes for friends and family without compensation don’t need a PTIN
A current PTIN can help ensure your client's tax returns are processed smoothly and without delays.
If you use an expired PTIN, you could face IRS penalties

According to the IRS, the penalty for returns filed in 2024 without a valid PTIN is $60 for each failure, and the maximum penalty is $30,000. For returns filed in 2025, the penalty is $60 for each failure, and the maximum penalty is $31,500.

PTIN Renewal 2025: How much does an IRS PTIN cost?

PTINs expire on December 31st each year. The renewal process typically opens in October for the following year and can be completed online at the IRS website.

If your PTIN has expired, the IRS encourages you to renew it to avoid complications.

The renewal fee is $19.75, and you can pay it to the IRS via eCheck, credit, ATM, or debit card.

Don’t have a PTIN? The IRS says that “most first-time PTIN applicants can obtain a PTIN online in about 15 minutes. The fee is $19.75 and is non-refundable. View this checklist to get started.”

PTIN risks

If you haven't renewed your PTIN and don’t actively use it, someone else might fraudulently misuse it to prepare tax returns. This could result in identity theft or liability for returns filed in your name without your knowledge.

For example, since PTINs must be included on tax returns prepared for compensation, they can be visible on those documents, making them susceptible to unauthorized use.

It’s also important to note that the IRS maintains a public directory of PTIN holders to help individuals find professional, credentialed tax preparers. Partly due to the Freedom of Information Act (FOIA), this information is available online, which could inadvertently contribute to potential fraudulent activity involving expired PTINs.

Some typical forms of PTIN misuse include:

Using Another Preparer's PTIN: A fraudulent preparer might use a valid PTIN belonging to a legitimate tax professional to file returns without authorization.
Preparing Returns Without a Valid PTIN: Some preparers may operate with an expired or revoked PTIN or prepare returns without obtaining one.
Identity Theft: Criminals could steal a tax preparer's identity and use their PTIN to file fraudulent returns.
Sharing PTINs: Multiple preparers might improperly share a single PTIN instead of each obtaining their own.

To protect against these risks, the IRS reminds tax professionals to regularly check their PTIN accounts for suspicious activity and report any suspected misuse using Form 14157.

IRS PTIN monitoring

The IRS also says it “actively monitors” PTIN usage and may take enforcement actions against non-compliant tax preparers.

For example, if your PTIN has expired, you might receive a letter from the IRS. These letters are supposed to alert tax professionals about their PTIN status and prompt action.

A typical notification letter states that your PTIN has expired, emphasizes the requirement for an active PTIN, provides renewal instructions, reminds you about potential penalties, and may include information about the annual renewal period.

What about emails from the IRS? Typically, the IRS won’t contact taxpayers via email. However, it could happen that you, as a tax preparer, receive a legitimate IRS email regarding PTIN issues.

If you do, the IRS points to the following two valid sender email addresses: irs@service.govdelivery.com and Taxpros@ptin.irs.gov.

Note: Those email addresses can be fraudulently spoofed, so be extremely cautious and don't reply to unsolicited emails. Instead, contact the IRS directly and/or report suspected phishing emails.

Is Your PTIN valid? Bottom Line

Given all this, it's crucial to check your PTIN status. If you discover yours has expired take action and if need be, renew it through the IRS website.

It's worth noting that some CPAs notice that tax returns continue to be filed with expired PTINs, which indicates potential fraudulent activity by unauthorized individuals.

If you haven’t prepared returns for compensation since your PTIN expired but suspect someone else is using your expired PTIN, report it by filing Form 14157 with the IRS.

Tax Software vs a Tax Professional: Which Should You Choose?

Marguerita M. Cheng, CFP® & RICP® — Sat, 30 Nov 2024 10:30:00 +0000

Many tax filers find tax-preparation software to be very useful, and most tax software is simple to use, cost-efficient (especially when compared to the cost of hiring a certified public accountant, or CPA) and fast (some returns may be completed in just an hour).

The proof of its popularity: The tax-prep software market was valued at $17.9 billion in 2024 by Fortune Business Insights and is projected to grow to $47.9 billion by 2032.

As we approach a new tax year, you might be wondering whether you could ditch your tax professional and stick with tax software. It depends on the nature of your financial situation. Let’s consider some financial situations that are appropriate for tax software and some that might require the expertise of a tax professional.

When should you consider using tax software?

Tax-prep software is most appropriate when your financial situation is straightforward. In the world of tax, the following qualifies as a straightforward financial situation:

You opt for the standard deduction, a fixed amount that is subtracted from your income to arrive at your taxable income, instead of itemizing your deductions.
You earn only employment income and receive a Form W-2 from your employer.
You invest only in traditional assets like stocks and bonds.
You’ve resided in only one state all year.

In essence, the fewer your tax events and the fewer tax forms you will need to complete, the more you can rely on tax-prep software.

When should you stick to a tax professional?

However, the financial situations of many people are more complicated. If any of the following apply to you, tax-prep software might not be entirely up to the job:

You itemize your deductions rather than using the standard deduction.
You have multiple sources of income, such as 1099 income (dividends, rental income, earnings from a side hustle, etc.), or you juggle two or more jobs.
You are self-employed or own a business.
If you are a partner in a business, you will need to report your share of income, losses, deductions and credits on Form K-1. The form also applies if you have shares in an S corporation.
You earn income in multiple jurisdictions.
You own non-traditional assets such as commodities, derivatives and currencies, among others.
You are focused on retirement planning and estate planning and need help identifying tax-efficient strategies to maximize your retirement income and the estate you leave to your loved ones.
You sold a business. The tax implications will depend on the business structure (LLC, partnership, S corp, etc.) and whether it is an asset sale (selling the business assets) or stock sale (selling ownership). Tax professionals can help you minimize your tax liability.
You received equity compensation. Different tax rules apply to the four types of stock (or equity) compensation — restricted stock awards, restricted stock units, non-qualified stock options and incentive stock options. Tax professionals can help you plan how to hold and exercise these options to minimize your tax liability.
You got divorced. If you file taxes jointly with your partner, then a divorce can complicate tax matters.

One point that you should note is that the more complicated your financial situation is, the more tax planning you need to minimize your tax liability.

While tax software can help with tax compliance — filing the necessary tax returns and paying the right amount — it cannot help much with tax planning — making decisions that will help reduce your tax liability.

Which tax professional do you need?

Though we have used “tax professional” throughout this article to refer to experts in tax matters in general, there are some key differences among who does what.

CPAs are full-time accountants who are very familiar with the tax code. They often work with businesses or those involved in long-term tax planning.
Enrolled agents (EAs) can help prepare your tax return, advise you on tax matters and even represent you before the IRS for a tax audit. The IRS issues the EA credential to those who have met the requirements.
Tax consultants or advisers usually have the same expertise on tax matters as CPAs. You can rely on them for both tax compliance and planning, especially in more complex situations.

However, while taxation is only one area of expertise for a CPA (financial planning, financial statements preparation, etc., being others), tax consultants are laser-focused on taxation.

So, which professional should you choose?

If you are looking only for tax preparation in situations that are a tad too complex for tax software, an EA may be all that you need.

However, if you are a business owner or you need long-term tax planning (especially relating to retirement and estate planning), investing the extra bucks in tax consultants or CPAs may be appropriate.

Finally, choosing between a tax consultant and a CPA boils down to the scope of services you want. If you are a business in need of more than just tax planning, a CPA might be in a better position to help.

In sum, while tax-preparation software has revolutionized the world of taxation by providing taxpayers with a fast, cost-effective and simple way to file their tax returns, some complex financial situations still require the personal touch of a tax professional.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

2025 Standard Deduction Changes Under New Trump Tax Bill

Kate Schubel — Tue, 22 Oct 2024 14:40:20 +0000

In light of the recent GOP tax bill being signed into law by President Trump, many may wonder: What is the new standard deduction?

The reconciliation bill, dubbed the "big beautiful bill" (BBB), includes a bunch of tax cuts and provisions that will impact U.S. taxpayers for years to come.

One of these provisions has to do with the standard deduction you'll use for tax returns you'll file in early 2026. While the IRS increased the standard deduction last fall, the new amounts for 2025 have been increased again under the BBB.

This is in addition to the usual annual adjustment for inflation, which means the newly raised standard deduction will also increase each year.

Plus, the Trump/GOP tax bill introduces a new temporary bonus deduction for those 65 and older. Interested? Read on.

In the news: The 2026 Standard Deduction is Here.

What is the new standard deduction amount for 2025?

The standard deduction amounts have increased under the 2025 Trump tax bill between $1,150 and $2,300 from prior-year numbers.

Below are the 2025 amounts:

Married Filing Joint and Surviving Spouses	$31,500	Increase of $2,300 from the prior tax year
Single and Married Filing Separately	$15,750	Increase of $1,150 from the prior tax year
Heads of Household	$23,625	Increase of $1,725 from the prior tax year

It's important to note that the above chart reflects the IRS's change to the standard deduction in the fall, plus the BBB increase.

So, for example, while the IRS initially increased the 2025 single filer deduction from $14,600 to $15,000 as part of its normal inflation adjustment, the BBB has now further increased that amount to $15,750.

2025 standard deduction over age 65

As Kiplinger has reported, there's an existing extra standard deduction for taxpayers 65 and older and those who are blind. For 2025, that additional amount is $1,600 ($2,000 if unmarried and not a surviving spouse).

Those eligible can add the extra standard deduction to the regular amount for their filing status. So, a single taxpayer 65 or older (or who is blind) can claim a total standard deduction of $17,750 on their 2025 federal tax return.

But the Trump tax overhaul introduces a new bonus standard deduction of $6,000 for those age 65 and older. This may be added to the additional standard deduction for 2025; however, the "bonus" amount is temporary and phases out for incomes above certain thresholds.

For more information on how the additional deduction works, see: The Extra Standard Deduction for People 65 or Older.

What about dependents?

Your standard deduction amount may differ if you can be claimed as a dependent on another taxpayer’s federal tax return.

The 2025 standard deduction for dependents is limited to either $1,350 or the sum of $450 and the dependent’s earned income, whichever is greater.

Note: The standard deduction for dependents cannot exceed the regular standard deduction for your filing status, even if your earned income is higher than the basic standard deduction amount.

2025 Trump tax bill standard deduction changes vs. the TCJA

It’s important to keep in mind that the TCJA, also known as the “Trump tax cuts,” almost doubled the standard deduction about seven years ago. Before the TCJA, the 2018 amounts for single filers and married filing jointly couples jointly were $6,500 and $12,000, respectively.

After the TCJA was enacted, the base standard deduction amounts jumped to $13,000 (single filers) and $24,000 (married filing jointly). As mentioned, the standard deduction is adjusted for inflation each year, and the BBB increases those amounts further.

The new "Trump tax bill," as the BBB is also called, raises each of the 2025 standard deduction amounts from anywhere between $750 to $1,500. The bill also introduced a $6,000 temporary bonus deduction for qualifying adults over 65 ($12,000 if both spouses qualify).

This brings the highest possible standard deduction amount to $46,700 for married filing joint couples who are both over 65 and qualify for the bonus deduction.

For more information on how to calculate your total standard deduction, see: The Extra Deduction for Those Over 65 Changes Again.

What about BBB 2025 tax brackets?

For 2025 (returns you'll usually file in early 2026), the top tax rate of 37% applies to single filers with incomes exceeding $626,350, up from $609,350 in the prior tax year.

While the Trump tax bill didn't raise tax bracket limits, it made the existing thresholds permanent.

This upward revision of income thresholds across all brackets means some taxpayers may find themselves in a lower tax bracket for the same income level compared to the previous year.

For more information, see Kiplinger's report 2025 Income Tax Brackets Are Set: What to Know Now.

The TCJA: Key Facts on the 2017 'Trump Tax Cuts' and What's Extended for 2025

Kate Schubel — Fri, 20 Sep 2024 14:44:00 +0000

The Tax Cuts and Jobs Act (TCJA) became effective more than seven years ago as a major Trump administration tax code overhaul.

Before the recently so-called "One Big Beautiful Bill" (OBBB), the TCJA was the biggest change to tax law and policy in recent decades. (That's why the TCJA is also known as the "Trump tax cuts.")

Extending the expiring TCJA provisions in the OBBB affects millions of taxpayers across the U.S. since its provisions cover everything from changes to the standard deduction and the child tax credit to income tax rates and even the availability and amounts of other popular tax credits and deductions.

While many key TCJA provisions were extended in the OBBB, some were not. For instance, certain individual Alternative Minimum Tax (AMT) phaseout limits reverted to 2018 levels.

We’ll cover what the TCJA is, several provisions that remain, and how it all might impact your household.

TCJA Explained

What is the TCJA?

The TCJA was a sweeping tax overhaul that reduced tax rates, changed processes, and restructured individual and corporate tax frameworks.

As mentioned, the law, enacted in 2017, is also known as the "Trump tax cuts" because it was a signature piece of legislation in Trump's first term as president.

Several significant tax changes are in the TCJA, but a major one was a temporary reduction in individual federal income tax rates.

Tax Rates

TCJA income tax changes

Almost every U.S. taxpayer was affected in some way by the TCJA. Below are a few highlights from the tax rates and the bracket changes tied to them. We’ll use the data to illustrate examples of the 2017 law’s impact.

Source: Tax Policy Center. The tax bracket income thresholds here compare 2018 prior and post-TCJA amounts to show the immediate impact of the TCJA on tax brackets.

Federal income tax brackets are adjusted annually for inflation, so these comparisons don't reflect current federal income tax brackets for the 2025 tax year.

2017 (Before the TCJA)
Single Filer	Married, Filing Jointly	Rate
$38,700 to $93,700	$77,400 to $156,150	25%
$424,950 to $426,700	$424,950 to $480,050	35%
$426,700+	$480,050+	39.6%

2018 (With the TCJA)
Single Filer	Married, Filing Jointly	Rate
$38,700 to $82,500	$77,400 to $165,000	22%
$200,000 to $500,000	$400,000 to $600,000	35%
$500,000+	$600,000+	37%

As shown above, a single filer with income above $38,700 before the TCJA was enacted would have been subject to a 25% federal tax rate. The year following the TCJA's enactment, that same income level was instead subject to a 22% tax.

Another example from above is a married, filing jointly couple with income above $480,050 before the TCJA was enacted would have been subject to a 39.6% marginal federal tax rate. The year after the TCJA was signed into law, those earnings were instead subject to a 35% tax.

Note: Remember that the above examples merely illustrate the immediate impact of the change in tax rates from 2017 to 2018. Since federal tax brackets are adjusted yearly for inflation, the income tax brackets for 2025 are not reflected in that chart. For more information, see 2025 Federal Tax Brackets and Income Tax Rates.

Most tax rates were reduced under TCJA. However, the lowest tax rate of 10% was not. Taxpayers in the lowest bracket before and after the TCJA could have been subject to a 10% tax.

Households earning $450,000 or more received about 45% of benefits from the TCJA. As you can see from the above examples, under the TCJA, those with higher incomes generally saved more on taxes than taxpayers with lower incomes.

Note: In the newly enacted OBBB, the post-TCJA federal income tax bracket schedule and lower rates were made permanent.

Child Tax Credit

TCJA child credit changes

The TCJA also cut personal exemptions and expanded the federal child tax credit (CTC). That meant families could no longer take the personal and dependent exemption, which was $4,050 (indexed for inflation).

And under the newly signed OBBB law, the elimination of the personal and dependent exemption is permanent.

Before the TCJA, 292.7 million people claimed personal and dependent exemptions. Total taxpayer savings were in the billions, so individuals could potentially see a reduction in savings with permanent termination.

However, a higher CTC amount, which used to be $1,000, pre-TCJA, has become permanent under the OBBB.

The new CTC amount under the OBBB is $2,200 per child.
The tax law also indexes the credit amount for inflation yearly, starting in 2026.
The qualifying child’s age for this credit remains at 17 and under (pre-TCJA allowed a credit for children 16 and under).

As Kiplinger previously reported, data show that poverty levels can decrease when families benefit from an expanded CTC. But it hasn’t ended there.

The OBBB also maintains the increased income phase-out thresholds, the nonrefundable, non-child dependent credit, and leaves the refundable part of the child tax credit at $1,700.

For more information, check out Kiplinger's report, Three Major Changes Coming to Parents Under the Trump Megabill.

Note: The TCJA also changed the child tax credit requirements regarding Social Security numbers (SSN). Before, a qualifying child didn’t have to have an SSN. After, children without eligible SSNs couldn’t qualify for the full credit. Under the OBBB, a child's and his or her parents' SSNs are required to claim the credit.

Standard Deduction

TCJA doubled standard deduction

The TCJA almost doubled the baseline federal standard deduction.

When the TCJA was enacted, the standard deduction jumped from $6,500 to $12,000 (single filer). For married, filing jointly filers, the standard deduction increased from $13,000 to $24,000. The standard deduction is indexed annually for inflation.

Some bipartisan organizations suggest that the larger standard deduction offered by the TCJA leads to a progressive tax rate (a rate that increases as taxable income increases). This would mainly benefit middle-class and low-income households.

According to the Center for Economic and Policy Research (CEPR), studies have shown that more people with $200,000 or less in income took the standard deduction when the TCJA was first enacted. However, it should also be noted that data show most people took the standard deduction before the TCJA.

Under the recently signed OBBB, the raised standard deduction amounts are made permanent and further increased with an extra year of inflation adjustment.

For tax years 2025, the bill increases the standard deduction by the following amounts:

Single filers get an extra $750
Married, filing jointly couples receive an extra $1,500
Head-of-household filers get an additional $1,125

For information about the current standard deduction, see How Does the Standard Deduction Work?

SALT Cap

New SALT Cap Limit under TCJA and OBBB Changes

The TCJA also limited the amount of state and local tax (SALT) you could deduct. The SALT deduction includes property tax and other taxpayer liabilities already taken out for state and local services.

Pre-TCJA, the deduction was limitless; after the law was enacted, you could only deduct up to $10,000 of your state and local taxes. This mainly affected those with high-worth homes or state and local taxes in high-cost areas, such as New York, New Jersey, or California.

For example, homeowners could no longer itemize the full amount they pay in state, local, and property taxes if they pay more than $10,000. This meant those taxpayers saw fewer benefits.

However, the OBBB includes a provision temporarily raising the SALT cap to $40,000.

The cap will increase by 1% annually from 2026 through 2029.
Starting in 2030, the SALT cap will expire and revert to the $10,000 TCJA limit.
Those with modified adjusted gross income (MAGI) above $500,000 or more are subject to a phaseout ($250,000 if married filing separately).

There was much debate before the OBBB's temporary raise on the SALT cap was made final.

Rep. Nick Lalota (R-N.Y.), an outspoken critic of the SALT cap, told Politico that the tax bill was "dead effectively on the floor" under the original $10,000 the GOP proposed. Other Republicans representing high-tax districts have argued that a later proposed limit of $30,000 was still too low.

This might hint at future negotiations down the road when the $40,000 SALT cap expires in 2030.

For more information, see Kiplinger's report: SALT Deduction 2025: Three Things to Know Now.

Did itemized deductions go away under the TCJA?

The TCJA affected other miscellaneous itemized deductions in the following ways:

It limited deductible medical expenses and deductible home-equity loan interest. The medical expense limit was later made permanent. The OBBB also made the limit on home-equity loan interest permanent, unless the loan is for buying, building, or substantially improving the home securing the loan.
Increased the charitable contribution deduction rate from 50% to 60%. The OBBB made this provision permanent.
Repealed a “Pease” limitation, which reduced itemized deductions based on taxable income above certain thresholds. The OBBB repeals the Pease limitation and replaces it with a new limit on itemized deductions, which applies mostly to taxpayers in the highest income tax bracket.

The TCJA also eliminated the deduction for unreimbursed employee expenses and tax prep fees, for alimony, hobby expenses, and moving expenses (unless you're military), and the deduction for casualty and theft losses, except for certain losses in federally declared disaster areas.

Those "miscellaneous itemized deductions" were permanently removed under the "One Big Beautiful Bill." However, the increased standard deduction in the OBBB might result in a larger tax refund for some taxpayers next year.

For more information, check out Kiplinger's report, Five Ways Trump's 2025 Tax Bill Could Boost (or Shrink) Your Tax Refund.

Many TCJA or "Trump tax cuts" were extended under the new OBBB, or "One Big Beautiful Bill" tax law. (Image credit: Getty Images)

Alternative Minimum Tax

How the TCJA affected AMT (Alternative Minimum Tax)

The Alternative Minimum Tax (AMT) places a floor on the amount that higher-income taxpayers must pay, regardless of credits or deductions taken on their taxes.

The AMT’s income level and phase-out were raised under TCJA. This meant fewer higher-income people qualified for AMT (which for 2025 applies to taxpayers earning above $239,100). If a taxpayer did qualify, they generally paid less in taxes.

For example, the Tax Policy Center estimated that the number of taxpayers who would have paid AMT the year TCJA was enacted fell by about 5 million. This was big news for people who were subject to what some call a "parallel tax system," which provided the government with about $34 billion in revenue the year before TCJA.

Under the OBBB, certain AMT increased thresholds were made permanent.

For instance, the current exemption amounts have been extended, meaning AMT won't kick in until you meet the post-TCJA limits of $88,100 (single filers) or $137,000 (married, filing jointly, couples).

However, the higher phaseout limits have reverted to pre-TCJA levels. This effectively lowers the phaseouts to $1,000,000 for married filing joint filers and $500,000 for single filers. The rate at which the exemption is phased out has also been increased from 25% to 50% as income increases.

Estate Tax

Estate tax exemption extension

Another benefit for wealthier taxpayers under the TCJA is the doubling of the federal estate tax exemption.

In 2017, instead of paying taxes on estates above $5.6 million, higher-income individuals were not taxed until $11.2 million. The threshold is inflation-adjusted annually, with the current exemption level at $13.99 million.

The recently signed OBBB makes the higher exemption for the estate tax permanent. Not only that, but the law also indexes the estate exemption for inflation and raises the 2026 amounts to $15 million for single filers and $30 million for married couples.

For more information, see Kiplinger's report Big GOP Tax Bill Could Change Your Estate Planning for 2025.

Corporate Tax

Trump corporate tax rate

The TCJA changed taxes for businesses, too. For example, the TCJA cut the corporate income tax (CIT) from 35% to 21%. This was a permanent change.

Though the effect of lower corporate tax rates is debated in economic circles, the Tax Foundation reports that the burden of the CIT falls on consumers. Consequently, a lower CIT might entice companies to raise wages and lower prices for buyers.

Other TCJA changes made for businesses included:

Created a 20% deduction on qualified business income for some business owners (pass-through entities). The OBBB made this deduction permanent.
Limited deduction for meals and entertainment expenses (the latter are generally not deductible). The TCJA made this change permanent.
Largely eliminated tax deductibility of net operating losses (NOL) for businesses. (The TCJA limited the NOL deduction to 80% of taxable income and eliminated most carrybacks.) This provision is permanent.
Limited business interest expenses. (The OBBB makes a more restrictive calculation of adjusted taxable income (ATI) permanent.)
Allowed 100% expensing on some business property for specific tax years. (This provision was set to phase out gradually after 2022.) The OBBB allows taxpayers to immediately expense 100% of qualified short-lived property that was placed in service on or after January 20, 2025.

That last point, on expensing business property, concerns depreciation. Normally, business assets are depreciated over their useful life (typically five, 10, or 15 years). Before the TCJA, tax law generally allowed some equipment to be partially expensed, but it was only 40% of qualifying assets.

The OBBB extends the TCJA provision allowing businesses to fully and immediately expense their qualifying short-lived assets placed in service after January 19 and before January 1, 2030. (Other types of property may be subject to a different duration of tax benefits.)

Accelerated depreciation creates a greater tax difference between reportable income (what the stockholders see) and taxable income (what the IRS sees). But this difference is temporary. In later years, when the asset has been fully expensed for tax purposes, but not for reportable income purposes, the business will pay more tax on that asset.

That is why accelerated depreciation might be called a "deferred tax liability." Businesses pay less in taxes now for greater tax liability in the future.

Effectively, immediate expensing allows companies to invest more in the short term. This could create more jobs, boost productivity, and raise wages.

TCJA vs. OBBB

Bottom line: Trump tax bill extends TCJA provisions

Many TCJA cuts became permanent. However, doing so came with a price tag.

The OBBB is estimated to cost about $4.5 trillion over ten years, according to Tax Notes. This significant federal deficit impact could impact your wallet through higher borrowing costs and potential future tax increases, or in other ways.

You might want to get a head start on your 2026 tax planning. Consult with a tax planner to look at your financial situation to see whether any recent tax changes apply to you.

Do You Fear an IRS Audit? You Shouldn't if You Do Your Homework

Matthew Chancey, CFP® — Sun, 09 Jun 2024 09:45:58 +0000

Audit. The word strikes fear in many people. They dread the scrutiny, penalties and other unfortunate outcomes when the IRS questions the accuracy or the veracity of their tax return.

The IRS recently announced its plans to significantly ramp up tax audits on the wealthiest taxpayers, large corporations and large, complex partnerships for tax year 2026. Audit rates will increase by more than 50% for those with total positive income of more than $10 million. That news is sure to trigger anxiety in some high-net-worth individuals.

But if you’re in that bracket, or any tax bracket for that matter, let me set your anxieties at ease. An IRS audit is more of an exercise that seeks documentation; it’s not necessarily an accusatory event.

You learned this in grade school

I like to think of an IRS audit as something that is similar to what goes on in classrooms. Remember when you had to take math tests in elementary school? Maybe you had to answer a quiz with 10 multiplication problems. You did them all in your head and turned in your exam.

The teacher looked at your answers, which were all correct. But she noticed you didn’t show your work. She couldn’t tell by merely checking your answers that you knew how to arrive at the solutions.

So she handed the exam back to you and said, “Can you show me how you solved these problems? Can I see the process you used to get these answers?”

When you get audited, the IRS wants to know how you got the answers you did.

Taxpayers should be able to explain and justify their tax positions and investments to the IRS. Proper documentation is crucial, and I advise clients to prioritize it. I tell them to make a note of what they do and when they do it. This way, they have their homework in place and ready to show the IRS if it’s needed. Start a file or folder that includes all the forms and documents that explain your financial actions.

The documentation should answer these questions:

What did you do?
How did you do it?
Why did you do it?
What documents do you have that support what you did?

Let’s say you’re a real estate professional. You need to have 750 hours a year of aggregated time in real estate activities to qualify as a real estate professional in the eyes of the IRS. Suppose the IRS decides to audit your return from five years ago. They ask for documentation to show that you spent 750 hours on real estate-related tasks during the year in question.

Do you have documentation that shows this? Maybe you spent an average of 40 hours a week at an office as a broker. You might have had regular training meetings with your staff. Your calendar may have been full of appointments. All those activities could serve as the evidence you need.

The approach for business owners is slightly different. These individuals are inherently risk-takers. Everything related to their business carries risk. They hope that by making purchases, investing in a workforce, targeting new markets or expanding their geographic reach, they’ll receive a return. Their goal is to generate revenue that exceeds the costs involved.

Translating this to tax planning, then, I ask, “Why would a business owner be any different when they’re looking at an advanced planning strategy?” They aim to take a calculated risk and say, “Can I document this position that gives me the ability to make an argument to the IRS on why this position works? If I were to get audited, do I have enough documentation to support it?”

Red flags that could trigger an audit

Most of the causes behind an audit stem from an error or omission. In some cases, not all the 1099s or K-1s get turned in. Illegal practices, such as fabricating documents, taking deductions that aren’t allowed or making up different types of expenses that didn’t occur, can lead to trouble.

Here are some situations that could draw the IRS’ attention:

Certain transactions. The IRS has identified the transactions on this list as potentially abusive. They are the same or substantially similar to those that the IRS has determined to be tax-avoidance transactions.

Dirty Dozen. The Dirty Dozen list, published annually by the IRS, highlights common tax scams and abusive transactions.

Active vs passive losses. Many taxpayers incorrectly use passive losses to offset active income (like wages). The IRS considers a passive business or trade activity one in which you don’t materially participate — i.e., you’re not involved in the operation on a regular or substantial basis. Popular passive activities include rental real estate, equipment leasing, limited partnerships and limited liability companies (LLCs). Passive losses can be written off only against passive gains.

Partnerships. The IRS is focused on partnerships that don’t pay corporate income taxes. Tiered partnerships, or those that own another one, can provide a way of hiding income.

Keep your transactions and actions well-documented so that you’re prepared if you get audited. In that event, you’ll be ready to show your homework. If you don’t want to have to represent yourself, there are attorneys and CPAs who specialize in tax-controversy work.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Why Your Tax Refund Could Be Higher This Year

Katelyn Washington — Sat, 23 Mar 2024 14:01:00 +0000

The latest IRS data show that the average federal tax refund is approximately $3,182. That’s more than $140 (5.1%) higher than it was at this time last year. But that doesn’t mean everyone will get a bigger tax refund from the IRS this year. Here are some reasons your refund could be more — or less — than last year.

2024 tax refund

IRS inflation-adjusted amounts could partially account for higher refunds in 2024. For example, 2023 standard deduction amounts increased by more than 6%, and federal income tax brackets also increased, so taxpayers who received only small raises (or none at all) may see a big difference in their 2023 tax liability when they file.

Families with lower incomes could see a significant increase in refund amounts too, even if they don’t benefit from the higher standard deduction. The maximum earned income tax credit (EITC) amount increased by nearly $500 for the 2023 tax year. And because the credit is 100% refundable, eligible taxpayers could receive the entire amount (up to $7,430) back as a tax refund.

What about the child tax credit? If the new child tax credit (CTC) becomes law this year, some families could receive even more money back as a tax refund.

However, the bipartisan tax bill, which includes an expansion to the CTC, is currently stalled in the Senate. So, there is no guarantee that the bill will become law before the end of the 2024 filing season — if at all.

What could cause a lower tax refund? There are several reasons your federal tax refund could be less this year.

If your dependent child turned 17 in 2023, they won’t qualify for the CTC.
Other major events, such as getting a divorce or an adult dependent moving out of the home, can decrease your refund amount.
If you (or a spouse if filing jointly) had a significant increase in income, you could be disqualified from claiming certain credits.
Underpaying when you made estimated tax payments for 2023 will increase your tax liability when you file.

There are many more reasons you could see your tax refund decrease (or your tax bill increase) in 2024. So, you may see a difference in your refund this year, even if none of the above events apply.

IRS refund schedule

While several “IRS refund schedules” are available online, the dates on those schedules are estimates. Some tax returns take longer to process than others, and several things, including incomplete returns and refunds that need adjusting, can cause processing delays.

However, the IRS issues refunds for most e-filed returns within three weeks. (Processing can take up to eight weeks for paper returns). E-filing and choosing to receive your refund via direct deposit remain the best options for receiving your refund sooner. You can begin checking the status of your tax return with ‘Where’s My Refund’ within 24 hours of IRS acceptance.

Where's my refund

To access the "Where's My Refund" tool, you need to enter your Social Security number or individual taxpayer identification number (TIN), the filing status used on your federal income tax return, and the exact whole dollar refund amount shown on your return. You can use either spouse's Social Security number if you filed a joint return.

'Where's My Refund' is only updated once per day — usually at night — so there's no need to check your status more often than that.

For more information see: Where's My Refund? How to Track Your Tax Refund Status.

How Much Richer Could You Be Without a Big Tax Refund?

Katelyn Washington — Wed, 13 Mar 2024 14:01:00 +0000

Many people rejoice each year when they receive their tax refund, but high refund amounts could mean that you overpaid your taxes throughout the year. And if that’s the case, you’ve essentially lent the government money, completely interest-free.

While no one wants a high-income tax bill, owing the IRS just a little could put more money in your pocket. Here’s how much richer you could be if you kept your money throughout the year instead of receiving it back as a tax refund.

IRS tax refund

According to the most recent IRS data, the average tax refund is $3,182 this month. That is a good chunk of change and is likely due, at least in part, to refunds that include the child tax credit (CTC).

Middle-class families who include other credits (including the CTC) on step 3 of their W-4 will likely have less federal income tax withheld from their paychecks. Of course, this could result in a lower tax refund when it’s time to file, but that is not necessarily a bad thing. With some adjustments to withholdings, some taxpayers could have pocketed just over $265 per month instead of receiving $3,182 all at once.

[Note: Projected earnings amounts are approximate and do not account for inflation.]

Saving for the future

If you had stashed away that $265 each month instead of waiting until tax time for your refund, you could have hundreds more in the bank. (That's assuming you deposited the money into a high-yield savings account with a 5.5% interest rate.) And even though savings rates are expected to fall, receiving a big tax refund in 2024 could cost you money next year as well.

	Deposit $265 per month	Deposit $3,182 per year	Difference
End of Year 1 (5.5%)	$3,261	$3,182	$79
End of Year 2 (4.6%)	$6,662	$6,514	$148
End of Year 3 (2.5%)	$10,047	$9,861	$186

Invest extra cash

If pocketing an additional $186 over three years isn’t enough to convince you that bigger tax refunds aren’t always better, perhaps pocketing an additional $4,637.69 will. Here is how much more money you could pocket over the years if you invest $265 each month rather than $3,182 per year, assuming a conservative 6% annual rate of return.

	Invest $265 monthly	Invest $3,182 annually	Difference
Year 5	$18,413.73	$17,937.23	$486.50
Year 10	$43,055.46	$41,941.29	$1,114.17
Year 15	$76,031.65	$74,064.14	$1,967.51
Year 20	$120,161.24	$117,051.75	$3,109.49
Year 25	$179,216.57	$174,578.88	$4,637.69

Income tax savings

Providing the government with an interest-free loan is not ideal, but it is worse to give away your hard-earned money. Missing out on often overlooked tax credits and deductions, such as the mortgage interest tax deduction and deduction for student loan interest, can result in the IRS keeping more of your money.

And don’t forget about ways to reduce your taxable income throughout the year. For example, record-high 2024 HSA contribution limits mean eligible taxpayers could reduce their taxable income by up to $8,300 this year. And IRA and 401(k) contribution limits are higher for 2024 than they were last year, too.

Just make sure you don’t exceed contribution limits for tax-advantaged or tax-deferred accounts. If you do, you could lose money instead of saving it. And if you do adjust your tax withholdings to receive a smaller tax refund next year, make sure you can pay the IRS (if you have a tax bill) on time because there are hefty penalties for paying late.

Because every tax situation is different, it’s a good idea to consult with a tax professional when determining how to keep more of your money year-round and during tax filing season.

Six Biggest Mistakes Made on Retirees’ Tax Returns

EBeach@exit59advisory.com (Evan T. Beach, CFP®, AWMA®) — Sun, 10 Mar 2024 09:30:02 +0000

The only thing worse than the monotonous task of preparing your tax return, or preparing your CPA to prepare your tax return, is doing it again on an amended return. We work with retirees to help maximize income, minimize taxes and plan their estate. Below are the six most common mistakes we see retirees make when seeking to minimize their lifetime tax burden.

Meet John and Linda. They are a newly retired fictional couple. We will use their story to illustrate, and help you prevent, some of the following mistakes.

1. Itemizing deductions vs taking the standard deduction.

One of the first things I notice when building out John and Linda’s financial plan is that there is still a mortgage balance. This is not an issue because they refinanced into a 15-year, 3% loan in 2021.

However, they assume that because they have a mortgage, they should itemize deductions. While that was often the case before tax laws changed in 2018, it is no longer. They have been taking the standard deduction for the last few years, which should have a downstream effect on several of the decisions they make.

John and Linda give to their church. They think that there is a tax benefit to this giving. Because they take the standard deduction, there is not. They could instead give appreciated stock and thus avoid capital gains taxes. More on that later.

Linda had a rough 2023, from a medical perspective. She spent an inordinate amount of time calculating the total cost because she believes it will be a deduction. But all you can deduct are the medical costs that exceed 7.5% of your AGI. To determine your itemized deductions total, add up medical costs, mortgage, state and local taxes and charitable donations. Then itemize only if that amount is greater than the standard deduction, which is above $30,000 for couples over 65, in 2023. (For more on this, see the article The Extra Standard Deduction for People Age 65 and Older.)

2. Improperly reporting qualified charitable distributions (QCDs).

Once John and Linda learn that they aren’t deriving any tax benefits for their charitable giving, they ask about a strategy their friend told them about: giving from their retirement accounts.

Qualified charitable distributions (QCDs) have been around for a while but have surged in popularity as fewer and fewer people itemize their deductions. Unfortunately, neither John nor Linda is 70½, the minimum age to make a QCD. Neither cracks a smile when I tell them to “be thankful for your youth.”

The biggest mistake I see among those who are eligible and who properly make the distribution is that they don’t actually report it on their return. I blame this on the custodians. On a Form 1099, custodians do not report who the money goes to — just that it has gone out.

Example: You give $30,000 from your retirement account to The Michael J. Fox Foundation. You take out an additional $10,000 to meet your required minimum distribution (RMD). Your 1099 will report a $40,000 distribution. There is no differentiation between recipients.

You have to report the gross distribution ($40,000) on line 4(a) and the net on line 4(b), of Form 1040. In between those, the letters “QCD” should be written. If you made a QCD and don’t see that reflected on your return, reach out to your preparer to make sure it was reported.

We rely on financial planning to see how much our clients can afford to give. We rely on tax planning software to see whether QCDs are the best way to give. You can access a free version of our planning software here.

3. Getting surprised by taxes via phantom gains or inefficient portfolios.

When I met with John and Linda in 2023, I was reviewing their 2022 return, which had a very large capital gain. Whenever I see this in a down year in the market, I ask what they sold. They told me they didn’t sell anything. Upon further review, we found that one of the mutual funds in their joint account had recognized significant capital gains.

Tax treatment within mutual funds passes capital gains, on a pro-rated basis, through to the owner of the fund. So, if the fund manager decides they no longer like Nvidia (NVDA), that gain passes along to you. Making money is still a good thing, and paying taxes is part of that. However, this makes tax planning very unpredictable. So we prefer to hold ETFs and individual stocks in taxable accounts. With these vehicles, you pay taxes when you sell, not when a fund manager does.

4. Selling stock with no basis.

We have recommended that John and Linda make their charitable contributions using stocks that have had significant gains. In looking at their statements, there are a few options. What really sticks out to me, though, are the five holdings that have no basis reported.

Custodians were not required to track basis on securities until 2011. So, many of the investments from before this period show up as “0” basis on a statement. If you sell them, the entire amount is taxed as a gain. People make this mistake all the time. It could be because they don’t realize or don’t want to take the time to make the calculation. If you’re in the latter boat, you may want to donate these shares if you were going to give that amount anyway. Odds are, if you’ve held them for 15-plus years, there is a significant gain.

5. Paying more than necessary for Medicare.

John filed for Medicare this year. Linda filed last year. Their premiums for 2024 are based on income in 2022, when both were working. They should consider filing an SSA-44, the life-changing event form. This will allow them to project current income and pay premiums based on their current income, not their income while they were both working.

As you may have inferred from the above paragraph, Medicare Parts B and D premiums fluctuate based on income. Like our tax rates, there are income thresholds above which your premium goes up. Often, I see people going slightly above these threshold amounts without realizing it. If we catch this before the return is filed, we will look for ways to bring down their gross income. (For more on this, see my article Four Things to Know if Medicare’s IRMAA Kicks In.)

6. Not taking advantage of lower tax years.

John and Linda were jazzed about the tax return their accountant projected. Neither worked the full year, so they overpaid based on what they had earned previously. Their taxes are likely to remain low until they tap Social Security and their retirement accounts.

We refer to the years between retirement and withdrawals as “tax valleys.” Tax peaks are during your peak earnings years, and valleys are just the opposite. Take advantage of those valleys by evaluating whether you can convert retirement funds, take distributions or sell capital gains at a lower rate than you would be able to in the future.

Often when I’m reading a “mistakes to avoid” article, it’s just to ensure I didn’t make those mistakes. This one is a bit different. While you may have fallen victim to a few of these, in some cases it means you can file an amended return and get money back. At the very least, you can fix the mistake in time for future years.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

What to Know About Medical Expenses and Your Tax Deductions: The Tax Letter

joy.taylor@futurenet.com (Joy Taylor) — Fri, 16 Feb 2024 21:23:03 +0000

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…

As you’re filling out your 2023 Form 1040 you may ask whether you should itemize on Schedule A or take the standard deduction. Most filers take the standard deduction because it’s higher than their total itemizations. But not all.

Take people with big medical bills. Itemizers can claim medical expenses not reimbursed by insurance, for themselves, their spouse and dependents. The cost must be incurred primarily to alleviate or prevent a physical or mental disability or illness. But there is a floor. Medical expenses are deductible only to the extent the total exceeds 7.5% of your adjusted gross income (AGI). For example, if you itemize, your AGI is $100,000 and your total medical expenses are $9,000, you can deduct only $1,500 of medical expenses on Schedule A ($9,000 - $7,500).

The list of eligible medical expenses for tax deductions is broader than most people think. It includes:

The basics: Such as out-of-pocket payments to doctors, dentists, optometrists and other medical professionals; mental health services; hospital stays; annual physicals; health insurance and Medicare premiums; prescription drugs; insulin; glasses and contact lenses; hearing aids; and dental work, such as braces and root canals.
In vitro fertilization: Amounts paid for IVF qualify as medical expenses.
Medical driving: The 2023 standard mileage rate is 22¢ per mile. It's 21¢ per mile in 2024.
Treatment for drug use or alcoholism: This cost is considered a medical expense.
Health and wellness costs: Among other health and wellness costs that qualify as deductible medicals are smoking cessation programs, nutritional counseling for a doctor-diagnosed disease, weight-loss programs and certain special food to help with the treatment of obesity, hypertension, heart disease or other physical illnesses diagnosed by a physician.
Long-term care costs: If you, your spouse or your dependent requires long-term care you may be able to deduct the unreimbursed costs as medical expenses. Long-term-care expenses include the costs of assisted living, in-home care and nursing home services. The long-term care must be medically necessary for one who is chronically ill. The costs of meals and lodging at an assisted living facility or a nursing home count as medical expenses for people mainly there for medical care. Premiums you pay for a long-term-care policy are deductible medicals, too. But the deduction is capped based on age. The older you are, the greater the write-off.
Certain home improvements to adapt to a disability or illness: For instance, ramps, wide doorways or entrances, railings and wheelchair lifts.
The cost of a service dog: Veterinary costs for a service dog to assist the visually impaired and others with physical disabilities are eligible for medical expense deductions. The same is true for the cost of buying and training the dog, plus feeding and grooming. An emotional support animal counts if needed primarily for the owner’s medical care to alleviate a mental disability or illness.
COVID-19 personal protective equipment: Masks, hand sanitizers and other supplies bought for the primary purpose of preventing the spread of COVID-19.
The cost of a legal abortion: The procedure must be performed in a state where abortion is legal. Transportation costs are deductible. Hotel expenses of up to $50 a night can also be deducted if the abortion is provided by a doctor in a licensed hospital or a medical care facility. You can take up to an additional $50 a night for a traveling companion’s lodging.
Genetic testing through DNA ancestry registries: If you use a DNA ancestry for genetic health testing, such as 23andMe, the portion of the DNA collection kit's cost that pertains to genetic testing may be treated as a deductible medical expense.

Among the costs that do not qualify as deductible medical expenses:

Most food, weight loss supplements or low-calorie beverages.
Weight-reduction programs or cosmetic surgery procedures to improve your appearance.
Gym membership fees.
Teeth whitening and hair transplants.
An elevator installed in your home (it adds value to your house).
Over-the-counter medications that are bought without a prescription.
Amounts paid for marijuana and other substances that aren't legal under federal law. It doesn't matter whether they are legal under state law.
Illegal operations or treatments.
Amounts paid to or for a gestational surrogate, including costs to identify and retain the surrogate and the person's medical expenses.

For more details on these and other qualifying and nonqualifying medical expenses, see IRS Publication 502, Medical and Dental Expenses.

Taylor Swift's 'Eras Tour' and a New Tax Rule? What To Know

Kelley R. Taylor — Sun, 01 Oct 2023 17:01:00 +0000

If you're a Swiftie or an NFL fan, you might not care so much that Travis Kelce of the Kansas City Chiefs and Taylor are dating. But all the excitement and talk about Taylor Swift has also raised questions about what Eras Tour tickets might have to do with your taxes.

So, to sort out some of the confusion, here’s what you need to know about how reselling concert tickets (not just those for Swift’s tour) might impact your tax bill.

Ticketmaster, StubHub tickets and your taxes

It's not uncommon to come across Eras Tour, Beyonce Renaissance Tour, and other tickets being resold on platforms like StubHub and Ticketmaster, particularly during times of high demand. Assuming, for instance, Swift's tour tickets originally sell for around $449, ticket resellers can profit substantially from selling coveted seats for $1,300 or more. That’s where tax could have come in if the IRS hadn't jumped in to change things.

Ticket resellers may have been subject to new IRS reporting requirements if, as in that example, they resold ticket(s) online and profited over $600. Form 1099-K reporting rules apply if you sell goods or services (not just concert tickets) online and receive payment through third-party payment networks like Stripe, PayPal, Venmo, and others.

That is the new “$600 rule.” For the 2022 tax year, the IRS delayed the implementation of the rule. That delay was supposed to give payment networks more time to prepare to send millions more 1099-K forms and online sellers more time to understand the new requirement. And just recently, the agency has decided to delay the $600 rule again until 2024.

So, for now, unless you have over $20,000 in payments for goods or services through online marketplaces or third-party payment processors in 2023, you don't have to worry about the $600 rule.

Online sales 1099-K reporting

Many businesses are subject to 1099-K reporting requirements. A few examples include popular platforms like Etsy, Depop, eBay, Poshmark, etc. (But this is far from an all-inclusive list.) If you need clarity on whether you will receive a 1099-K, most of these sites have information on their websites that can help.

However, personal transactions (e.g., personal payments to friends and family) on payment networks, including Venmo, PayPal, Cash App, etc., aren't considered "payments for goods and services." The 1099-K third-party payment network reporting rule doesn't apply to payments made that were gifts or other personal money payments to family and friends.

For now, the $600 rule won't apply for the 2023 tax year (i.e., federal income tax returns that are normally filed in April 2024). That means if you received payment (for goods or services) over $600 through online platforms this year, you shouldn't have to worry about receiving a 1099-K form by January 31, 2024, to use when you file your 2023 federal income tax return.

For 2024, the IRS is planning to phase in a $5,000 reporting threshold. To learn more, see 1099K Tax Reporting: What You Need To Know.

Will you have to pay taxes on your ticket sales?

Receiving a 1099-K doesn’t necessarily mean you will have to pay taxes on your ticket sales. For example, on its website, Ticketmaster tells sellers that the 1099-K “just provides the total gross transactional amount processed by Ticketmaster during that calendar year.” As always, your tax liability depends on several factors, including taxable income, tax deductions, and credits.

However, whether you receive a 1099-K or not, it is important to report any taxable income on your federal income tax return as required by the IRS. (This typically includes profits from reselling concert tickets.)

If you are worried about the impact of your online selling on your tax liability, consult a trustworthy tax professional.

How Long to Keep Tax Returns and Records? Kiplinger Tax Letter

joy.taylor@futurenet.com (Joy Taylor) — Fri, 22 Sep 2023 12:23:39 +0000

The 2024 tax filing season is in full swing. The IRS began accepting 2023 Forms 1040 and other federal tax returns on January 29. As you're getting ready to file your 2023 return, or perhaps even just thinking about filing, you may be wondering how long you need to keep your old tax returns and related records. We get asked this question a lot by people looking for a cutoff date to toss paperwork relating to taxes that they have been saving for years. The answer depends on the type of document and the kinds of transactions you engage in.

Tax returns and Records - General Rule
As a general rule, you should keep your tax returns and supporting documents for at least three years from the due date of your return. That’s generally how long the IRS has to question items on your return and to bill you for any additional tax. It’s also generally the timeframe to file an amended return to seek a refund. There are situations when the IRS can audit even older returns. The IRS can go back up to six years if your return omits more than 25% of income. If fraud is proven, there is no limit. Also, you may have to keep your state tax returns for longer than three years, depending on your state's rules.

Tax Returns and Records You Should Keep for Longer
Don’t automatically throw out all of your tax returns and records after three years. Look over old documents to see if you might need any parts of them in the future. Here are some common examples of records and returns that you should keep longer than three years.

Real Estate

Hold on to records that help establish the adjusted basis of real estate
Save your settlement sheet whenever you buy real property, including your home
Don’t throw away receipts or invoices for improvements made to the property that add to its value, prolong its useful life, or adapt it to new uses
If you have multiple real estate properties, it’s best to have separate folders for each
Retain all files until at least three years after you dispose of the property

Taxpayers who keep good records will find it easier to calculate the adjusted basis of their real estate investments, which you'll need when you sell the property, compared with people who don’t maintain records.

Securities
The same rules that apply to real estate apply to securities transactions. You should hold on to all records until at least three years after you dispose of the securities. Be sure to keep your purchase documents for taxable mutual funds, stocks and the like. You'll need to include the purchase date and cost on your return in the year you sell the assets. Among other records to maintain:

Those showing stock splits, dividend reinvestments and nontaxable distributions
If you invest in bonds or Treasury bills or notes, track when these securities mature

IRAs and 401(k)s
If you’ve made nondeductible pay-ins to traditional IRAs or post-tax pay-ins to 401(k)s:

Save records until three years after the accounts are depleted
File Form 8606 with your return for the year you make a nondeductible contribution to a traditional IRA. If you don’t, those contributions will be treated the same as deductible pay-ins when withdrawn
Retain copies of Form 8606 and your 1040s for each year that such pay-ins are made
Hold on to Form 5498 or similar statements reflecting the amount of IRA payouts

Inheritances and Gifts
If you inherit property or receive property as a gift that you might eventually sell, heed this advice:

For inheritances, you’ll need to know the date-of-death value.
For gifts, you’ll need to know the donor’s cost.
So, keep documentation of these figures until three years after you sell the asset

Businesses
Businesses should hang on to payroll tax records for a minimum of four years after the due date for filing Form 941 for the fourth quarter of a particular year. Among the information to be retained:

Wage amounts
Payment dates
Employee data (such as names, employment dates and Social Security numbers)
Periods for which workers were paid while absent because of sickness or injury
Copies of all W-4 forms and payroll returns, and amounts and dates of tax deposits
Records of tips earned by workers and fringe benefits provided to employees

Copies of worker health coverage forms should be kept at least three years after the deadline for filing these documents. These are the 1094 and 1095 forms that many employers are required to file to report employee health insurance data.

Also, records on costs of business assets, depreciation, etc., should be retained for decades.

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.

Are You Mistakenly Dead to the IRS?

Kelley R. Taylor — Sun, 13 Aug 2023 14:00:00 +0000

The IRS incorrectly locked thousands of taxpayer accounts because the agency thought the taxpayers had died. A recent report from the Treasury Inspector General for Tax Administration (TIGTA) found that over 90,000 accounts were "deceased locked” last year despite the taxpayers being alive.

Typically, the IRS locks accounts of taxpayers who have passed away to prevent fraudulent use of the deceased person’s information. When your account is locked by the IRS because you have been marked deceased, you can't file tax returns or receive tax refunds.

The IRS confirmed that many of the "taxpayer accounts were locked in error due to both human and computer programming issues when identifying the appropriate taxpayer accounts to be locked,” the report states.

IRS mistakenly ‘deceased locked’ taxpayer accounts

The TIGTA looked at taxpayer account information from January 1, 2022, and found that the IRS locked close to 78,000 taxpayers' accounts due to mistakenly being deemed deceased by the agency.

According to the report, “In these instances, the Social Security Administration’s (SSA) data didn't indicate that the taxpayer was deceased, i.e., there was no date of death present.”

TIGTA also found that through October of 2022, the IRS continued to decease lock accounts for taxpayers who weren’t dead. From January to October of last year, data showed the agency erroneously locked an additional 14,193 taxpayer accounts.

At the beginning of 2023, the IRS worked to reconcile some of its records with information from the SSA. According to the TIGTA, about seventy percent of accounts reconciled in that process were improperly issued an IRS CP01H notice.

What is a CPO1H Notice?

A CP01H notice is a letter issued by the IRS when the agency receives a tax return that contains a Social Security number (SSN) for a locked account.
The IRS usually locks accounts because the taxpayer identification number (TIN) on the tax return belongs to someone who the IRS believes died before the tax year of the return. Sometimes, the account is locked by the IRS due to identity theft.
But as the TIGTA report found, thousands of taxpayers received CP01H notices in error.

To help the IRS resolve the problem, the TIGTA made several recommendations. (Those mainly involved reviewing affected taxpayer accounts and taking action to remove erroneous locks.) However, another TIGTA recommendation was that the IRS update its CP01H notice to state that taxpayers can work with the agency to resolve the mistaken deceased locks.

According to the report, the IRS argued that the CP01H letter already directs taxpayers to resolve account lock issues with the SSA. However, TIGTA believes that the IRS should “clarify the notice so taxpayers are aware they can work directly with the IRS to correct the erroneous deceased account locks.”

What to do if the IRS thinks you’re deceased

If you receive an incorrect CP01H notice, the IRS says you should contact the Social Security Administration to resolve the situation. After the SSA corrects the information, the IRS says you can file your return by following the instructions on the notice. That process involves providing the following information.

A copy of the CP01H notice
A written request to unlock the account
A photocopy of your passport, driver’s license, Social Security card, or other valid U.S. federal or state government-issued identification
Your federal tax return with original signatures

The IRS also suggests you double-check that the information provided on your tax return is correct — mainly, your Social Security number.

Whose Name Goes First on Your Income Tax Return?

Kelley R. Taylor — Wed, 12 Jul 2023 15:20:00 +0000

As many people across the U.S. prepare to file their 2025 joint tax returns in this 2026 tax season, some are understandably concerned about issues like maximizing refunds and how to pay the IRS if they owe.

Another common question couples may have is simper: whose name should appear first on a joint federal income tax return?

For married couples filing jointly, the order of names generally doesn't affect the taxes owed or the size of any refund. However, some research suggests that the "who's on first" choice may hold clues about other non-tax-related social dynamics and beliefs.

Curious? Here's more to know.

Does it matter whose name is first on a tax return?

The person listed first on your joint federal income tax return is sometimes called the “primary taxpayer.”

Also, some IRS processing systems index joint returns by the Social Security number (SSN) listed first on the return. That administrative detail can impact how certain records appear, including payments, tax transcripts, or IRS online account information.

Still, it's important to note that:

Your tax liability remains the same regardless of whether you list your name or your partner's name first on your federal income tax return when you are married and filing jointly.
The order of spouse names on your joint tax return also doesn’t mean one spouse has more or less income or will have to pay more or less tax than the other.

However, when you file taxes jointly, both spouses must sign and date the return.

Also, the IRS says you and your spouse are generally jointly and severally liable for any tax, interest, and penalties due on the return. So, is this study relevant?

A study, conducted by researchers at the University of Michigan using data from the U.S. Treasury Department, found that nearly 90% of married heterosexual couples who filed joint federal income tax returns listed the man's name before the woman's name.

The tendency to list the man’s name first on the tax return was linked to factors like political and gender attitudes, risk tolerance, and fear of tax noncompliance.

However, the study additionally revealed that the number of joint federal income tax returns filed with the man’s name listed first on Form 1040 has declined by more than 9% in recent decades.

The study authors say data findings on tax return name order are informative for two main reasons.

The data suggest that the decision by married couples filing jointly to list the man's name first on the tax return isn't random.
Listing the man’s name first on the return can reflect social norms, attitudes, and mindsets.

(Researchers based those and other conclusions on a sampling of data from IRS records containing information from individual income tax returns filed from 1996 to 2020.)

The researchers make clear that the Treasury Department has not “revealed the gender distribution of the name order on joint income tax returns.” Despite this, the study discovered that:

From the 2020 tax year, the man’s name was listed first on jointly filed returns 88.1% of the time. In 1996, that number was 97.3% for the man’s name being listed first.
Listing the man’s name first on a tax return correlated with several varied factors, including being highly religious (61% chance), politically conservative (65% chance), Christian (70% chance), and against abortion (73% chance). According to the researchers, those findings were based on state data cross-referenced with filers' addresses.
Joint tax returns with the man’s name listed first reportedly correlated with a greater propensity toward financial risk. (Examples provided in the research include holding stocks over bonds, engaging in tax evasion, etc., which researchers say they found from matching returns with random IRS audits.)

The researchers note that opinions and conventions regarding who should be listed first on a tax return could be changing. That's partly because younger filers were generally more likely to list the woman’s name first on their jointly filed federal income tax returns.

(According to study data, about 25% of new joint filers in 2020 listed the woman’s name first on the return.)

IRS audits and tax noncompliance?

As it turns out, however, most people maintain the same order of their spouse's name on their federal income tax returns. (According to the study, nearly 99% of filers chose the same name order for their federal tax returns in consecutive years.)

The researchers note that earlier versions of Form 1040 instructions suggested listing first the person who completed the tax return.
In the past 20 years leading up to the study, this may have historically resulted in the man’s name being listed first in a joint filing scenario — for any number of reasons.
Also, the IRS generally encourages taxpayers to enter their names and Social Security numbers in the same order as on their return from the previous tax year.

The agency has said that changing the order of names and Social Security numbers from one year to the next can sometimes cause processing issues because IRS systems attempt to match returns to prior filings.

So, who’s listed first on a federal income tax return may or may not be a choice correlated with social norms, attitudes, and perspectives.

But for some taxpayers, it’s also possible that the order of spouses' names on tax returns might persist because they follow Form 1040 instructions in light of longstanding fears about tax noncompliance leading to potential IRS audits.

Some tax professionals recommend keeping the same name order on a joint return each year unless there is a specific reason to change it. That kind of consistency can make it easier to verify prior-year filing information, access IRS transcripts, and track payments associated with the return.

Filing a Deceased Person's Final Income Tax Return

joy.taylor@futurenet.com (Joy Taylor) — Wed, 01 Mar 2023 14:20:41 +0000

Benjamin Franklin coined the saying, “In this world, nothing is certain but death and taxes.” But what about when death and taxes coincide, such as when someone dies during the year and has a tax filing obligation?

When someone is deceased, the decedent's personal representative is generally required to file any final tax returns for the deceased person. That includes federal income tax returns that the decedent would have been required to file for the year of his or her death. A personal representative can be an executor, administrator, or anyone else who oversees the decedent’s property.

Read further for more information on how to file a final federal income tax return for a deceased person.

Filing a final Form 1040 or 1040-SR for a deceased spouse

If your spouse died during the year, you are considered married for the entire year for federal income tax purposes, provided you didn’t remarry that year. So, for example, if your spouse died this year and you don’t remarry before Dec. 31, 2024, you can file a joint 2024 return this year. The return would show your spouse’s income before death and would show your income for the entire year.

You would mark “married filing jointly” for your filing status and include your spouse’s name and your name and address as normal in the name and address fields of Form 1040 or 1040-SR.
If filing a paper return, write the word “deceased,” along with the decedent’s name, and date of death, at the top of the 1040 or 1040-SR.
If you are using tax preparation software, the software will do this automatically for you once you mark that the spouse is deceased and enter the date of your spouse's death.

If there is a court-appointed personal representative, that representative must sign the return with the surviving spouse. If there is no court-appointed representative, the surviving spouse will sign, and write “filing as surviving spouse” in the decedent’s signature box.

If you are filing a joint return that shows a refund due, there is nothing you need to do to receive the refund, other than filing the tax return.

If you remarried before the end of last year, 2024, you file a joint return with your new spouse, and your deceased spouse’s filing status will be married filing separately.

Here's a tip. The qualifying widow or widower filing status lets surviving spouses with dependents use the income tax brackets and standard deductions for joint filers for two years after a spouse’s death.

For example, if your spouse died last year and you have two minor children, you can file a joint 2024 return. Then for your 2025 and 2026 returns, you can file as a qualifying widow or widower, provided you are still unmarried at the end of 2025 and 2026 and claim dependent children for these years.

Filing a final Form 1040 or 1040-SR for an unmarried decedent

The decedent’s final federal income tax return would report his or her income and expenses before death. If filing a paper return for the decedent, write the word “deceased” and the decedent’s name and date of death at the top of the 1040 or 1040-SR. If you’re using tax preparation software, the software will do this automatically for you once you mark that the filer is deceased and enter the date of death.

You would also mark the decedent’s filing status as single or head-of-household, depending on the situation. You write the decedent’s name on the name line of the 1040 or 1040-SR and the personal representative’s name and address in the remaining name and address field.

If there is a court-appointed or court-certified personal representative, that representative should sign the return. If not, and there is no surviving spouse, then whoever is in charge of the decedent’s property signs the return as the personal representative.

If a refund is due to the decedent, you may have to complete and attach Form 1310 to the final 1040 or 1040-SR. This rule does not apply to surviving spouses who file a joint return with the decedent. Nor does it apply to court-appointed or court-certified personal representatives, who are instead required to attach to the return a copy of the court document showing the appointment. However, all other filers requesting the decedent’s tax refund must attach Form 1310.

Note: The IRS has an interactive tax assistant on its website to help you file a deceased person’s federal income tax return. The online tool (i.e., "How do I file a deceased person's tax return) asks several questions, including the marital status of the decedent, whether the decedent is owed a refund, and whether a court-appointed representative or a personal representative is designated by the will.

Failing to file a decedent's final return: What happens if you don't file a deceased person's taxes?

The consequences for not filing a decedent's final federal income tax return depend on whether the decedent owes money to the IRS or is due a refund for the year.

If the decedent is required to file a return for the year and owes money with the final return, then the IRS will eventually send a notice to the decedent's last-known address about the requirement to file a return.
If the taxes aren't paid, then the IRS could eventually go after the executor, or maybe even the decedent's heirs to the extent the heirs received the decedent's property upon death, for the unpaid taxes.
If the decedent is owed a refund, and no final income tax return is ever filed, then the decedent's heirs will not get the refund payment.

When Can You File Taxes in 2023?

Rocky Mengle — Thu, 12 Jan 2023 22:12:05 +0000

We are just starting 2023, but some people already want to know when you can file taxes this year. That's understandable, because generally, the sooner you file your federal income tax return, the sooner you will receive your tax refund--if you're due one.

So, when can you file taxes this year? Here's information you need to know.

When You Can File 2022 Taxes

This year, the IRS started accepting 2022 tax returns at 9:00 a.m. ET on January 23, 2023. That's one day earlier than last year.

When Are Taxes Due in 2023?

If you wanted to file your return as soon as possible and made $73,000 or less in 2022, IRS Free File opened on January 13.

It should also be noted that participating Free File providers began accepting completed returns starting on January 13 and held them until January 23, when they could be filed electronically with the IRS. Other tax preparation software companies and tax professionals may also accept or prepare tax returns before January 23 and hold them until the IRS begins accepting returns.

If you prefer to wait to file your taxes, you have until April 18, 2023, to file your 2022 federal income tax return or request a tax filing extension.

Normally the due date is April 15, but since that day falls on a weekend this year and the next business day is a holiday in Washington, D.C. (Emancipation Day), the deadline is pushed to April 18.

Anyone requesting an extension will have until October 16, 2023, to file their 2022 federal income tax return (although payment of any tax owed is still due on the original April 18 deadline).

Who Must File a Tax Return?

Not everyone is required to file a tax return. If your income is under a certain amount (see table below), you aren't required to file a tax return because you will not owe any tax.

Federal Tax Return Filing Requirements (2022 Tax Year)
Filing Status and Age at End of 2022	Income Required to File 2022 Return
Single; Under 65	$12,950
Single; 65 or Older	$14,700
Married Filing Jointly; Both Spouses Under 65	$25,900
Married Filing Jointly; One Spouse 65 or Older	$27,300
Married Filing Jointly; Both Spouses 65 or Older	$28,700
Married Filing Separately; Any Age	$5
Head of Household; Under 65	$19,400
Head of Household; 65 or Older	$21,150
Qualifying Widow(er); Under 65	$25,900
Qualifying Widow(er); 65 or Older	$27,300

What Tax Bracket Are You In?

However, even if your income is below the applicable threshold, you still may want to file a 2022 tax return anyway. For example, you will need to file a return to claim certain tax credits, such as the:

Earned income credit;
Additional child tax credit;
American Opportunity credit;
Credit for federal tax on fuels;
Premium tax credit; and
Credits for sick and family leave.

When Will Tax Refunds Arrive?

If you have a federal tax refund coming, you could get your money back in as little as three weeks.

In the past, the IRS has issued over 90% of refunds in less than 21 days. If you want to speed up the refund process, e-file your 2022 tax return and select the direct deposit payment method. That is the fastest way.

Paper returns and checks slow things down considerably.

However, don't expect your refund before mid-February if you claim the earned income tax credit or the additional child tax credit.

By law, refunds for returns claiming these credits must be delayed. This applies to the entire refund, not just the portion associated with the credits. According to the IRS, its "Where's My Refund" tool should provide an updated status for your refund by February 18 if you claim one of these credits.

The IRS also expects most refunds that are held up because the earned income tax credit or additional child tax credit was claimed to be available in bank accounts or on debit cards by February 28 if you chose direct deposit and there are no other issues with your return.

How Much Is the Standard Deduction?

PODCAST: Decoding ESG Investing with Ellen Kennedy

David Muhlbaum — Tue, 19 Apr 2022 13:29:02 +0000

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Transcript

David Muhlbaum: Environmental, social and governance investing is hot these days. So much so that we at Kiplinger now have our own editor on the beat. Ellen Kennedy will share her insights about the intersection of investing and activism. Also, how to spend that tax refund wisely, coming up on this episode of Your Money’s Worth.

David Muhlbaum: Welcome to Your Money’s Worth. I’m kiplinger.com’s senior editor, David Muhlbaum, joined by my co-host, Kiplinger senior editor, Sandy Block. How are you doing, Sandy?

Sandy Block: I’m good. Finishing up my taxes right now. Did you file yours yet, David?

David Muhlbaum: Me?

Sandy Block: You said you were going to get them done this year before the deadline.

David Muhlbaum: I think it’s going to be close. I’ve roughed out a version of them. I imagine I’m going to pay what’s owed and get the extension. So at least I won’t be paying penalties for late payment. There may be domestic penalties, but I’d rather not get into that. On the bright side, I did file both of my kids’ tax returns and we, that meaning me and my kids, had a little discussion about how to claim exemption from withholding in the future, so at least someone got a little education. Actually also, I used IRS Free File so I guess I got some education too.

Sandy Block: So tax teachable moments for you and your kids. We certainly pushed IRS Free File here enough, so what did you think? What’s your review?

David Muhlbaum: You’re asking me to review software? You’re the one who reviews tax software. Well, first of all, as you know well, IRS Free File is an expression, it’s a phrase, it’s a marketing term that we and others use to get people to those filing software options that are actually free, so long as you meet the income and other requirements. IRS Free File isn’t a piece of software itself. It’s like a program. So there are many and, of those, I chose TaxSlayer. And I guess I’d say the one thing I noticed that was different from when I’ve used, shall we say, full-pay versions of TurboTax and others in the past, was that the Free File version of TaxSlayer did not offer me the ability to log into brokerage accounts and things like that to get information directly imported electronically. And that meant I had to copy and paste, sometimes even look and retype and, as we know, that’s a way to make mistakes and is tedious.

Sandy Block: Yeah, and actually TaxSlayer has gotten pretty good reviews from us, but I suspect you have to upgrade the premium to get that service, which tells us that you get what you pay for. TurboTax and H&R Block basically dropped out of Free File so the most popular tax software versions aren’t even available there anymore. So on the one hand, you get to file for free. On the other hand, you may not get all the bells and whistles you’re used to if you pay.

David Muhlbaum: Duly noted, and we should probably move on because, well, when this episode drops, it will be after that filing deadline and the only people still mucking around in software will be clowns like me who missed it. But we’re still in the tax season in a way, because now we’re in potentially the happy side of tax season, refund time.

Sandy Block: Well, refund checks or more hopefully and likely, direct deposit. And we certainly understand that this isn’t anything other than getting your own money back because you’ve given an interest-free loan to the government, but people still love their refunds. And a fat refund is probably a sign that you should consider adjusting your withholding, which you do with a W-4 if you’re an employee, but maybe that’s another-

David Muhlbaum: Yes! That’s what I went over with my kids.

Sandy Block: That’s right. Don’t give the government all your money. All right, it’s too late to do that for 2021 so let’s just talk for a minute about what to do with that fat refund. And as we’ve mentioned before, refunds are up in part because of the various stimulus programs like the enhanced child credit. While generally the goal of those was to get money out quickly, depending on how some people access them, some people didn’t really get to claim their full credit until they filed their taxes, which means a bigger refund for them.

David Muhlbaum: Okay, so I’m sure we’ve got some good solid Kiplinger eat your broccoli ideas about what you should do with that refund.

Sandy Block: We sure do, and I guess the takeaway is make your refund work for you. So I think the number one thing would be, if you’ve got any high-interest credit card debt, you want to pay that down. Interest rates are going up. The fed has pretty much put on billboards, “We are raising interest rates.” That’s going to raise the amount you��re paying on a balance on your credit card. Pay off your balance. You get a 15% return or more, you can’t get that anywhere else, so that’s number one. Build up your emergency fund is another one, and you may want to invest it because many brokerage firms will now let you open an account for less than $500 and some have no minimums at all.

David Muhlbaum: A brokerage account, or you could invest directly with Uncle Sam. You could turn that money right back around and go get you... What is the bond-

Sandy Block: The I bond.

David Muhlbaum: The I bond that’s paying 7.12%.

Sandy Block: And it’s going to go up-

David Muhlbaum: For now, for now.

Sandy Block: It’s going to go up above 9%.

David Muhlbaum: Okay, I’m going to get myself one of these. I’m going to do this as a reader service or a listener service. I’m just going to go get myself one and I’ll report back on the process.

Sandy Block: Yeah, we’ve got to talk about this.

David Muhlbaum: Yeah, okay. There are other ways that you can put that refund to use and Sandy’s delineated many more of them in... What’s it called, Sandy, the slideshow?

Sandy Block: This is a Kiplinger special. It is Seven Money-Smart Ways to Spend your Refund.

David Muhlbaum: That’s right. Do not blow it at the racetrack. Coming up next, we’ll be joined by Ellen Kennedy, Kiplinger’s editor for environmental, social and governance investing. She’ll help us decode ESG. Stick around.

Decoding ESG Investing with Ellen Kennedy

David Muhlbaum: Welcome back to Your Money’s Worth. Joining us for our main segment today is Ellen Kennedy, an associate editor for Kiplinger with a long history in the ESG space, as the jargon goes. She was an ESG manager and analyst at Calvert Investments for 15 years covering environment, climate, consumer staples, and she served on the sustainability councils of several Fortune 100 and Fortune 500 companies. She’s filed shareholder proposals on supply chain and issues like that. She served on ESG boards and councils. Real hands-on stuff. And now she’s writing for us here at Kiplinger with articles that do a great job unpacking all these acronyms we find in environmental, social and governance investing. ESG is just one of them and I think you’ll find her articles interesting, whether you’re grappling with what is this ESG stuff about really? Or maybe you’re already deep into the topic and you’d appreciate her interview with Amy Domini of Domini Impact Investments, who is a true pioneer in ESG. So welcome, Ellen.

Ellen Kennedy: Thanks for having me.

David Muhlbaum: And a welcome back also to Kyle Woodley, senior investing editor for kiplinger.com who helped bring Ellen to Kiplinger. He’ll be co-hosting with me today. Sandy Block is going to give ESG a pass.

Kyle Woodley: Hello, hello.

David Muhlbaum: So to move from who Ellen is to what she knows, I’m going to start with a definitional question. The term we’ve headlined this podcast with is ESG, environmental, social and governance investing. But let’s wade a little bit into history. When you started in this field, Ellen, it was called social investing, socially responsible investing. Can you take us back a bit please?

Kyle Woodley: Wait, did he just ask you to define the history of ESG in 30 seconds? Good luck with that.

David Muhlbaum: No, no. You’ve got a whole minute. You’ve got a whole minute.

Ellen Kennedy: Okay. Well, back in the 1980s, religious groups and human rights activists started to realize that capital markets, the stock market, are a powerful tool to bring about change. So a handful of firms, like Amy Domini’s that you just mentioned, dedicated to socially responsible investing or SRI, they set the table for a way investors could avoid industries they found distasteful or unsustainable like tobacco. And they also tried to work with these activists to pressure corporations to change. So SRI investors were asking the question, how can we use investing to maximize positive impact in the world?

David Muhlbaum: So investors, they were part of the fight against big tobacco?

Ellen Kennedy: That’s right, David. And as SRI investors became more and more successful, the mainstream investors sat up and took notice. They realized that some sustainability issues really could affect a company’s bottom line or what we call material, and so environmental, social and governance or ESG investing was born in the mid 2000s. They asked the question, how can we harness sustainable opportunity or risk to improve performance?

David Muhlbaum:

They being investors?

Ellen Kennedy: Yes, the ESG investors. Yes, so nowadays we have this huge mosaic of many, many sustainable investment approaches. ESG has two levers it can pull. If you imagine a box with two up and down vertical levers in front of you, the first one is deciding how much you want to invest to avoid risk versus seize opportunity. So all the way at the top of that lever, your ESG fund will avoid investing in the dirtiest companies. And if you pull that lever chunk like in an old voting booth, it will focus on a theme like renewable energy or investing in industry leaders.

The second lever is how much the fund will try and influence a company through engagement or advocacy. So on one extreme, a fund could do nothing at all to encourage the companies that it holds to be more sustainable. And on the other hand, if you pull that lever all the way, it could meet with corporate leadership or even file shareholder proposals. There are so many combinations of these two continuums, so the mantra is ESG is not a monolith.

David Muhlbaum: Well, thank you. The history is important here, because ESG is not something that came out of nowhere. There was John Wesley, the Methodist minister, he was telling his people in the late 18th century, don’t invest in liquor, don’t invest in gambling, that sort of thing. So I think there’s also a religious component to the history.

Ellen Kennedy: It goes back to the Bible!

David Muhlbaum: We might just have been calling it differently, but language matters. So now that we’ve said, ‘Here’s what it is,’ I guess my first question would be what do you think is the biggest misperception about ESG investing?

Ellen Kennedy: Definitely that you have to sacrifice returns for gains. And most studies have shown, however, that you will do as well as or better than traditional investment approaches. Last year, there was this huge, ginormous — That’s a technical term — study looking at over a thousand other studies on the stock market performance of companies with high ESG scores. It found that a majority, 58% of the time, companies that embraced ESG beat the performance of non-ESG companies. ESG laggards beat the stock performance of ESG-embracing corporations only 8% of the time and the remaining studies showed mixed results. So again, that score was ESG 58%, non-ESG 8%.

Some other really interesting findings that came out of that study were that ESG is more likely to outperform over longer time horizons, and ESG can provide a hedge against economic or social crises. And I’d say we are facing several of those major crises these days.

David Muhlbaum: No doubt. We live in interesting times. So beyond tracking performance trends on the macro scale, Ellen, you also write about new wrinkles in ESG investing, and one that caught my eye were these mutual funds or exchange traded funds that link your investment to a charity. Let’s say you want to support an organization like the National Wildlife Federation, well, you can invest in a fund with their name on it. But here’s my question, it’s not so simple you say, or rather, these funds are not all cut from the same cloth. We don’t have time to rank them all. That’s what your article is for. But what should someone who’s trying to do good and get a good return with one of these linked funds be looking for?

Ellen Kennedy: There are a growing number of funds that donate a portion of their fees to a specific charity, and in some cases they even construct the portfolio to match the goals of the fund. So in a way, you can have your cake and eat it too. For example, the Simplify Healthcare ETF whose ticker is PINK (PINK) is actively managed by Michael Taylor. He’s a really fascinating guy. He’s a virologist who also has deep experience in biotech and also is a highly regarded hedge fund manager. Simplify is donating all of its net profits from managing the fund, or a minimum of $100,000 per year, to the Susan G. Komen Foundation for breast cancer research. The fund is in the top quartile for its category year to date according to Morningstar, so it’s really interesting to look at this.

David Muhlbaum: So to break this down, in this case, in PINK, is the fund invested in companies that are trying to solve breast cancer?

Ellen Kennedy: So remember those two levers I spoke about earlier, this actually doesn’t use an ESG screen per se. It just invests in really solid biotech healthcare stocks. It doesn’t focus on breast cancer or even on women’s health. It just uses Michael Taylor’s knowledge of that sector, which one could argue is a beneficial sector for social good and so that’s the ESG investing slant, but they don’t call themselves an ESG fund per se. And then it has this minimum $100,000 donation as well.

David Muhlbaum: Got it. So he, as a fund manager, is basically taking some of his earnings from being a fund manager and apportioning it to the Susan G. Komen Foundation?

Ellen Kennedy: Yes.

David Muhlbaum: And your returns are what you get from his fund?

Ellen Kennedy: Yes.

David Muhlbaum: Okay, got it. But there are some other funds that where the fund itself is choosing investments based on the charity with which it’s affiliated?

Ellen Kennedy: Sure. So there are a number of funds that try to combine an ESG screen that would favor what a nonprofit is trying to accomplish in the world with a donation as well. So one example that’s really interesting is the Impact Shares NAACP Minority Empowerment ETF. The ticker on that one is NACP.

David Muhlbaum: So like the charity minus one A. Right.

Ellen Kennedy: Minus one A, yes. So they actually have worked with the NAACP to design the fund. The only screen really, as I recall, is for racial equity and they then hired somebody from the NAACP who has a very deep experience in what’s called DEI or diversity, equity and inclusion to work with impact shares to talk with companies and to say, “Hey, we really want you to be in this fund. And it’s a real sign of your commitment to NAACP values to be in this fund, but you’re not quite there yet. Here’s the changes that you need to make.” So they’re really reaching out to companies and actively trying to change their policies and programs to align with those goals.

David Muhlbaum: And backing it up by saying, “Do this and we will buy your shares.”

Ellen Kennedy: Exactly, yes. So these are very attractive funds but before you invest, there’s a few things that you have to look out for as you can imagine. It would be very easy for these kind of funds to just be a marketing ploy. So you have to ask yourself is this fund designed to bring a positive impact to the cause it supports? And the example that I just gave of NACP is an example where they are trying to do that. You can also ask yourself is the company that manages the fund dedicated to sustainability? Does it actively partner with a nonprofit group it benefits to bring about change like I just mentioned? And also does the fund vote shareholder proxies or file shareholder proposals to help the nonprofit’s cause? And most importantly, make sure you’re not investing in these funds just because they donate to the charity you like. That’s just not a good way to focus your donations or your investments.

David Muhlbaum: Well, they make the donation to take the tax deduction as opposed to you. It seems a little odd, yes.

Ellen Kennedy: Exactly. And we are limited now in the amount of tax deductions we can take so this might be a way for people to have more of an impact in terms of their donations.

David Muhlbaum: Oh, that’s a good point.

Ellen Kennedy: But still, this is an investment and you need to treat it as such. You should make absolutely sure that the fund is a solid investment that fits with your own personal portfolio and your investment goals.

David Muhlbaum: Got it. Okay, we’ve talked about PINK, the ticker, and we’ve talked about green because the first word in ESG is environmental so I use that as a proxy for the color. But there’s a new color on the block too and that’s blue. So we had a piece in Kiplinger’s personal finance magazine recently about the blue economy and so, Ellen, what’s the blue economy?

Ellen Kennedy: I see what you did there with those colors. That was very clever.

David Muhlbaum: Thank you.

Ellen Kennedy: So the blue economy refers to all of the dollars spent to improve the economic health and livelihood of oceans and coastal zone ecosystems. So think about everything related to oceans which cover 70% of the world’s surface. They’re huge, but also that section of the earth where the oceans come up to the shore and we interact with them there. So we often just forget about oceans. They’re really critical to our survival and also for healthy economies. We’ve been dumping plastic and toxics in the oceans. We’ve been overfishing and removing coastal plants that help buffer the effects of hurricanes. I’ve experienced that personally because my husband is from New Orleans and the loss of so much of coastal zones in those areas that had been planted or had wild habitat there acted as a buffer to hurricanes. But when those were taken out, Hurricane Katrina, of course was able to exact a real toll on that area.

David Muhlbaum: So blue is not water, but ocean. That’s one of the key distinctions, because there are water funds out there, right?

Ellen Kennedy: That’s right, there’s a ton of water funds out there. I actually used to manage the sustainability side of one of them, but they’re often filled with utilities and water infrastructure companies and they don’t focus as much on the conservation solutions. One interesting company we’ve profiled recently is called Danimer Scientific (DNMR). The ticker is D as in dog, N, Nancy, M-R. It is developing a kind of plastic that is 100% biodegradable and compostable. It’s a small company that IPO’d in 2020 and is still proving that it can turn a profit and scale up, but it has already scored valuable customers like PepsiCo and Walmart.

David Muhlbaum:

Okay, so Danimer Scientific doesn’t handle water or oceans, but because their product is aimed at helping the oceans, that’s how they got on the list. So this screening and thinking, it also governs a much longer list that we have at Kiplinger, the Kiplinger ESG 20. Now, we rolled this out in 2021 and it’s 15 stocks and five funds that do well on meeting environmental, social and corporate governance challenges. Good corporate citizens. So Ellen and Kyle, I was hoping you guys could call out one or two from that list, which we’ll link to, but you know there are 20, so Ellen?

Ellen Kennedy: One of the stocks that I like from the ESG 20 may surprise you, it’s called Clorox.

David Muhlbaum: No, I never heard of that.

Ellen Kennedy: The ticker is C-L-X and most of us think, ‘Oh, gross. It’s bleach. It’s environmentally terrible. Why would Clorox be in the ESG 20?’ Well, first of all, aside from the environmental issues, it’s a really good pick on governance. They’ve done a good job of diversifying their board of directors. 42% of its members are women and four members are people of color. And the board is also independent, which is a great metric for understanding how a company has tried to shape its board in a way that will benefit investors and shareholders. I used to cover the household products and personal care products industries. And I remember the bad old days when Clorox was really a laggard in this area, but they did a lot of work to clean up their act and to get more involved in green chemistry. For example, if you go on a website called the Skin Deep database of the Environmental Working Group-

David Muhlbaum: Skin Deep?

Ellen Kennedy: Yeah, that’s right. Skin Deep. They provide ratings on the toxicity of thousands of different products. And so, for instance, you can find products made by Clorox that score very well because they are, for instance, bleach-free hand sanitizers. They also acquired Burt’s Bees which you may think of as a green company. And overall they’ve really worked to think about the life cycle of those products and ensure that they are just much more environmentally responsible than they used to be from cradle to grave.

David Muhlbaum: Yeah, that’s interesting. Kyle, I think we ought to look to you for a fund.

Kyle Woodley: Yeah, so if you just prefer to buy a bundle of ESG-friendly stocks and let it ride, one ESG 20 option is the Putnam Sustainable Future ETF. That’s ticker P-F-U-T, and this is an actively managed ETF whose companies either make products or provide solutions to sustainability challenges. Top holdings include science and tech from Danaher, that’s ticker D-H-R. There’s Chipotle Mexican Grill, ticker C-M-G, and that’s long been a pioneer in sustainable food sourcing. And it even holds MSCI, ticker M-S-C-I of course, which is the top global provider of ESG indexes, so there you go.

David Muhlbaum: That’s very inside, that they-

Kyle Woodley: There’s a little meta there, isn’t there?

David Muhlbaum: We’ve mentioned Amy Domini’s name a couple of times so far, and we’ve done so in part because you, Ellen, got to interview her recently. So tell us a bit more about who she is, what she’s done.

Ellen Kennedy: So I’m an Amy Domini fan girl, as I think a lot of people who came out of the SRI industry are. She’s someone I’ve admired for years. She pioneered SRI investing way back in the 1980s by founding Domini Impact Investments which is still growing strong. And she did all this as a woman in a field that was very male-dominated back then. What I appreciate most about her is her clarity. She helped develop the concept of triple P investing or investing for people, planet and profit. And she recommends avoiding companies that spell trouble in those three areas. Very simple, invest in triple P, and she’s always looking out for the next sustainability opportunity around the corner. She’s especially bullish these days on healthcare and transportation innovations, so check out my interview with her.

David Muhlbaum: We’ve gone in a number of directions with ESG. There are many more we can go to. We’ve got to keep an eye on the clock, but one of the things that just lurks in the back of my head that I want to ask Ellen before we go is, there’s a phenomenon where writing about/discussing ESG investing generates negative feedback. Is that a fair enough term for it? What is it about ESG that frankly gets some people so riled?

Ellen Kennedy: Well, I think first of all, as I said, ESG is not a monolith. It’s many things, but overall I think there’s a lot of misunderstanding about how ESG has become professionalized. And as we know, it could use more standardization but it’s getting there. And so people often read into ESG, I think, political opinions. It’s to try and find those metrics that will deliver the best return for shareholders and that’s really all there is to it. It just so happens that a lot of the metrics that were ignored by shareholders for many years are these things that lead us to a more sustainable world.

Ellen Kennedy: I actually often think of ESG, I know Kyle is also a nerd, I think of it like a Tardis, like a time machine from Dr. Who, a big red telephone box that you can get into and you can set your course for the future. And if you look at the major trends going on, a lot of them happened to be sustainability trends, climate change, water issues that we’ve talked about, equity issues we’ve also talked about, along with those other thing that investors have considered for many years, like population growth or geopolitical risk. So I really think that when people dig into the way ESG is conducted, they’ll see that it really just makes business sense and that is why so many people are turning to it now and why it’s so popular.

Kyle Woodley: Well, being a fellow nerd, I’m going to have to point out, the Tardis is blue. It is not a big red box. It is a big blue box. And sorry, ladies, I am not available. Sorry.

Ellen Kennedy: I am mortified. I thought it was red. Thank you so much. I stand corrected.

David Muhlbaum: Okay. Well, we’re sure if that’s all we have to worry about, we’re in great shape. Thank you so much for joining us today, Ellen. We really appreciate your insights and all you’ve brought to ESG coverage for Kiplinger. Thanks again.

Ellen Kennedy: Thank you. My pleasure.

David Muhlbaum: That will just about do it for this episode of Your Money’s Worth. If you like what you heard, please sign up for more at Apple podcasts or wherever you get your content. When you do, please give us a rating and a review. And if you’ve already subscribed, thanks. Please go back and add a rating or review if you haven’t already. To see the links we’ve mentioned in our show, along with other great Kiplinger content on the topics we’ve discussed, go to kiplinger.com/podcast. The episodes, transcripts and links are all in there by date. And if you’re still here because you want to give us a piece of your mind, you can stay connected with us on Twitter, Facebook, Instagram, or by emailing us directly at podcast@kiplinger.com. Thanks for listening.

9 Tax Deadlines for April 18

Rocky Mengle — Sat, 09 Apr 2022 15:40:44 +0000

Time is running out if you haven't filed your 2022 federal income tax return yet. This year's tax filing deadline is April 18 for most people. (The tax deadline is extended for some residents in states impacted by severe weather and storms). But filing your federal tax return isn't the only thing you should be thinking about for April 18, because there are a few more tax deadlines that fall on that day.

If you are self-employed, saving for retirement or college, have a health savings account, or employ a nanny, you may want to take action by the tax deadline. There are other reasons why you might have a tax-related deadline today. And, overlooking a tax deadline could cost you money, either in additional taxes, penalties, or interest. So, here are 9 tax deadlines for Tax Day, April 18, that you don't want to miss. Check them out to see if any apply to you.

2023 Tax Calendar: Important Tax Due Dates and Deadlines

Of course, the biggest due date on the tax calendar each year is the one for your federal personal income tax return. Like most of the tax deadlines on this list, it usually falls on April 15 but is April 18 this year because of a local holiday in Washington, D.C. and because April 15 falls on a weekend.

This year, you generally must file your return for the 2022 tax year (i.e., for the income you received from January 1 to December 31, 2022). Use Form 1040 and the related schedules to report your 2022 income, adjustments, and credits. The IRS recommends filing your return electronically, as opposed to using a paper form and mailing it in, because the return will be processed much faster. If you are getting a tax refund, you will also get your money much faster if you e-file your return. Opting for direct deposit over a paper check will speed up your refund as well.

Stricter EV Tax Credit Rules Begin April 18

If you can't file your income tax return on time, you can get an extension until October 16. However, to get the extension, you must request it by the end of the day on April 18. To make the request, either file Form 4868 or make an electronic tax payment.

Just remember that the extension to file your return doesn't extend the time to pay your tax. You still have to estimate the amount of tax you'll owe and pay your tax bill by midnight April 18. If you don't act in time, the IRS will charge you interest on the unpaid balance and hit you with late payment penalties.

For more information, including extension details for Americans living abroad and people serving in a combat zone, see How to Get More Time to File Your Tax Return.

Pros and Cons of Getting a Tax Extension

Although we only have to file an income tax return once each year, the IRS expects you to pay your taxes throughout the year as you earn income. If you are working for a business, those tax payments are withheld from your paycheck and sent to the IRS by your employer. But if you are self-employed or have income from other sources that aren't subject to withholding, then it is up to you to make quarterly estimated tax payments during the year.

The first estimated tax payment for 2023 is due April 18 for most people. This payment is for the estimated amount of taxes owed for income received from January 1 to March 31, 2023. Use Form 1040-ES to calculate and pay your estimated taxes. If at least two-thirds of your gross income is from farming or fishing, you can make just one estimated tax payment for the 2023 tax year by January 17, 2024. If you don't pay enough tax during the year, either through estimated payments or withholding, the IRS could hit you with a stiff penalty.

When Are 2023 Estimated Tax Payments Due?

If you want to put more money in an IRA and have it count towards your 2022 contributions, you have until the end of the day on April 18 to make that move (If you're in a state impacted by disaster or storms, the IRS may have extended that deadline). That's because most people have until your tax return filing deadline for the year to fund an IRA for that year. But remember that there are limits to the amount you can contribute to an IRA each year. For 2022, you can put away up to $6,000 in an IRA – $7,000 if you're age 50 or older.

If you haven't already maxed out your 2022 IRA contributions, doing so before the April 18 tax deadline can be a smart move. First, contributions to a traditional IRA are often tax deductible, while withdrawals from a Roth IRA are tax-free. So, whether you contribute to a traditional or a Roth IRA, you can cut your tax bill now or in the future.

People with low or moderate income who contribute to an IRA might also qualify for the Saver's Credit, which can be worth as much as $1,000 ($2,000 for joint filers).

If you contribute to an IRA for 2022 by the tax filing deadline, you can claim the IRA deduction and/or the Saver's Credit on your 2022 tax return. That means you can get the tax benefits immediately, instead of waiting until next year if you were to contribute the same amount after Tax Day.

Also note that the tax return filing deadline is also the last day to withdraw any excess 2022 contributions to your IRAs (if you didn't request a filing extension). So, if you put in more than the $6,000 limit ($7,000 if you're 50 or older), take it out now to avoid stiff penalties.

Traditional IRA Contribution Limits for 2022

Self-employed people saving for retirement have until the end of the day on April 18 to put money away in a Solo 401(k) plan or Simplified Employee Pension (SEP) IRA for 2022. If they request a tax return filing extension, the deadline shifts to October 16.

For the 2022 tax year, a self-employed person can contribute up to $61,000 to a Solo 401(k) – $67,500 if they are age 50 or older. (Those amounts go up to $66,000 and $74,500, respectively, for 2023.) These amounts are relatively high because you can make contributions as both an employee and an employer, although the April 18 deadline only applies to the "employer contributions."

The SEP IRA contribution limit for 2022 is $61,000 ($66,000 for 2023). Only the employer can contribute to a SEP IRA, and whatever percentage of compensation employers set aside in the plan for themselves is the same percentage of pay they must contribute for each eligible employee.

Contributions to both Solo 401(k)s and SEP IRAs are deductible – at least to a point. Contributions made to a Solo 401(k) as an employer are deductible business expenses. However, the deduction can't be more than 25% of the compensation paid (or accrued) during the year to eligible employees participating in the plan. If you're self-employed, you must reduce this limit for contributions you make for your own account.

For a SEP IRA, the most you can deduct on a 2022 tax return for contributions to your or your employee's account is the lesser of: (1) your contributions, or (2) 25% of the compensation (limited to $305,000 per participant) paid to the participants during the year from the business that has the plan, not to exceed $61,000 per participant. (In 2023, these amounts increase to $330,000 and $61,000, respectively.) If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for the contributions.

What to Know About the Home Office Tax Deduction

If you have a health savings account (HSA) or Archer medical savings account (MSA) as part of your health insurance plan, Tax Day (April 18) is the last day you can contribute to the account for 2022 (People in states where the IRS extended the tax deadline due to storms, have more time).

For 2022, you can contribute up to $3,650 to an HSA if you have self-only coverage or up to $7,300 for family coverage. (For 2023 figures and other 2022 limits, see HSA Contribution Limits and Other Requirements.) For an Archer MSA, you or your employer can contribute up to 75% of the annual deductible of your high deductible health plan (65% if you have a self-only plan), although you can't contribute more than you earned for the year from the employer through whom you have your HDHP.

Plus, you may qualify for a deduction on your 2022 tax return for contributions to your HSA or Archer MSA (complete Form 8889 for the HSA deduction and Form 8853 for the Archer MSA deduction). If you can claim one of these deductions, think about putting more money into the account for 2022 before the tax deadline expires if you haven't already reached the contribution limit. That's especially true if you plan to make a contribution soon anyway. That way, you'll get that extra deduction for 2022 and save more cap space for 2023 contributions.

Most-Overlooked Tax Deductions, Credits and Exemptions

People saving for retirement or medical expenses have until the end of today to contribute to 2022 accounts – but what about people saving for college? If you're using a Coverdell Education Saving Account (ESA) to save away money for college, then you also have until the end of Tax Day, April 18, to put more money away in the account for 2022.

With a Coverdell ESA, you can't contribute more than $2,000 for any particular child. Plus, if your modified AGI is between $95,000 and $110,000 (between $190,000 and $220,000 for joint filers), the $2,000 limit for each child is gradually reduced to zero.

There's no deduction for contributions to a Coverdell ESA. However, money deposited in a Coverdell ESA grows tax free, and there's no tax on distributions used for qualified college expenses. So, the earlier you get money into the account, the more time it has to grow before the child is off to college.

Child Tax Credit FAQs for Your 2022 Tax Return

If you employ a nanny, babysitter, maid, gardener or other household worker, but you aren't filing a federal income tax return (Form 1040), you must file Schedule H and pay 2022 employment taxes for your household workers by the end of Tax Day (April 18). If you do file a tax return, include Schedule H with the return and report the tax owed on Schedule 2 (Form 1040), Line 9.

Both you and the employee may owe social security and Medicare taxes. You're responsible for payment of the employee's share of the taxes as well as your own. You can either withhold your worker's share from the employee's wages or pay it out of your own pocket.

Your share is 7.65% of the employee's wages (6.2% for Social Security tax and 1.45% for Medicare tax). Your employee owes the same amount. The limit on wages subject to social security tax was $147,000 for 2022, but there's no limit on wages subject to the Medicare tax. Household employees also owe a 0.9% additional Medicare tax on wages exceeding $200,000 for the year. The additional tax is only imposed on the employee, but you have to withhold it from their wages and pay it to the IRS.

You also might have more to worry about than just federal taxes. Unless you live in a state with no income tax, you probably have to file a state income tax return on April 18, too. (You might have a local tax return due as well).

In most states, the deadline for file a state income tax return is the same as the federal due date. But there are a few states that have a different due date. Also, due to severe weather and natural disasters, some states have extended tax deadlines.

For state tax deadlines, including those for extension requests, estimated payments, and returns for other types of taxes, check with the state tax agency where you live.

State-by-State Guide to Taxes on Middle-Class Families

PODCAST: National Taxpayer Advocate Erin M. Collins Wants to Help

David Muhlbaum — Thu, 10 Feb 2022 16:13:16 +0000

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Transcript

David Muhlbaum: Did you know there’s someone at the IRS whose sole purpose is to help taxpayers deal with the agency? If that sounds like an oxymoron, that’s just because you haven’t met Erin Collins, the current taxpayer advocate. She’ll join us to explain what her office does, how it can help you, and why the IRS is struggling to get refunds out. Also, Amazon is raising prices; what can you do? All coming up on this episode of Your Money’s Worth.

David Muhlbaum: Welcome to Your Money’s Worth. I’m kiplinger.com senior editor David Muhlbaum, joined by my co-host, senior editor Sandy Block. How are you doing, Sandy?

Sandy Block: I’m doing great. Welcome back from whatever wilderness you were in the last few days.

David Muhlbaum: I was in Utah, experiencing the rising cost of rental cars. So yeah, that’s an inflation story, you know. Everyone’s got an inflation story these days. Have you seen the price of milk, gas? Oh my God, whatever. But now we have a price increase for the way we live now, and that is to say by ordering things online.

Sandy Block: You mean Amazon?

David Muhlbaum: Yeah, exactly. That’s a shorthand. I mean, the price of Amazon Prime is going up from $119 to $139. So that’s a 17% increase if you’re paying annually. And that covers a lot of people. I don’t know that it’s more people then who buy milk or gas, but it’s 150 million or so here in the United States. That’s a lot of people who are going to be affected.

Sandy Block: Right. And I mean, I know the headline definitely caught my attention because 17% sounds pretty steep. But since we brought inflation into this, we need to be careful about our statistics. That’s not a year-over-year increase like we talk about with the price of milk or gas, which seem to go up every month or whatever. The last Amazon Prime increase was quite a while ago.

David Muhlbaum: Yeah. Yeah. It was 2018. So our editor Bob Niedt, he knows Amazon backward and forward. And in fact, he forecast this increase a few weeks ago. So, Amazon has operated on a four-year cycle for price increases. And the last one was from $99 to $119. Now, you know on a percentage basis, that was a bigger jump.

Sandy Block: Right. We’ve got our calculators out, but let’s move on from crunching numbers. What are those 150-plus million people supposed to do other than just roll their eyes and suck it up?

David Muhlbaum: Yeah. I imagine most people are going to shrug and pay it. Probably in part because they’re going to get auto renewed at the new rate. And well, there you go.

Sandy Block: Right. And that’s I think what a lot of these subscription services really count on, is inertia. You’re not even paying the bill. You’ve got it on your credit card. It goes on, and they’re just hoping that you’ll just move on, but if you really don’t want to give up free shipping, maybe one way to live with this increase is to go deeper into the Amazon ecosystem and make sure that you’re actually getting what you’re paying for, because there’s a whole lot more to Amazon Prime, as I plan to discover for myself, than just free shipping. There’s videos, there’s music, there’s movies, there’s all kinds of stuff

David Muhlbaum: Yeah. So forth indeed. I mean, that’s just the thing that Bob has written about in his piece on best Amazon Prime Benefits to Use, beyond the entertainment. You mentioned there’s also this try before you buy, which lets you pick up to six items of clothing, shoes, accessories. You can see if they fit or well, look good, and then bring it back for free or send it back for free. And he also gets into how to manage a Prime membership to get the most out of it. Like, you can share benefits with something called Amazon Household. So maybe you don’t need as many accounts, that sort of thing.

Sandy Block: Right. And one of the things that I discovered even before this price increase, I don’t go to Whole Foods all the time, but I did happen to go into one this week. And I used my prime membership. And I saved a couple bucks on some overpriced fish. So that’s the kind of thing you need to be thinking about. But the other alternative is, you could quit. What wasn’t around last time there was an increase was Walmart Plus. They’ll give you free next day or two-day delivery, prescriptions and gasoline discounts, some other perks for $84 a year. So maybe they’ll pick up some disgruntled Amazon people who aren’t into inertia.

David Muhlbaum: Yeah. Well, until they raise their price, maybe? I doubt it. That would not make much sense. But you know who is also likely to raise their membership fee this summer? Costco. That’s another one of Bob’s forecasts.

Sandy Block: Oh no. Well, I don’t go to Costco anymore because I always spent too much when I did; we go to BJ’s. But you are a dedicated Costco customer, aren’t you?

David Muhlbaum: Yeah. Truth. My dogs have been on Nature’s Domain salmon meal and sweet potato dog food for well, as long as I’ve had dogs. So I don’t think they’re going to let me switch.

Sandy Block: Well, maybe your dogs won’t let you switch to Old Roy, but I think these increases in subscription prices present a good opportunity for everyone to review their subscriptions, make sure you’re actually using all of the ones that you signed up for. If there are cheaper alternatives or maybe you can get more out of the subscriptions that you already have, because they really do count on you not doing that when they raise these prices.

David Muhlbaum: Be a conscious shopper. Yes, thank you for the actionable personal finance advice, Sandy.

Sandy Block: That’s what we’re here for.

David Muhlbaum: That’s right. Anyway, coming up on our main segment, we will talk to Erin Collins, the national taxpayer advocate about what her office does, what it can do for you as a taxpayer and how this filing season is shaping up. Stick around.

Meet the National Taxpayer Advocate, Erin Collins

David Muhlbaum: Welcome back to Your Money’s Worth. For our main segment today, we’re joined by Erin Collins, the national taxpayer advocate. Now that’s a pretty cool title, don’t you think? So here’s the history. A law called the Taxpayer Bill of Rights created this job almost 30 years ago. And the advocate has a staff of about 1,600 and a mission to be a voice for taxpayers, as well as report to Congress on what kind of job the IRS is doing. So that’s kind of a policy-wonk description of the taxpayer advocate’s place in the Washington ecosystem. But they have a very real, very tangible role in helping individual taxpayers all over the country. And we definitely want to get into what they can and can’t do for you. So, welcome Erin.

Erin Collins: Thank you so much for having me today.

Sandy Block: I want to thank Erin not for just coming today, but for being a great source for us since she took the job a while back. And you’ve given us a lot of insights on what’s happening in the IRS and what people can expect when people are filing their taxes, which frankly isn’t really good. That’s important to our audience because they come to us for a lot of information about filing their taxes and I think that’s been even more critical in the past couple of years when people have gotten lots of stimulus checks, child tax credits, and other sorts of new wrinkles in the tax system. The other thing we want to talk about is if people need help with their taxes. They have to be careful about who they go to because basically anybody can call themselves a tax preparer in the current system. So, on that note, Erin, can you explain a bit more about how your office, the Taxpayer Advocate Service operates? I think people might find it a little confusing that while it’s technically part of the IRS and funded with taxpayers’ dollars, it’s actually meant to advocate for taxpayers.

Erin Collins: Yeah. We have a unique role that we play in tax administration with respect to assisting taxpayers. So we wear multiple hats. As you indicated, the position was created over 20 years ago. And what we do is we represent individual taxpayers with their unique problems that they have with the IRS. But we also look at what we call systemic issues. Those are issues that impact multiple taxpayers, where we can provide administrative recommendations to the IRS for change as well as proposed legislative recommendations to Congress to change the law on behalf of taxpayers. But I think most people that work with our local TAS offices, they’re working with our case advocates to fix a particular problem.

And I think what a lot of people don’t focus on is what our authority is. We advocate, hence in our name, Taxpayer Advocate Service. So we do not have the delegated authority to actually implement the correction or the change. And that was specifically created so we could be an independent organization. We can give it a fresh or fair new look from what the IRS has previously done. And then we work with our colleagues or our counterparts in the IRS and recommend the correction or the fix.

David Muhlbaum: But there’s not a real equivalent at other federal agencies, is there? I mean, you know some have ombudsmen and that sort of thing, but this is so much more involved and aimed at private citizens, businesses too.

Erin Collins: Yeah. So again, we do. It’s a unique role. I think most people are familiar with what I would call the classic ombudsman. And those are individuals that conduct investigations, make recommendations. We do wear that hat, but we also have the ability to advocate specifically for taxpayers, both systemically across the board for all taxpayers, but again, we can help individuals with a particular challenger problem they’re having with the IRS.

David Muhlbaum: Okay. Let’s dig in a little bit to what that particular problem might be. Which ones you can solve, which ones are not your purview. And I noticed on the website, you have this really cool thing, the TAS Qualifier Tool. And we’ll put a link into that, which is basically, it literally tells you, it answers the question that I’m asking you now: "Does your problem fit?" But since not everyone’s going to go there right away, could you give us some sense of what problems are in your purview and what problems are not.

Erin Collins: Sure. So we have what we call two buckets. One is for financial hardship, and the second bucket is our systemic, when you have an issue with the IRS system. So the first bucket for example, take a situation where collections is knocking at the door and a taxpayer is having issues making ends meets. They can’t pay the rent or they’re having trouble. And what we can do is assist and work with our collection folks to possibly suspend the collection activity, or even possibly get an offer in compromise or installment agreement.

Erin Collins: So we can work with the taxpayer with that specific problem. The other challenge taxpayers are facing right now, and it’s been a very difficult two years for the taxpayers with respect to the filing season is when the system isn’t working as it’s intended. It’s broken. Unfortunately, the filing season with all the additional backlogs, and the challenges, and the delayed of the processing of those claims, we’ve created millions of taxpayers that in essence fit in that second bucket. And as you alluded to, we have typically 1,600, 1,700 employees. We can’t help 2, 3, 4, 5 million taxpayers at a time. So we try and limit what we can do to get the most result. And where’s the best use of our resources? So as you said, if you go into the tool, you’ll see it gives you options as to whether or not your case qualifies to work with us and contact a local taxpayer advocate.

Sandy Block: So I think Erin, from what I understand about what you all do, tthe axpayer advocate office is not there if you have a question about whether you should itemize or not, or whether you’re eligible for the child tax credit, the IRS has a lot of websites for that. But as you alluded to, and this is something we want to dig into, you’re probably not going to have a lot luck calling the IRS for help. Can you talk to us a little bit about what taxpayers can expect during the upcoming tax season? Because last season was pretty awful in terms of customer service. Hardly anybody could get through to the IRS. A lot of refunds were delayed. What should we expect this year?

Erin Collins: Yeah. If we’re talking about the filing season, I do have concerns that the IRS has, as we call it, they’ve dug themselves into a hole from the last two filing seasons. And they still have not dug out of that hole. So it’s going to potentially impact the smooth or quick processing of the current filing season. So we do have concerns. And as you alluded to, Sandy, although we are IRS employees, we’re not really main IRS. So the typical questions and problems, that’s really more in the purview of IRS. Although we do a lot of outreach and lot of education, that’s really not our main role. So again, when the system isn’t working, that’s really where taxpayers should reach out to us. But yes, they should make the effort to try and work with the IRS. But as you pointed out, the level of service on the phone this past year, it was about one in 10 calls were answered, which is just unacceptable.

Erin Collins: So taxpayers are being forced to try and self-help. irs.gov has a lot of useful information, but unfortunately, it’s sometimes difficult to find. And if you’re trying to get specific information on your delays, on your refund, the tool the IRS has, Where’s My Refund, doesn’t answer the question if you have a delay.

Sandy Block: And Erin, following up on that, I know from personal experience that Where’s My Refund does not work very well, but given this situation that the IRS has a huge backlog of returns from last year, from 2020 that they haven’t even processed, what is the most effective way that a taxpayer can avoid a delay or a problem during this tax filing season?

Erin Collins: Yeah. I think, although we realize that there is a percentage of our population for whom filing electronically is not an option, but for those who have the ability, make every effort to file electronically. Paper returns, those are where they have the most delays. Paper is not a friend to the IRS. So number one, you want to file electronically. Number two, if you can request a direct deposit, so provide your bank information. And number three, triple check for errors. Last year, part of the delay that was caused for all taxpayers was individuals that put inconsistent information on the return from IRS records. So for example, you use your last pay stub to put your income, not your W2. And your pay stub may include two or three days from the month of January. So that information may not match the IRS’s records. If you received a stimulus check or the six monthly payments that you receive for the advanced child tax credit, that should match IRS records.

If it doesn’t, it will be pulled out of the system and manually processed. So last year again, we had at least 13 million returns that had to be manually processed, which caused a 35 million backlog at the end of the filing season. So we do not want to have a repeat of that backlog going forward. So if taxpayers can really try and make sure that the correct information is on the return and they file electronically, they should not have a delay and it should be processed within that 21 days that the IRS projects that you’ll get your refund.

Sandy Block: I want to dig a little bit deeper Erin, as to why there was such a backlog last year, you mentioned the stimulus checks. And I also think that the pandemic’s effect on the IRS itself had a role in that. Maybe you could talk a little bit about why some people still haven’t gotten their 2020 refunds yet.

Erin Collins: Yeah. It actually started at the onset of the pandemic. The IRS shut down, basically all the facilities across the country. And think of the volume that the IRS receives. And in essence, it’s over 200 million tax returns every year. So what happened was when the pandemic first started, they got in a hole, and it’s been two years now and they still are not out of the hole. They still have a backlog month after month after month. So if we don’t get through the backlog, we’re never going to get ahead. So this year, absolutely the IRS has to not only be timely with respect to the current filing season, but we’ve got to get that backlog resolved and get the payments to the taxpayers who are still waiting for those refunds from last year.

David Muhlbaum: That gives me an idea for a modest proposal. So, if you don’t pay your taxes or behind you pay, not only, but interest on the amount that’s outstanding. What if the IRS were to pay you interest for a refund they haven’t processed, assuming it’s not your fault?

Erin Collins: You are great on tax administration because golly gee, you can get interest if the checks are delayed.

David Muhlbaum: Oh, this exists?

Erin Collins: So thank you for that recommendation. But yeah. But unfortunately that doesn’t make people happy. The interest rate’s incredibly low. And so, yes, maybe you’ll get an extra $5, but people want the money now. A lot of these returns that were filed or were filed before, possibly April of last year and they still have not received their payment. And again, that’s just unacceptable.

David Muhlbaum: Well, as Sandy knows my own personal tax situation is such that I’ve never been in a position to receive such a reward. I am a little curious though, is the interest rate the same as you pay for owing?

Erin Collins: Now you’ve stumped me. I want to say the answer is yeah.

Sandy Block: I don’t think it is.

Erin Collins: I think when you have... There are exceptions, like if the size of the company. There’s all sorts of different criteria, but they’re close, but again, neither one is anything to write home about.

David Muhlbaum: Right. Right. Got it. Okay. Well, we certainly appreciate your guidance about filing electronically and that’s what more and more people do each year. But there’s a subset who are going to want help filing whether it’s electronically or on paper. That is to say they don’t have a tax problem. Well, not at least yet. They just want someone to do their taxes for them. So assuming someone doesn’t meet the guidelines of... And Sandy, these are the two programs you wrote about the Volunteer Income Tax Assistance Program or the Tax Counseling for Elderly Program. We’ll put some links in to explain what those are about. How do you recommend people go about finding a tax preparer? Like, do you all have guidance on that?

Erin Collins: Yes. And it’s also on irs.gov, but real quick, going back to the VITA and what we call the TCE, that is limited with respect to your income. And I believe it’s $56,000 a year ...

David Muhlbaum: Or your age.

Erin Collins: Right. So if you’re above that amount, unfortunately, you don’t qualify for that. But IRS has on their website, I think it’s https://www.irs.gov/chooseataxpro. And then actually, it’s a very useful tool. It helps you select a qualified or federal tax preparer. So it includes a list of licensed or certified, or folks with credentials. So for example attorney, CPA, enrolled agents, and it also includes a directory of those individuals that take annual CPE and also get certified. And it’s listed by name, city, and the criteria.

Erin Collins: So it’s a great directory and it’s a great tool if you’re looking to find a particular person. But you really should choose that preparer carefully. We read about the scams, the IRS is very well aware. So you know, ask a friend, ask somebody you trust, get referrals, check out their credentials. Some people go into the Better Business Bureau, see if there’s complaints. And then taxpayers also have the ability to what I call self-help. There are a number of companies out there that do tax preparation software which will walk you through as you’re preparing the returns. So there are options for taxpayers out there to get help with respect to preparing their returns.

Sandy Block: And to follow up on that, Erin, you and I have talked about this just when you refer to scams. I know you’ve advocated for some kind of minimum competency requirements for tax preparers. But right now, basically David or I could put a sign on our door and charge people to prepare tax returns, which would not be a good idea, but we could do that. Is that not the case, Erin, is that why you have to be extra careful?

Erin Collins: Yeah. I think, again, there are some good intentioned folks out there that are helping their neighbors or families or loved ones, but they may, no offense, not be familiar with the tax laws. I’m more concerned about those who are unscrupulous, people who are taking advantage of taxpayers. And unfortunately there are many of those individuals out there. There’s something that’s referred to as a PTIN. I think it’s your professional tax identification number is what it stands for. If your return preparer doesn’t have a PTIN that would be a red flag to you because the taxpayer or the preparation folks have to put that on the return, at the bottom of the return if you sign it and also your return preparer signs it. So if the person doesn’t want to sign it, there’s probably a reason and you might want to get up and walk away.

Sandy Block: So Erin, one thing that I’ve reported on through the years. And if anybody stays up late, who watches late night TV will see ads saying, "We can reduce your IRS debt. We can make your IRS tax bill go away." And I think what they’re referring to is a legitimate program called offer in compromise. But, it’s a lot harder to get that than some of these commercials imply. And a lot of these companies, as I understand it, just basically charge you a fee and then never get the offer. Could you talk a little bit about that?

Erin Collins: Yeah. Again, if you are going to use someone to assist you in the offer in compromise program, you want to make sure that they are on the up and up, so to speak. You don’t want people who can over promise pennies on the dollar and under deliver, and then charge you on top of it. So again, these are companies, there are a lot of legitimate folks out there. A lot of firms that do offer in compromise and assist taxpayers. And then there’s the others that we would prefer you not go to. So IRS tries to identify if there’s potential problems. In fact, I know we are currently as an organization or agency looking at that issue across the board so that we can make sure we get useful information out to taxpayers. But yes, you can do it yourself. You can do it with the assistance of TAS or you can get a professional to help you. But be wary of those who make very large promises and have a price tag attached to it.

Sandy Block: I think anytime you hear pennies on the dollar it’s probably a big red flag, right?

Erin Collins: Yeah. And you know I hate to say it, there are some taxpayers who may end up pennies on the dollar based on their financial situation, but it’s not a standard you can apply across the board.

Sandy Block: Right.

Erin Collins: So again, be careful, the old saying, "If it’s too good it to be true, it probably is."

David Muhlbaum: So Erin, this question of trust, who can you trust to help you with your taxes? Do you or your advocates ever, or your staff ever find essentially pushback, because at the end of the day, you’re an IRS employee? And as we discussed, there is this independence built into your office, but, you might have to do some convincing of people, right?

Erin Collins: Well, yes, that’s hence the term advocacy, but I don’t believe we’re advocating for positions that we do not believe are correct. So if a taxpayer comes to us and wants to argue that the moon is purple, we would probably not recommend we take that position with the IRS because A) we think it’s wrong and B) it would not be successful. So we work with the taxpayer to get the best possible facts and position when we work with the IRS. So in essence, I would like to think of us as trusted, sort of, advisors or trusted advocates because really that is what we’re doing for the taxpayers. We’re working with the IRS and pushing what we think is the correct position.

David Muhlbaum: Excellent. Maybe you could put another T in the acronym, you could be "Trusted Taxpayer Advocate Service" because we’re all about acronyms here. On that acronymic, Washington note, I’m curious if since you sometimes deal with things that are systemic problems with the IRS, rather not the problem of the individual taxpayer but a group of taxpayers, do you find yourself being pulled into the policy debates of how taxation should be implemented? That is, when it ends up in congressional testimony, how we all argue about that here.

Erin Collins: Well, it depends how you define that, but we push for administrative change. I lead the policy up to the Hill and Treasury, but I guess we push for policy in the sense of, we want fair treatment of taxpayer and we want the system to be fair and fairly implemented. So in that sense, if that’s a policy, yes, we do push for that. If it’s whether or not the tax rate should be 20% versus 30%, we normally stay out of that debate.

Sandy Block: But on that note, Erin, I know you don’t get involved in what tax rate should be and that sort of thing. But you do advocate for the IRS in terms of funding. You and your predecessor Nina Olson have argued for many years that the IRS is underfunded. Nobody wins votes by saying they want to give money to the IRS, but why is that important? And why is the IRS so underfunded?

Erin Collins: Yeah. I think the challenge is, and I look at not necessarily the IRS, but the impact to taxpayers. So what is the impact of underfunding the IRS with respect to service, with respect to fairly administering the tax laws. And that has been a real challenge for a number of years because the budget that Congress has every year has gone down about 20% over the last 10 years. Unfortunately, that means so have the IRS employees. I mean, you can’t have more employees without more budget. And the challenge is IRS has picked up additional work. So over the years and especially over the last two years, Congress has entrusted the IRS to do three rounds of the stimulus payments. They’ve done the monthly advance child tax credit payments, as well as a number of business benefits that they’ve done.

So they’re overtaxing, so to speak, the IRS’s abilities to process just not only the normal filing season, but all the additional work, with fewer employees and fewer budgets. So unfortunately service and taxpayers are paying the price. And when you think about, if you want to step back and look at the politics of this, the IRS brings in and I think the numbers about and 95% of the entire nation’s budget. So the monies that go through IRS and Treasury is what funds everything else that Congress does. So when you think about how important the IRS is, without a functioning IRS, it’s going to impact the function of our country of what we can do.

Sandy Block: Erin, that’s a great way to wrap up this conversation, and we really want to thank you for coming on to our podcast and for all the things that you do. Thanks again.

Erin Collins: Thank you so much.

David Muhlbaum: Thank you, Erin.

David Muhlbaum: That will just about do it for this episode of Your Money’s Worth. If you like what you heard, please sign up for more at Apple Podcasts or wherever you get your content. When you do, please give us a rating and a review. And if you’ve already subscribed, thanks. Please go back and add a rating and review. If you haven’t already to see the links we’ve mentioned in our show, along with other great Kiplinger content on the topics we’ve discussed, go to kiplinger.com/podcast. The episodes transcripts and links are all in there by date. And if you’re still here because you want to give us a piece of your mind, you can stay connected with us on Twitter, Facebook, Instagram, or by emailing us directly at podcast@kiplinger.com. Thanks for listening.

How to Cut Your 2021 Tax Bill

kiplinger@futurenet.com (Sandra Block) — Sat, 29 Jan 2022 11:15:06 +0000

When the Tax Cuts and Jobs Act was signed into law in 2017, proponents said it would make filing taxes easier for millions of Americans. It hasn’t worked out that way.

2021 Tax Returns: What's New on the 1040 Form This Year

While the tax overhaul nearly doubled the standard deduction, sharply reducing the number of taxpayers who need to itemize deductions, taxes have become even more fraught for millions of taxpayers. In part, that’s because lawmakers have tweaked the tax code to provide credits and deductions for non-itemizers. Those tax breaks could lower your tax bill but also require more work when it comes time to file.

In addition, as Congress scrambled to prevent the COVID-19 pandemic from torpedoing the economy, it funneled billions in economic stimulus payments through the IRS in the form of tax credits. When you file your 2021 tax return, you may need to reconcile those credits to claim funds you should have received or, in a few cases, pay some of that money back.

We’ll walk you through the tax-filing minefield. We’ll alert you to tax breaks you may overlook, and help you decide whether you should do your own taxes or pay a professional. And we’ll look at whether IRS customer service, which was so bad during last year’s tax filing season that only 10% of taxpayers got through to an IRS representative, will improve for this year’s filing season.

As has always been the case, our first piece of advice is to start early. By now, you should have received all of the documents you need to file, such as your W-2 and 1099 forms from your financial service providers. Filing early means you’ll get your refund more quickly; if you owe money, it’s better to learn that now than on April 18 (this year’s federal tax filing deadline for most taxpayers). It’s also a lot easier to find a qualified tax preparer in February or March than it is in April. And filing early will protect you from outlaws who use stolen personal information to file bogus tax returns so they can claim fraudulent refunds.

Strategies for Non-Itemizers

In the past, non-itemizers who were charitably inclined had to hope that they’d be rewarded in the afterlife, because they didn’t get any tax breaks in this one. But in response to the pandemic, which placed higher demands on many charitable organizations, Congress created a new tax break for philanthropic non-itemizers. For 2021, taxpayers who claim the standard deduction can deduct up to $300 of cash donations to charity. The $300 amount is per person, so if you’re married, you can deduct a total of $600 on your 2021 tax return.

What Are the Federal Income Tax Brackets?

The deduction is limited to cash contributions; contributions of clothing and household goods to your local Goodwill aren’t eligible. Donations to donor-advised funds aren’t eligible, either. Keep a record of your contribution with your tax documents. For donations of less than $250, you need a bank record, such as a canceled check or credit card statement. For donations of $250 or more, you should obtain a written acknowledgement from the charity that shows the date of the contribution and the amount and states whether you received any goods or services in exchange for your donation.

The kids are alright. Raising a family is expensive, and luckily, most child-friendly tax breaks are available to taxpayers who claim the standard deduction.

Let’s start with the most generous: the expanded child tax credit. For the 2021 tax year, parents can claim $3,600 for each child younger than 6 and $3,000 for each child between 6 and 17. As your income rises, the tax credit is reduced in two stages. First, the credit is reduced to $2,000 per child if your 2021 income exceeds $150,000 on a joint return, or $75,000 for singles. The credit is reduced below $2,000 as income rises above $400,000 on joint returns and above $200,000 on single and head-of-household returns. The amount varies depending on income. There’s no limit to how many eligible kids you may claim on a return.

The IRS sent advance payments for the credit to families from July to December 2021. Unless you opted out, the amount you received in advance will be subtracted from your total child tax credit when you claim it on your 2021 return. You’ll need to reconcile the credit when you file your tax return. (For complete coverage, see Child Tax Credit FAQs for Your 2021 Tax Return.)

Will You Have to Pay Back Your Child Tax Credit Payments?

You may also qualify for a tax credit designed to reduce the cost of child care. For the 2021 tax year, if your children are younger than 13, you’re eligible for a 20% to 50% credit for up to $8,000 in child care expenses for one child or $16,000 for two or more.

You are eligible for the full credit if your adjusted gross income for 2021 doesn’t exceed $125,000. The percentage is gradually reduced from 50% to 20% for people with an AGI between $125,001 and $183,000. It stays at 20% for families with an AGI from $183,001 to $400,000, but then it’s gradually reduced again from 20% to 0% for taxpayers with an AGI between $400,001 and $438,000. Anyone making over $438,000 isn’t eligible for this credit. (See Your Child Care Tax Credit May Be Bigger on Your 2021 Tax Return for more information.)

If you adopted a child last year, make sure you take advantage of a tax credit to help cover expenses related to the adoption. For 2021, the adoption credit can be taken on up to $14,440 of qualified expenses per child. For example, if you had $5,000 in qualifying expenses, you can’t claim the full $14,440 credit, unless you adopted a child with special needs. In that case, you can claim the full credit even if your expenses were less than that. The credit phases out for families with 2021 AGI over $216,660; those with AGI over $256,660 are ineligible.

To qualify, the child you adopted must have been 17 years old or younger—or any age if physically or mentally incapable of caring for himself or herself.

Defraying the cost of education. The cost of college has risen at a faster pace than inflation for years, so if you’re paying for higher education, make sure to take advantage of college-related tax breaks.

2022 Tax Calendar: Important Tax Due Dates and Deadlines

If you’re a parent with a child in college, your best bet is the American Opportunity Credit, which is available for up to $2,500 of college tuition and related expenses (but not room and board) paid during the year. The full credit is available to individuals whose modified adjusted gross income is $80,000 or less ($160,000 or less for married couples filing a joint return). Single taxpayers with MAGI greater than $90,000 and married couples with MAGI above $180,000 are ineligible for the credit. The credit covers all four years of college. (Keep in mind that a credit is a dollar-for-dollar reduction in your tax bill, making it more valuable than a tax deduction.)

If you went back to school—whether to improve your employment prospects or just because you had a hankering to learn—you may qualify for the Lifetime Learning Credit. The credit is calculated as 20% of up to $10,000 of qualified expenses, so you can get back as much as $2,000 for 2021.

The income limits for the Lifetime Learning Credit are $90,000 if single and $180,000 if married. You can’t claim both this credit and the American Opportunity Credit for the same student in the same year.

Strategies for Itemizers

You may benefit by itemizing if you have a large mortgage, spent a lot on medical bills last year or were extremely generous.

Why This Tax Filing Season Could Be Ugly

Your home is your castle, and it may be deductible. For home loans acquired after December 15, 2017, you can deduct interest on a mortgage—or mortgages—of up to $750,000. (For loans taken out before that date, you can deduct interest on mortgage debt of up to $1 million.) You can also deduct property taxes, although if you live in a high-tax state, you may not be able to deduct the entire amount. The maximum that you can deduct for combined state and local property tax is $10,000 (or $5,000 if married filing separately).

Defray your medical expenses. The COVID-19 pandemic has left some families with large medical bills, not all of them covered by insurance. If you itemize, you can deduct unreimbursed medical expenses that exceed 7.5% of your adjusted gross income. If your AGI was $50,000, for example, you would only be allowed to deduct the unreimbursed medical expenses that exceeded $3,750. The list of eligible expenses is long, ranging from the costs of long-term care to prescription drugs. COVID-19 at-home tests and personal protective equipment, such as masks, hand sanitizer and sanitizing wipes, are deductible medical expenses if they’re used primarily for preventing the spread of COVID-19. Costs for dental and vision care that aren’t covered by your insurance are also deductible.

Charitable giving. It’s too late to make charitable contributions for 2021, but if you itemize, make sure you claim credit for all of the donations you made last year.

If you made large charitable contributions last year—perhaps as part of your estate plans—you’ll be able to deduct donations worth up to 100% of your adjusted gross income. (In the past, the maximum deduction for cash contributions was 60% of AGI, but Congress expanded the tax break to encourage charitable giving during the pandemic.)

If you cleaned out your attic and closets last year, keep in mind that you can deduct the fair market value of donations of clothes, books and other noncash items. Some tax software will help you estimate the value of donated items.

Tax Breaks for Disaster Victims

Although April 18 is the deadline for most taxpayers (who don’t request an extension), victims of the tornadoes that devastated parts of Kentucky, Arkansas, Illinois and Tennessee, as well as victims of Colorado wildfires, have until May 16 to file individual and business tax returns and pay any taxes owed. Taxpayers in the affected areas have until May 16 to contribute to their 2021 IRAs, too.

Most-Overlooked Tax Deductions, Credits and Exemptions

Tornado and wildfire victims will also get more time to make the quarterly estimated tax payments that are due on January 18 and April 18, 2022. If you missed the estimated tax payment for the fourth quarter of 2021 that’s normally due on January 18, you can include it with your 2021 tax return that’s due May 16.

If you live in the affected areas, you don’t need to contact the IRS to get this relief. However, if you receive a late-filing or late-payment penalty notice from the IRS, call the number on the notice to have the penalty abated.

The IRS says it will work with taxpayers who live outside the affected areas but had tax records in the disaster zones. This includes workers assisting the disaster-relief activities who are affiliated with a recognized government or philanthropic organization.

Deducting your losses. The 2017 Tax Cuts and Jobs Act limited the deduction for unreimbursed casualty losses, but it’s still available if the losses occurred in a federally declared disaster area—which means victims of tornadoes, wildfires, hurricanes and other disasters may still be able to claim a portion of their losses.

You must itemize to claim this deduction. But even if you ordinarily claim the standard deduction, your losses, combined with other deductible expenses, could push you over the standard-deduction threshold. You must subtract reimbursement from your insurance provider and funds from government assistance when you calculate your loss, along with any reimbursements you expect to receive.

Once you’ve determined that you have enough deductions to get over the threshold to itemize, you must reduce the amount of your unreimbursed losses by $100. After you’ve done that, you can only deduct unreimbursed losses that exceed 10% of your adjusted gross income. If, for example, your adjusted gross income last year was $150,000 and your total net loss was $83,000, you would first reduce it to $82,900, then knock off $15,000, leaving you with a net deduction of $67,900.

To compute and report casualty losses, fill out IRS Form 4684 (tax software will walk you through this process). You must enter the FEMA disaster declaration number on that form.

"Tax Preparers Near Me"? There's a Better Way to Find a Tax Professional

Taxpayers who are eligible for the casualty loss deduction have the option to claim the loss in the year it occurred—2021 in the case of the December tornadoes—or for the previous year. That allows you to choose the year that will give you the biggest tax break. If you decide to claim it for 2020, you can amend your 2020 return by filing Form 1040X. You must file your amended prior-year return no later than six months after the due date for filing your current-year return (without extensions) for the year in which the loss took place. That means for tornado losses in 2021, you would need to file an amended 2020 return by October 17, 2022.

If your losses were caused by another weather-related event in 2021, don’t assume you’re ineligible for this deduction just because your local disaster didn’t make the national news. You can get a complete list of disaster declarations by state on the Federal Emergency Management Agency's website.

Taxes on Your Investments

Free trading apps such as Robinhood have made it easier than ever to take a flier on hot stocks, turning thousands of novice investors into day traders. But if you managed to make money trading GameStop or other hot tickets, your day of reckoning is April 18. Unless you did your trading in a tax-deferred account, such as your IRA, you’ll be required to share some of your booty with the IRS.

Capital gains on stocks, exchange-traded funds, mutual funds and other assets held for one year or less are taxed at your ordinary income tax rate, which currently ranges from 10% to 37%. If you bailed out at a loss, the tax code limits the amount of relief you can obtain. First, you must use your losses to offset any capital gains of the same type—short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains. (After that, net losses of either type can be deducted against the other type of gain.) If you go through those steps and still have losses, you can deduct up to $3,000 against other income, such as your salary. Losses that exceed that amount can be carried over to future years, so keep good records.

The tax code is more forgiving for investors who sell stocks or other assets held for more than a year. Tax rates on long-term capital gains range from 0% to 20%, depending on your income. If you are single and your 2021 taxable income was less than $40,400 (or $80,800 if you’re married and file jointly), you won’t have to pay any taxes on gains from the sale of assets held for more than a year.

To avoid paying more than you owe, make sure you have the correct cost basis for any investment you sold in 2021. The cost basis is the price you paid for your shares, plus any reinvested dividends, capital gains distributions, sales commissions or transaction fees. The higher your basis, the lower the amount of gain that will be taxed. Financial services firms are required by law to track the cost basis of shares in mutual funds or stocks purchased in 2011 or later and provide that basis to investors when the securities are sold. For securities purchased before 2011, you may need to do some detective work, but it’s worth the effort—without a cost basis, the IRS will tax you on the entire proceeds of the sale.

How Is Cryptocurrency Taxed? Here's What You Need to Know

Don’t forget that gains on bitcoin—along with other cryptocurrencies—are subject to the same short- and long-term capital gains rates that apply to stocks, mutual funds and other assets, says Lisa Lewis, a certified public accountant and editor at TurboTax. Even if you used your cryptocurrency to buy something, you’ll owe taxes on the difference between what you paid for the currency and its value when you used it to make a purchase.

Some cryptocurrency platforms are sending investors statements that provide a record of their transactions, Lewis says. But even if you didn’t get a statement, you’re responsible for paying taxes on your crypto gains. The IRS has taken pains to remind taxpayers that cryptocurrency profits are taxable, adding a line to Form 1040 asking whether you’ve bought or sold cryptocurrency.

Taxes on Home Sales

Skyrocketing housing prices could force some taxpayers to do something they haven’t done for nearly 25 years: Pay taxes on profits from the sale of their home.

Since 1997, taxpayers who sell a primary residence they’ve lived in for at least two out of the past five years can exclude up to $500,000 in profits from taxes if they’re a married couple filing jointly, or $250,000 for a single homeowner.

IRS Audit Red Flags

The threshold wasn’t adjusted for inflation, but the vast majority of homeowners have qualified for the exclusion. Now, though, homeowners in some parts of the U.S. where home prices have soared are netting more than the excluded amount. When that happens, the excess gain must be reported on Schedule D with other capital gains. Long-term capital gains are usually taxed at 15% to 20%, depending on your income. In addition, the increase in your adjusted gross income could have other tax consequences, such as a 3.8% surtax on net investment income, which kicks in if you have modified adjusted gross income over $200,000, or $250,000 if you’re married and file jointly. If you’re older, the increase in your AGI could trigger a high-income surtax on Medicare Part B premiums.

There are, however, steps you can take that will lower or even eliminate taxes on your home-sale gains. Your tax bill will be based on your net gain—the amount you sold your home for minus its adjusted basis, which is the amount you paid plus the cost of any home improvements. The higher your basis, the lower your tax bill. “So many people remodeled their homes during the pandemic, and that adds to the basis of the property,” says John Schultz, a certified public accountant in Ontario, Calif.

Ideally, you should have records documenting the cost of your improvements. If you don’t, the contractor that did the work may be able to provide invoices, Schultz says. Building permits may also help you document your expenses. If you can’t track down receipts for every expense, the IRS will usually accept a reasonable estimate, Schultz says.

Allowable improvements that will add to your basis include a new roof, kitchen upgrade, an addition or anything else that would improve the resale value of your home, says Annette Nellen, a CPA and professor at San Jose State University. However, you can’t include routine repair and maintenance costs when calculating your basis. For a complete rundown on allowable expenses, see IRS Publication 523.

Some homeowners mistakenly believe that they can avoid capital gains taxes by reinvesting the proceeds from the sale of their home in another home. Although that was a legitimate strategy before 1997, it’s no longer the case, unless you’re selling real estate purchased for business purposes, Schultz says.

The housing market could slow in 2022 but shows no signs of stalling, so if you’re considering selling your home, start pulling together records of home improvements.

Advice for the Self-Employed

In what’s been dubbed the Great Resignation, millions of Americans quit their 9-to-5 jobs in 2021. If you decided to work for yourself (or pursued a side gig to generate extra income), your taxes are likely to be more complicated. Self-employed taxpayers must pay income taxes on their profits as well as 15.3% in Medicare and Social Security taxes. (When you work for someone else, your employer picks up 50% of that amount.) However, you can deduct half of that amount on your tax return.

Most-Overlooked Tax Deductions and Credits for the Self-Employed

And that’s just one of a host of potential deductions that could lower taxes on your income. In addition to expenses associated with running your business, you can deduct the cost of health insurance premiums for yourself and your family. Self-employed individuals who are eligible for Medicare can deduct the cost of Medicare Part B and Part D premiums, as well as the cost of supplemental Medicare (medigap) policies or a Medicare Advantage plan. If after leaving your job you signed up for COBRA, which allows you to stay on your employer’s health insurance for up to 18 months, those premiums are deductible, too.

Most remote workers aren’t eligible to deduct the costs of their home offices. Once you start working for yourself, though, you’re eligible to claim this money-saving deduction. If you use part of your home or apartment regularly and exclusively for your business, you can deduct part of your utility bills and insurance costs.

In the past, many work-at-home taxpayers skipped this tax break because of fears it would trigger an audit. Others were put off by the recordkeeping needed to support the deduction. In recent years, though, the IRS has come up with a simplified method that allows taxpayers to deduct $5 for every square foot that qualifies for the deduction. For example, if you have a 300-square-foot home office (the maximum size allowed for this method), you can deduct $1,500.

If you went into business for yourself because you were laid off last year, keep in mind that unemployment benefits are taxable on your federal tax return, and many states tax unemployment benefits, too. In response to the pandemic, Congress waived taxes on a portion of unemployment benefits in 2020 but didn’t extend the exclusion into 2021. You should receive a Form 1099-G, “Certain Government Payments,” showing the amount of your benefits. Report them as “additional income” on Schedule 1 of your federal tax return.

Tax Advice for Retirees

Millions of older workers left their jobs last year for a variety of reasons: big gains in their stock portfolios, rising home values and concerns about the pandemic. If you are part of the Gray Resignation, make sure you take advantage of all the tax breaks available to you.

How is Retirement Income Taxed?

In 2021, taxpayers 65 and older can claim a standard deduction of $14,250 (compared with $12,550 for younger taxpayers). If you’re married and both spouses are 65 or older, your total standard deduction for 2021 is $27,800.

For that reason, most retirees are better off taking the standard deduction than itemizing. However, if you still have a mortgage and had high medical bills in 2021, you may want to run the numbers to see if you’ll get a lower tax bill by itemizing.

Retirees who are 70½ or older can donate up to $100,000 a year from their IRAs to charity via a qualified charitable distribution. After you reach age 72, the QCD counts toward your required minimum distribution. A QCD isn’t deductible, but it will reduce your adjusted gross income.

If you made a QCD last year, make sure you won’t be taxed on the distribution. You—or your tax preparer—must report it under “tax withdrawals” on the line for IRA distributions. On the line for the taxable amount, enter zero if the full amount was a qualified charitable distribution. Enter “QCD” next to this line. Tax software will walk you through this process.

Taxes in Retirement: How All 50 States Tax Retirees

2021 Tax Returns: What's New on the 1040 Form This Year

Rocky Mengle — Fri, 21 Jan 2022 11:00:05 +0000

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

Tax Rate	Taxable Income (Single)	Taxable Income (Married Filing Jointly)
10%	Up to $9,950	Up to $19,900
12%	$9,951 to $40,525	$19,901 to $81,050
22%	$40,526 to $86,375	$81,051 to $172,750
24%	$86,376 to $164,925	$172,751 to $329,850
32%	$164,926 to $209,425	$329,851 to $418,850
35%	$209,426 to $523,600	$418,851 to $628,300
37%	Over $523,600	Over $628,300

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

Tax Rate	Taxable Income (Married Filing Separately)	Taxable Income (Head of Household)
10%	Up to $9,950	Up to $14,200
12%	$9,951 to $40,525	$14,201 to $54,200
22%	$40,526 to $86,375	$54,201 to $86,350
24%	$86,376 to $164,925	$86,351 to $164,900
32%	$164,926 to $209,425	$164,901 to $209,400
35%	$209,426 to $314,150	$209,401 to $523,600
37%	Over $314,150	Over $523,600

What Are the Income Tax Brackets for 2022 vs. 2023?

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.

401(k) Contribution Limits for 2022

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.

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