J.K. Lasser's 1001 Deductions & Tax Breaks 2025 E-Book

Barbara Weltman

• Herausgeber: John Wiley & Sons
• Kategorie: Ratgeber
• Serie: J.K. Lasser
• Sprache: Englisch

Seitenzahl: 805

Veröffentlichungsjahr: 2024

Beschreibung

Save money—legally—on your 2024-25 taxes with easy, expert advice from America's most trusted personal and small business tax advisor

In the newly revised edition of J.K. Lasser's 1001 Deductions and Tax Breaks 2025: Your Complete Guide to Everything Deductible, renowned small business tax attorney Barbara Weltman walks you through every relevant tax credit and deduction you're entitled to claim on your 2024 return, including brand new tax breaks introduced just this year. You'll find hundreds of money-saving opportunities that help ensure you don't overpay on your taxes, giving Uncle Sam exactly what you're legally required to give him—and not a penny more!

You'll also find:

• A complimentary e-supplement that covers the latest developments from the IRS and Congress
• Step-by-step instructions on how to claim every deduction that applies to you and your family, complete with record-keeping requirements, dollar limits, and filing instructions
• The latest tax rulings, laws, and cases that impact your 2024-25 tax return

Perfect for every individual US taxpayer who has ever wondered, “Can I claim X?” or “Can I deduct this expense?”, J.K. Lasser's 1001 Deductions and Tax Breaks is a straightforward and authoritative roadmap to saving money on your taxes and simplifying tax season.

Leseprobe

Table of Contents

Cover

Table of Contents

Title Page

Copyright

Introduction

Tax-Favored Items

Limits on Qualifying for Tax-Favored Items

Standard Deduction versus Itemized Deductions

Impact of Deductions on Your Chances of Being Audited

How to Use This Book

CHAPTER 1: You and Your Family

Marital Status

Dependents

Qualifying Child

Qualifying Relative

Child Tax Credit

Earned Income Credit

Dependent Care Expenses

Adoption Costs

Foster Care

Child Support

Alimony

ABLE Accounts

CHAPTER 2: Medical Expenses

Individual Mandate

Employer-Provided Health Insurance

Premium Tax Credit

Itemized Medical Expenses

Self-Employed Health Insurance Deduction

Long-Term Care Coverage

Flexible Spending Accounts for Health Care

Health Reimbursement Arrangements

Individual Coverage HRAs

Excepted Benefit HRAs

QSEHRAs

Health Savings Accounts

Archer Medical Savings Accounts

ABLE Accounts

COBRA Coverage

Medicare

Continuing Care Facilities and Nursing Homes

Accelerated Death Benefits

Decedent’s Final Illness

Medical Insurance Rebates

Forgiveness of Medical Debt

CHAPTER 3: Education Costs

FAFSA Submissions

Employer-Paid Education Assistance

Scholarships, Fellowships, and Grants

American Opportunity Credit

Lifetime Learning Credit

Work-Related Education

Student Loan Interest

Savings Bonds for Education

Coverdell Education Savings Accounts

Qualified Tuition Programs (529 Plans)

ABLE Accounts

Seminars

Educational Travel

Cancellation of Student Loans

Penalty-Free Withdrawals from IRAs

Government Reimbursements

Internships and Apprenticeships

CHAPTER 4: Your Home

Mortgages

Mortgage Interest Tax Credit

Home Equity Loans

Points

Prepayment Penalties

Late Payment Penalties

Reverse Mortgages

Cancellation of Mortgage Debt

Penalty-Free IRA Withdrawals for Home-Buying Expenses

Real Estate Taxes

Cooperative Housing

Minister’s Housing Allowance

Home Sale Exclusion

Moving Expenses for Active Duty Military Personnel

Energy Improvements

ABLE Accounts

Disaster Rules for Casualties to Your Home

Government Assistance

Home Office Deduction

CHAPTER 5: Retirement Savings

Traditional IRAs

Roth IRAs

Roth IRA Conversions

IRA Rollovers

Overview of 401(k) and Similar Plans

Starter 401(k)

Regular 401(k)

Self-Employed Retirement Plans

SEPs

SIMPLEs

Retirement Saver’s Credit

Custodial/Trustee Fees

Employer-Paid Retirement Planning Advice

Charitable Transfers of IRA Distributions

Qualified Longevity Annuity Contracts

Loans from Qualified Retirement Plans

PLESAs

Hardship Distributions from Retirement Plans

Special Rules for Federal Disasters

CHAPTER 6: Charitable Giving

Cash Donations

Appreciated Property Donations

Used Clothing and Car Donations

Intellectual Property Donations

Real Estate Donated for Conservation Purposes

Bargain Sales

Volunteer Expenses

Tickets to Fund-Raisers, Raffles, and Sporting Events

Membership Fees to Nonprofit Organizations

Student Exchange Program

Special Inventory Donations

Donor-Advised Funds

Charitable Gift Annuities

Sophisticated Charitable Giving Arrangements

IRA Transfers to Charity

Leave-Based Donation Programs

Record Keeper for Your Charitable Giving

CHAPTER 7: Your Car

Business Use of Your Personal Car

Employer-Provided Car

Vehicle Registration Fees

Car Accidents and Other Car-Related Problems

Donating Your Car

Credits for Clean Vehicles

Credit for an EV Charging Station

CHAPTER 8: Investing

Penalty on Early Withdrawal of Savings

Loss on Bank Deposits

Capital Losses

Capital Gains and Qualified Dividends

Worthless Securities

Loss on Section 1244 Stock

Margin Interest and Other Investment-Related Borrowing

Amortization of Bond Premium

Municipal Bonds

Savings Bonds

Gain on the Sale of Small Business Stock

Gain on DC Zone Assets

Gain on Reinvestments in Opportunity Zones

Foreign Taxes on Investments

Exercise of Incentive Stock Options

Losses from Investment Ponzi Schemes

Deferral of Income in Commercial Annuities

Losses on Digital Assets

CHAPTER 9: Travel

Business Travel

Temporary Work Assignments

Conventions

Medical Travel

Charitable Travel

Education-Related Travel

National Guard and Military Reservist Travel

Frequent Flier Miles

Recordkeeping for Travel Expenses

CHAPTER 10: Real Estate

Vacation Home

Home Office

Timeshares

Rentals

Low-Income Housing Credit

Rehabilitation Credit

Like-Kind Exchanges

Deduction for Energy-Efficient Commercial Buildings

Qualified Improvement Property

Conservation Easements

CHAPTER 11: Borrowing and Interest

Home Mortgage Interest

Student Loan Interest

Borrowing from Retirement Plans

Investment-Related Interest

Business Interest

Accrued Interest on Bond Purchases

Below-Market Loans

Bad Debts

Debt Forgiveness

CHAPTER 12: Insurance and Catastrophes

Casualty, Theft, and Disaster Losses

Disaster Relief Payments

Damages

Disability Coverage

Accelerated Death Benefits

Legal Fees

Identity Theft Losses

Tax Identity Theft and Relief

CHAPTER 13: Your Job

Educator Expenses

Prizes and Awards

Performing Artists

State or Local Government Officials Paid on a Fee Basis

Repayment of Supplemental Unemployment Benefits

Jury Duty Pay Turned Over to Your Employer

Impairment-Related Expenses

Military Benefits

Contributions to State Benefit Programs

Dependent Care Assistance

Fringe Benefits

Income Earned Abroad

CHAPTER 14: Your Business

Start-Up Costs

Qualified Business Income Deduction

Equipment Purchases

Payment for Services

Supplies

Gifts

Self-Employment Tax Deduction

Home Office Deduction

Farming-Related Breaks

Other Business Deductions

Business Credits

Net Operating Losses

CHAPTER 15: Miscellaneous Items

State and Local Income Taxes

State and Local Sales Taxes

Certain Federal Taxes

Tax Refunds

Legal Fees

Gifts You Receive

Inheritances

Life Insurance Proceeds

Gambling Losses

Estate Tax Deduction on Income in Respect of a Decedent

Rebates and Discounts

Government Benefits

Olympic Medals

Alternative Minimum Tax

APPENDIX A: Items Adjusted Annually for Inflation

APPENDIX B: Checklist of Tax-Free Items

APPENDIX C: Checklist of Nondeductible Items

Nondeductible Items

APPENDIX D: Common Mistakes to Avoid

Index

End User License Agreement

List of Tables

f03

TABLE I.1

Standard Deduction Amounts for 2024

Chapter 1

TABLE 1.1

Phaseout of Child Tax Credit over MAGI Limits in 2024

TABLE 1.2

Maximum Earned Income Credit for 2024

TABLE 1.3

Earned Income Needed for Top Credit in 2024

TABLE 1.4

AGI Phaseout Range for the Earned Income Credit in 2024

TABLE 1.5

Dependent Care Credit Limits

TABLE 1.6

MAGI Phaseout Range for the Adoption Credit in 2024

TABLE 1.7

Year to Claim the Credit for Adoption of a U.S. Citizen or Residen

...

TABLE 1.8

Year to Claim the Credit for Adoption of a Foreign Child

Chapter 2

TABLE 2.1

2024 Poverty Amounts in the Contiguous States and D.C.*

TABLE 2.2

Household Income Percentage Limit

TABLE 2.3

Maximum Repayment Amount for 2024 Premium Tax Credit Advance

TABLE 2.4

Deductible Long-Term Care Premiums for 2024

TABLE 2.5

Health Savings Account Contribution Limits for 2024

TABLE 2.6

2024 High-Deductible Policy Limits

TABLE 2.7

2024 Limits on Deductlbles and Out-of-Pocket Expenses

TABLE 2.8

Part B Premiums for 2024

TABLE 2.9

Part D Premiums for 2024

Chapter 3

TABLE 3.1

2024 MAGI Phaseout Range for Education Credits

TABLE 3.2

2024 Phaseout Ranges for Student Interest Deduction

TABLE 3.3

2024 Phaseout Ranges for Savings Bond Interest Exclusion

TABLE 3.4

MAGI Phaseout Ranges for Coverdell ESA Contributors

Chapter 5

TABLE 5.1

2024 MAGI Phaseout Range for Active Participants Deducting IRA Con

...

TABLE 5.2

2024 MAGI Phaseout Range for Roth IRA Contributions

WORKSHEET 5.1 Reduced Roth IRA Contribution Limit for 2024

WORKSHEET 5.2 Figuring Your 2024 Contribution to a Defined Contribution Plan

TABLE 5.3

MAGI Limits in 2024 for Retirement Saver’s Credit

Chapter 6

TABLE 6.1

Deduction for Income from Intellectual Property Donations

TABLE 6.2

Record Keeper for Your Cash Donations

Chapter 7

TABLE 7.1

Dollar Limit on Depreciation of Passenger Cars

TABLE 7.2

Sample Inclusion Amounts for Cars First Leased in 2024*

TABLE 7.3

States with Ad Valorem Taxes*

Chapter 8

TABLE 8.1

2024 Ceiling on Taxable Income for Zero Tax Rate

TABLE 8.2

2024 Taxable Income Triggering 20% Tax Rate

TABLE 8.3

State Income Tax Treatment of Municipal Bond Interest

Chapter 9

TABLE 9.1

North American Area for Convention Deduction

TABLE 9.2

Sample Weekly Travel Expense Record Keeper

Chapter 10

TABLE 10.1

Depreciation Rates for Residential Rental Property

TABLE 10.2

Depreciation Rates for Nonresidential Rental Property (Placed in

...

Chapter 13

TABLE 13.1

Fringe Benefits in 2024

TABLE 13.2

Benefits Exempt from Social Security and Medicare (FICA) Taxes

Chapter 14

TABLE 14.1

2024 Taxable Income Phaseout for the QBI Deduction

TABLE 14.2

Tax Credits

Chapter 15

TABLE 15.1

Income Threshold for the Excludable Portion of Social Security Be

...

TABLE 15.2

2024 Phaseout Thresholds for the AMT Exemption

Guide

Cover

Table of Contents

Title Page

Copyright

Introduction

Begin Reading

APPENDIX A Items Adjusted Annually for Inflation

APPENDIX B Checklist of Tax-Free Items

APPENDIX C Checklist of Nondeductible Items

APPENDIX D Common Mistakes to Avoid

Index

WILEY END USER LICENSE AGREEMENT

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J.K. LASSER’S™

SMALL BUSINESS TAXES 2025

Your Complete Guide to a Better Bottom Line

Barbara Weltman

Copyright © 2025 by Barbara Weltman. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permission.

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Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Further, readers should be aware that websites listed in this work may have changed or disappeared between when this work was written and when it is read. Neither the publisher nor authors shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Library of Congress Cataloging-in-Publication Data is Available:

ISBN 9781394280933 (Paperback)ISBN 9781394280988 (ePDF)ISBN 9781394280971 (ePUB)

Cover Design: Wiley

Introduction

The word “taxes” makes most people groan. There are good reasons for this response: First of all, the cost of paying your taxes annually can be a financial burden. You may feel taken to the cleaners every time you view your paycheck after withholding for federal income taxes (not to mention state income taxes as well as Social Security and Medicare taxes). And taxes are time consuming—to gather information, meet with a tax professional if you use one, or prepare and submit your own returns.

Second, it can cost you money to get your taxes done. The IRS says that nearly 60% of taxpayers use paid preparers for their returns. Of course, because more than 90% of individual income tax returns are completed by computer (through a paid preparer, with software, or through FreeFile or Direct File), knowing the places where deductions and credits are entered on the return is not critical to you; it’s effectively done automatically.

Third, the tax law is very complicated and changing all the time. Federal tax legislation means there are a number of new rules for 2024.

Fourth, you have to know what the tax rules are and can’t claim ignorance to avoid taxes and penalties. Even if you use a tax professional or tax preparation software to prepare your return, you remain responsible for your taxes. The Tax Court has noted that using software is not an automatic excuse to avoid underpayment penalties.

How can you combat the feeling of dread when it comes to taxes? It helps to know that the tax law is peppered with many, many tax breaks to which you may be entitled. These breaks allow you to not report certain economic benefits you enjoy or to subtract certain expenses from your income or even directly from your tax bill. As the famous jurist Judge Learned Hand once stated (in the 1934 case of Helvering v. Gregory in the Court of Appeals for the Second Circuit):

Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike, and all do right, for nobody owes any public duty to pay more than the law demands.

So get your tax affairs in order and legally reduce what you pay each year to Uncle Sam!

In getting a handle on how to do this by taking advantage of every tax break you may be entitled to without running afoul of the Internal Revenue Service (IRS), there are some simple rules to keep in mind. They include:

You must report all of your income unless a specific law allows you to exclude or exempt it (so that it is never taxed) or defer it (so that it is taxed at a later time).

You can claim deductions only when and to the extent the law allows. Deductions are referred to as a “matter of legislative grace”; Congress doesn’t have to create them and does so only for some purpose (for example, to encourage economic activity or to balance some perceived inequity in the tax law).

Tax credits are worth more than tax deductions. A credit reduces your tax payment on a dollar-for-dollar basis; a $1,000 credit saves you $1,000 in taxes. A deduction is worth only as much as the top tax bracket you are in. Suppose you are in the 24% tax bracket, which means this is the highest rate you pay on at least some of your income. If you have a $1,000 deduction, it is worth $240 (24% of $1,000) because it saves you $240 in taxes you would otherwise have to pay.

In a number of cases, different deduction rules apply to the alternative minimum tax (AMT), a shadow tax system that ensures you pay at least some tax if your regular income tax is lower than it would have been without certain deductions.

Whether you prepare your return by hand, use computer software or an online solution, or rely on a professional, this book is designed to tell you how to get every tax edge you’re entitled to. Knowing what to look out for will help you plan ahead and organize your activities in such a way that you’ll share less of your hard-earned money with the government.

Tax-Favored Items

There are 5 types of tax-advantaged items receiving preferential or favorable treatment under the tax law:

Tax-free income

—income you can receive without any current or future tax concerns. Tax-free income may be in the form of exclusions or exemptions from tax. In many cases, tax-free items do not even have to be reported in any way on your return.

Capital gains

—profits on the sale or exchange of property held for more than one year (long-term). Long-term capital gains are subject to lower tax rates than the rates on other income, such as salary and interest income, and may even be tax free in some cases. Ordinary dividends on stocks and capital gain distributions from stock mutual funds are taxed at the same low rates as long-term capital gains.

Tax-deferred income

—income that isn’t currently taxed. Since the income builds up without any reduction for current tax, you may accumulate more over time. But at some point the income becomes taxable.

Deductions

—items you can subtract from your income to reduce the amount of income subject to tax. There are 2 classes of deductions: those “above the line,” which are subtracted directly from gross income, and those “below the line,” which can be claimed only if you itemize deductions instead of claiming the standard deduction (explained later). And there are some deductions subtracted from adjusted gross income that may be claimed whether or not you itemize other personal deductions.

Credits

—items you can use to offset your tax on a dollar-for-dollar basis. There are 2 types of tax credits: one that can be used only to offset tax liability (called a “nonrefundable” credit) and one that can be claimed even if it exceeds tax liability and you receive a refund (called a “refundable” credit). Usually you must complete a special tax form for each credit you claim. For 2024, the premium tax credit can be enjoyed on an advanced basis by using it to reduce health insurance premiums for coverage through a government marketplace. And credits for new or used electric vehicles purchased in 2024 can be sold to the dealer, enabling the buyer to get the benefit of the credit up front.

This book focuses on different types of tax-favored items: exclusions (tax-free income), above-the-line deductions that don’t require itemizing, itemized deductions, tax credits, and other benefits, such as subtractions that reduce income. At the end of this Introduction you’ll see symbols used to easily identify the type of benefit being explained.

Limits on Qualifying for Tax-Favored Items

In many cases, eligibility for tax benefits or the extent to which they may be claimed depends on adjusted gross income (AGI) or modified adjusted gross income (MAGI).

Adjusted gross income is gross income (all the income you are required to report) minus certain deductions (called “adjustments to gross income” on Schedule 1 of Form 1040 or 1040-SR). Adjustments or subtractions you can make to your gross income to arrive at your adjusted gross income are limited in 2024 to the following items:

Alimony payments for pre-2019 divorces and separation agreements

Archer Medical Savings Accounts (MSAs) (for accounts set up prior to 2008)

Attorneys’ fees and costs for certain discrimination claims or IRS whistle-blower claims

Business expenses of self-employed individuals

Capital loss deductions of up to $3,000

Educator expenses up to $300

Employer-equivalent portion of self-employment tax

Fee-basis government officials’ expenses

Foreign housing expenses

Forfeiture-of-interest penalties because of early withdrawals from certificates of deposit (CDs)

Form 1099-K loss reporting for personal items or incorrect forms that could not get corrected

Health Savings Account (HSA) contributions

Individual Retirement Account (IRA) deductions

Jury duty pay turned over to your employer

Legal fees for unlawful discrimination claims

Moving expenses of members of the military

Net operating losses (NOLs)

Olympic and Paralympic medals and prize money that are nontaxable

Performing artist’s qualifying expenses

Qualified retirement plan contributions for self-employed individuals

Rent and royalty expenses

Repayment of supplemental unemployment benefits required because of the receipt of trade readjustment allowances

Self-employed health insurance deduction

Simplified employee pension (SEP) or savings incentive match plan for employees (SIMPLE) contributions for self-employed individuals

Student loan interest deduction up to $2,500

Travel expenses to attend National Guard or military reserve meetings more than 100 miles from home

Figuring AGI may sound complicated, but in reality it’s merely a number taken from a line on your tax return. For example, AGI is the figure you enter on line 11 of the 2024 Form 1040 or 1040-SR.

Modified adjusted gross income is AGI increased by certain items that are excludable from income and/or certain adjustments to gross income. Which items are added back varies for different tax breaks. For example, the MAGI limit on eligibility to claim the student loan interest deduction is AGI (disregarding the student loan interest deduction) increased by the exclusion for foreign earned income and certain other foreign income or expenses. All of these items are explained in this book.

Household income is a term in tax law used to determine eligibility for the premium tax credit to help pay for health coverage purchased through a government marketplace. Household income is explained further in this book in connection with these tax rules.

Qualified business income. If you are an owner in a pass-through entity—a sole proprietorship, limited liability company, partners, or S corporation—you may be eligible for a qualified business income (QBI) deduction. QBI for purposes of this personal deduction is explained further in Chapter 14.

Taxable income. This is the amount of income remaining after subtracting deductions. Taxable income is the amount on which taxes are figured. Taxable income is also the threshold used for determining the QBI deduction explained in Chapter 14.

Alternative minimum taxable income (AMTI) is the income on which the alternative minimum tax is figured. It is essentially taxable income increased by tax preferences and increased or decreased by certain adjustment items. The AMT and the exemption subtracted from AMTI is explained in Chapter 15.

Standard Deduction versus Itemized Deductions

Every taxpayer, other than a dependent of another taxpayer, is entitled to the basic standard deduction if they choose not to itemize personal deductions. This is a subtraction from your income, and the amount you claim is based on your filing status. Table 1.1 shows the standard deduction amounts for 2024. Almost 90% of all filers used the standard deduction.

TABLE I.1 Standard Deduction Amounts for 2024

Filing Status

 Standard Deduction

Married filing jointly

$ 29,200

Head of household

21,900

Single (unmarried)

14,600

Surviving spouse

29,200

Married filing separately

14,600

In addition to the basic standard deduction, certain taxpayers can increase these amounts. An additional standard deduction amount applies to those age 65 and older and for blindness. For 2024, the additional amount is $1,900 for individuals who are not married and are not a surviving spouse and $1,550 for those who are married or a surviving spouse.

Example

In 2024, you are single, age 68, and not blind. Your standard deduction is $16,500 ($14,600 + $1,900).

The standard deduction can also be increased by net qualified disaster losses. This is explained in Chapter 12. You cannot claim any additional standard deduction that applies to those 65 or older and/or blind if you choose to itemize deductions in lieu of claiming the basic standard deduction amount.

Instead of claiming the standard deduction, you can opt to list certain deductions separately (i.e., itemize them). While only about 10% of individuals itemize, this still means millions of individual taxpayers don’t use the standard deduction and need to know about itemized deductions. Itemized deductions include:

Medical expenses

Taxes

Interest payments

Gifts to charity

Casualty and theft losses of personal-use property in federally-declared disaster areas

Casualty and theft losses related to income-producing property

Gambling losses

Estate tax payments on income in respect of decedents

Generally, claim the standard deduction when it is greater than the total of your itemized deductions. But it may save overall taxes to itemize, even when total deductions are less than the standard deduction, if you are subject to the alternative minimum tax (AMT). The reason: The standard deduction cannot be used to reduce income subject to the AMT, but certain itemized deductions can.

In the past there was an overall limit on itemized deductions for high-income taxpayers. This limit does not apply for 2018 through 2025.

If a married couple files separate returns and one spouse itemizes deductions, the other must also itemize and cannot claim a standard deduction.

Impact of Deductions on Your Chances of Being Audited

Did you know that the IRS collects statistics from taxpayers to create profiles of average deductions? If you claim more than the average for your income range, the IRS’s computer may select your return for further examination. The Inflation Reduction Act provided funding for the IRS to hire thousands of new agents, causing concern among taxpayers that audit chances would increase. In the IRS Strategic Operating Plan released in May 2024, the IRS said there would be no increased audit rates for those with income under $400,000, but there are no guarantees.

Tax experts agree that you should claim every deduction you are entitled to. About 10% of individuals itemize their deductions. Just make sure to have the necessary proof of your eligibility and other records you are required to keep in case your return is examined.

How to Use This Book

This book is tied to Form 1040, U.S. Income Tax Return for Individuals. It can also be used for Form 1040-SR, Income Tax Return for Seniors; a form specifically for seniors age 65 and older.

The chapters in this book are organized by subject matter so you can browse through them to find the subjects that apply to you or those in which you have an interest.

Each tax benefit is denoted by an icon to help you spot the type of benefit involved:

 Exclusion

 Above-the-line deduction

 Itemized deduction (a deduction taken

after

figuring adjusted gross income)

 Credit

 Other benefit (e.g., tax deferral or a subtraction other than an above-the-line or itemized deduction that reduces income)

There are references to free IRS publications on a variety of tax topics that you can download from the IRS website (www.irs.gov) or obtain free of charge by calling 800-829-1040.

You’ll also see key dates for various actions, such as filing returns, contributing to retirement plans, and reporting foreign financial accounts to the U.S. Treasury. For example, the deadline for filing 2024 federal income tax returns is April 15, 2025.

In the appendices, you’ll find a listing of items that can be adjusted each year to reflect cost-of-living changes so you can plan ahead, as well as a checklist of items that are tax free, and a checklist of items that are not deductible.

Throughout the book you will see alerts to possible changes to come. Remember: the tax law is continually changing. For a free update on tax developments, look for the Supplement to this book in February 2025, by going to www.jklasser.com, as well as to my website, www.BigIdeasForSmallBusiness.com.

CHAPTER 1You and Your Family

Marital Status

Dependents

Qualifying Child

Qualifying Relative

Child Tax Credit

Earned Income Credit

Dependent Care Expenses

Adoption Costs

Foster Care

Child Support

Alimony

ABLE Accounts

The nature of families is changing, and taxes have specific rules for them. Do the old clichés still ring true? Can two still live as cheaply as one? Are things really cheaper by the dozen? For tax purposes, there may be a penalty or bonus for being married versus single, depending on the income of each spouse and the particular tax break involved. And there are certain tax breaks for having a family.

This chapter explains family-related tax benefits, such as tax credits related to your children, and the consequences of marital dissolutions. For more information on these topics, see IRS Publication 501, Dependents, Standard Deduction, and Filing Information; IRS Publication 503, Child and Dependent Care Expenses; IRS Publication 504, Divorced or Separated Individuals; and IRS Publication 596, Earned Income Credit.

Marital Status

Whether you are married or single has a significant impact on your taxes. In some cases, being married results in a “marriage bonus,” which means effectively averaging taxes when one spouse works and the other does not or has only modest income. In other cases, being married results in a “marriage penalty,” which means that two working spouses earning about the same likely will pay higher total tax than if they were single. For some tax rules, a married couple has the identical tax break as a single individual, such as the $3,000 capital loss deduction against ordinary income, the adoption credit limit ($16,810 in 2024), and the $10,000 limit on itemizing state and local taxes, which is a distinct disadvantage for those who are married. For some tax rules, a married couple has double the tax break for singles, such as the ordinary loss deduction for so-called Section 1244 stock, so marital status makes no difference here.

There are a number of filing statuses that determine eligibility for various tax breaks:

Married filing jointly (MFJ)

Married filing separately (MFS)

Head of household (HOH)

Single

Qualifying surviving spouse with a dependent child (QSS)

You need to know which term applies to you. The terms are not further defined here and often cause confusion, so check IRS Publication 501 if you are unsure. Under federal tax law, the terms “husband,” “wife,” and “spouse” are gender neutral. The term “husband and wife” means two individuals lawfully married to each other. Those in a civil union or domestic partnership are not married for federal income tax purposes.

Dependents

No personal or dependency exemptions can be claimed in 2018 through 2025. So if you had 4 exemptions in 2017 and deducted $16,200 ($4,050 × 4) in that year, your deduction in 2024 is zero. The suspension of exemptions seriously reduces write-offs for many taxpayers. Of course, because high-income taxpayers were subject to a phaseout of exemptions, they are not greatly affected by the suspension in the deduction for exemptions.

The concept of dependents has not been eliminated and continues to apply for various purposes. For example, for purposes of a child tax credit that may be claimed for a qualifying child or a dependent who is not a qualifying child, the concept of dependents continues to apply. The definition of dependent varies for certain purposes and is explained in each relevant tax break in this book. For example, the amount of income for a qualifying relative taken into account in determining a dependent for purposes of head of household status and some other tax breaks in 2024 is $5,050.

Qualifying Child

The following is a brief explanation of a qualifying child and a qualifying relative (someone who is not a qualifying child):

A qualifying child must meet all of the following conditions:

Relationship test:

The child must be your son or daughter (natural, adopted, step, and in some cases foster) or a descendant of your sibling (e.g., niece or nephew).

Age test:

The child must be younger than you and either younger than 19 years old, be a “student” younger than 24 years old as of the end of the calendar year, or any age but permanently and totally disabled.

Residency test:

The child must live with you in the United States for more than half the year (special rules for noncustodial parents are explained later).

Joint return test:

The child cannot file a joint return unless doing so only to claim a tax refund.

Support test:

The child does not provide more than half of his or her own support.

Multiple people claiming the child as a dependent. Where one parent has physical custody of the child, he or she can waive treating the child as a dependent to permit the noncustodial parent to do so. The waiver (annually or permanently) is made on Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent. The form applies to some benefits (e.g., child tax credit) but not for other benefits (e.g., earned income tax credit, dependent care credit, head of household status).

Where 2 people are eligible to treat the child as a dependent, a “tie breaker rule” comes into play. Generally, the person with greater physical custody (determined by counting the nights that the child spends with each person) is determinative. When there’s an even split, other rules are used to decide which person can treat the child as a dependent.

Qualifying Relative

This is a person who is not a qualifying child and who meets all of the following conditions:

Relationship test

.

The person must be either related to you in a stated way (e.g., a child too old to be a qualifying child, grandchild, parent, certain in-laws, aunt, uncle, niece, or nephew) or a member of your household.

Support test

.

You must provide more than half of the person’s support for the year.

Gross income test

.

The person must have a gross income below a set amount ($5,050 in 2024).

Child Tax Credit

Alert: Congress was considering a dramatic change to the child tax credit. Check the Supplement for any update. The U.S. Department of Agriculture estimates that it costs a middle-class family over $233,610 to raise a child born in 2015 to age 18 (there are no newer statistics), but if you factor in inflation, the cost becomes nearly $306,619 today). In recognition of this cost, the tax law allows you to claim a tax credit.

Benefit

You may claim a tax credit of up to $2,000 for each qualifying child under the age of 17. You may claim a $500 credit for a qualifying dependent (a person who is not a qualifying child). If the credit for a qualifying child that you are entitled to claim is more than your tax liability, you may be entitled to a refund under certain conditions.

Generally, the credit up to $1,700 per qualifying child is refundable for 2024. This refundable credit usually is allowed to the extent of 15% of earned income over $2,500.

If you have 3 or more children for whom you are claiming the credit, you are entitled to an additional child tax credit. In reality, the additional child tax credit is merely a larger refund of the credit you are ordinarily entitled to. There are 2 ways to figure your refundable amount (the additional child tax credit) and you can opt for the method that results in the larger refund:

15% of earned income over $2,500 up to the lesser of this calculation or the unused child tax credit of $1,700 per qualifying child

Excess of your Social Security and Medicare taxes (plus the so-called employer share of self-employment taxes, if any) over your earned income credit for the year (the earned income credit is explained in the next main section)

Conditions

To claim the child tax credit, you must meet 2 conditions:

You must have a qualifying child or a qualifying dependent.

Your income must be below a set amount.

QUALIFYING CHILD

You can claim the $2,000 credit only for a “qualifying child.” There are 5 tests for a qualifying child and you must meet all of them. Here are the 5 requirements for a qualifying child:

Age test

. The child must be under age 17 by the end of the year. This age limit applies even if a child is disabled (but an older child may be a qualifying dependent, as explained later).

Residence test

. The child must have the same principal residence as you for more than half the tax year. There are some exceptions in certain cases for a child of divorced or separated parents, a kidnapped child, temporary absences, and for a child who is born or dies during the year.

Support test

. The child does not provide more than half of his or her support.

Social Security number

. No refundable or nonrefundable credit can be issued unless the child has a Social Security number. The Social Security number must be issued on or before the due date of your return. A Social Security card that is labeled “not valid for employment” (i.e., it is only good for purposes of receiving federal benefits, such as Medicaid) is not treated as a valid Social Security number for purposes of the child tax credit.

Nationality

. The child must be a U.S. citizen or national, or a resident of the U.S. The person can’t be a resident of Canada or Mexico.

QUALIFYING DEPENDENT

You can claim the $500 nonrefundable child tax credit for a qualifying dependent. A “qualifying dependent” is a person who is not a qualifying child and who is viewed as a dependent (even though there is no dependency exemption). More specifically, a dependent is a qualifying relative. There are 5 tests for being a qualifying relative, all of which must be met:

Relationship test

. The person must be your child (including adopted or step); your grandchild or great-grandchild; in-law (son, daughter, father, mother, brother, or sister); parent or stepparent; sibling (including step and half); and aunt, uncle, niece, or nephew if related by blood.

Gross income test

. For 2024, this means having gross income exceeding $5,050.

Support test

. You must provide more than half of the person’s support for the year.

Qualifying child test

. The person cannot be a qualifying child for you or any other taxpayer.

Residency test

. The qualifying dependent must be a U.S. citizen, national, or residence of the United States. The person can’t be a resident of Canada or Mexico.

MAGI LIMIT

You must have modified adjusted gross income (MAGI) below a set amount. The credit you are otherwise entitled to claim is reduced or eliminated if your MAGI exceeds a set amount. MAGI for purposes of the child tax credit means AGI increased by the foreign earned income exclusion, the foreign housing exclusion or deduction, or the possession exclusion for American Samoa residents.

The credit amount is reduced by $50 for each $1,000 of MAGI or a fraction thereof over the MAGI limit for your filing status. The phaseout begins if MAGI exceeds the limits found in Table 1.1.

Example

In 2024, you are a head of household with 2 qualifying children. You are single and your MAGI is $210,000. Your credit amount of $4,000 ($2,000 × 2) is reduced by $500 ($210,000 − $200,000 = $10,000 excess MAGI ÷ [$1,000 × $50]). Your credit is $3,500 ($4,000 − $500).

REFUNDABLE CREDIT

If the credit you are entitled to claim is more than your tax liability, you can receive the excess amount as a “refund.” The refund is limited to 15% of your taxable earned income (such as wages, salary, tips, commissions, bonuses, and net earnings from self-employment) over $2,500, for a maximum refundable amount of $1,700. If your earned income is not over $2,500, you may still qualify for the additional credit if you have 3 or more children.

TABLE 1.1 Phaseout of Child Tax Credit over MAGI Limits in 2024

Filing Status

MAGI Limit

Married filing jointly

$400,000

Other filing status

200,000

If you have 3 or more children for whom you are claiming the credit, you may qualify for a larger refund, called the additional child tax credit. You can figure your refund in the usual manner as explained earlier, or, if more favorable, you can treat your refundable amount as the excess of the Social Security and Medicare (FICA) taxes you paid for the year (plus the employee equivalent portion of self-employment taxes, if any) over your earned income credit (explained later in this chapter).

Planning Tips

The child tax credit and the credit for other dependents should be factored into income tax withholding from paychecks to enjoy the tax savings throughout the year. If you know you will become entitled to claim the credit (e.g., you expect the birth of a child), you may wish to adjust your withholding so that you don’t have too much income tax withheld from your paycheck. Increase your withholding so that less income tax is withheld from your pay by filing a new Form W-4, Employee’s Withholding Certificate, with your employer. There is a Tax Withholding Estimator at https://www.irs.gov/individuals/tax-withholding-estimator to help you complete Form W-4.

If you can’t claim a credit for a qualifying child because the child doesn’t have a valid Social Security number, you may be able to claim the credit for a qualifying dependent. For example, if there is another taxpayer identification number (e.g., Adoption Taxpayer Identification Number, or ATIN), you may be eligible for the $500 credit.

Pitfalls

If you claim the foreign earned income exclusion to exclude income earned abroad up to the annual dollar limit ($126,600 in 2024), you cannot receive the refundable child tax credit.

For 2024 returns filed in 2025, the IRS is not permitted to issue tax refunds for the refundable child tax credit before mid-February 2025. As a result, refunds usually aren’t received until the third or fourth week in February, even for returns submitted in January 2025.

Where to Claim the Credit

On page 1 of Form 1040 or 1040-SR, enter dependents for whom you are claiming a child tax credit or credit for other dependents, along with their Social Security numbers and relationship to you. The additional child tax credit is figured on Schedule 8812 of Form 1040 or 1040-SR. The nonrefundable child tax credit or the credit for other dependents is entered on line 19 of the return. The additional child tax credit is entered on line 28 of the return.

Earned Income Credit

Low-income taxpayers are encouraged to work and are rewarded for doing so by means of a special tax credit, called the earned income credit. The earned income credit is the second-largest program, after Medicaid, that provides assistance to low-income people. The amount of the credit varies with income, filing status, and the number of dependents, if any. The credit may be viewed as a “negative income tax” because it can be paid to taxpayers even if it exceeds their tax liability.

Benefit

If you are a working taxpayer with low or moderate income, you may qualify for a special tax credit of up to $7,830 in 2024. The amount of the credit depends on several factors, including your adjusted gross income, earned income, and the number of qualifying children. Table 1.2 shows the maximum credit you may claim based on the number of your qualifying children, if any.

The credit is “refundable” because it can be received in excess of the tax owed.

Conditions

To be eligible for the credit, you must have earned income from being an employee or a self-employed individual. The amount of the credit you are entitled to claim depends on several factors.

QUALIFYING CHILDREN

You may claim the credit even if you have no qualifying child. But you are entitled to a larger credit if you have one qualifying child and a still larger credit for 2 or more qualifying children.

To be a qualifying child, the child must:

Be a qualifying child as defined earlier in the chapter under the child tax credit

Live in your U.S. household for more than half the year

TABLE 1.2 Maximum Earned Income Credit for 2024

Maximum Earned

Number of Qualifying Children

Income Credit

No qualifying child

$ 632

1 qualifying child

4,213

2 qualifying children

6,960

3 or more qualifying children

7,830

Qualify as your dependent if the child is married at the end of the year

Be a U.S. citizen or resident (or a nonresident who is married to a U.S. citizen and elects to have all worldwide income subject to U.S. tax)

If you do not have a qualifying child, you must be at least age 25 but under age 65.

EARNED INCOME

Earned income includes wages, salary, tips, commissions, jury duty pay, union strike benefits, certain disability pensions, U.S. military basic quarters and subsistence allowances, and net earnings from self-employment (profit from your self-employment activities). Military personnel can elect to treat tax-free combat pay as earned income for purposes of the earned income credit.

Nontaxable employee compensation, such as tax-free fringe benefits or salary deferrals—for example, contributions to company 401(k) plans—is not treated as earned income.

Earned income does not include pensions and retirement plan distributions, long-term disability and military disability pensions, welfare, Social Security benefits (for retirement or disability), and unemployment benefits.

To qualify for the maximum credit, you must have earned income at or above a set amount. Table 1.3 shows the earned income you need to obtain the top credit (depending on the number of your qualifying children, if any).

ADJUSTED GROSS INCOME

If your adjusted gross income is too high, the credit is reduced or eliminated. Table 1.4 shows the AGI phaseout range for the earned income credit. This depends not only on the number of qualifying children, if any, but also on your filing status, as shown in the table.

TABLE 1.3 Earned Income Needed for Top Credit in 2024

Earned Income Needed for Top Credit

Number of Qualifying Children

No qualifying child

$  8,260

1 qualifying child

 12,390

2 or more qualifying children

 17,400

TABLE 1.4 AGI Phaseout Range for the Earned Income Credit in 2024

Number of Qualifying Children

Married Filing Jointly

Other Taxpayers

No qualifying child

$17,250–25,511

$10,330–18,591

1 qualifying child

$29,640–56,004

$22,720–49,084

2 qualifying children

$29,640–62,688

$22,720–55,768

3 or more qualifying children

$29,640–66,819

$22,720–59,899

JOINT RETURN

If you are married, you usually must file a joint return with your spouse in order to claim an earned income credit. This requirement is waived if your spouse did not live in your household for the last 6 months of the year or you have a decree, instrument, or written agreement of separation and did not live with a spouse by the end of the year. In this case, assuming you paid the household expenses in which a qualifying child lived for the full year, you qualify as single for purposes of the earned income credit (using “other taxpayers” limits on AGI).

Example

You are married and file a joint return. You and your spouse have 1 qualifying child. In 2024, if your AGI is less than $29,640, your earned income credit is not subject to any phaseout. If your AGI is $56,004 or higher, you cannot claim any earned income credit; it is completely phased out. If your AGI is between these amounts (within the phaseout range), you may claim a reduced credit.

CHILDLESS INDIVIDUALS

The minimum age for claiming the earned income credit usually is 19. The minimum age for a full-time student is 24; it’s 18 for a former foster child or homeless youth. The maximum age is 65.

If you have a qualifying child who lacks a Social Security number, you may claim the earned income tax credit as if you were childless.

Planning Tips

The credit is based on a set percentage of earned income. The good news is that you don’t have to compute the credit. You merely look at an IRS Earned Income Credit Table, which accompanies the instructions for your return. If your return is prepared by computer, the computation is automatic based on the information—your filing status, AGI, earned income, number, if any, of qualifying children—you input.

You can have the IRS figure your credit for you (you don’t even have to look it up in the table). To do this, just complete your return up to the earned income credit line and put “EIC” on the dotted line next to it. If you have a qualifying child, complete and attach Schedule EIC to the return. Also attach Form 8862, Information to Claim Earned Income Credit after Disallowance, if you are required to do so as explained next.

If your child does not qualify as your dependent because of the tie-breaker rule (discussed earlier in this chapter), you may claim the earned income credit with no qualifying child. For example, a grandmother has a home in which her daughter and the baby (granddaughter) live. Under the tie-breaker rule, while the baby could be a qualifying child of the grandmother and mother, she is the daughter’s qualifying child. The grandmother can claim the earned income tax credit with no qualifying child, assuming all other requirements for the credit are met. Alternatively, if the daughter foregoes the dependency exemption, the grandmother can claim the grandchild as her dependent and the earned income tax credit, assuming that her AGI exceeds the daughter’s AGI. In this instance, the daughter could claim the earned income tax credit with no qualifying child, assuming all other requirements for the credit are met.

Pitfalls

You lose eligibility for the credit if you have unearned income over $11,600 in 2024 from dividends, interest (both taxable and tax free), net rent or royalty income, net capital gains, or net passive income that is not self-employment income.

You lose out on the opportunity to claim the credit in future years if you negligently or fraudulently claim it on your return. (If you use a paid preparer, he or she is required to perform to diligence before allowing you to claim the earned income credit.) You are banned for 2 years from claiming the earned income credit if your claim was reckless or in disregard of the tax rules. You lose out for 10 years if your claim was fraudulent. If you become ineligible because of negligence or fraud, the IRS issues a deficiency notice. You may counter the IRS’s charge by filing Form 8862, Information to Claim Earned Income Credit after Disallowance, to show you are eligible.

If the IRS accepts your position and recertifies eligibility, you don’t have to file this form again (unless you again become ineligible). For 2024 returns filed in 2025, the IRS is not permitted to issue tax refunds for the refundable earned income tax credit before February 15, 2025. As a result, refunds usually aren’t received until the third or fourth week in February, even for returns filed in January 2025.

Where to Claim the Earned Income Credit

You claim the earned income credit on line 27 of Form 1040 or 1040-SR.

Dependent Care Expenses

Many taxpayers must pay for the care of a child in order to work. According to the World Population Review, the cost of child care in 2024 for an infant or toddler in the U.S. is nearly $15,000 at a center. The tax law provides a limited tax credit for such costs, technically called the child and dependent care credit, but more commonly referred to as the dependent care credit. The amount of the credit you may claim depends on your income. It may be as much as 35% of eligible expenses. Or, if your employer helps with child care costs, you may exclude the payments from your income.

Benefit

If you hire someone to care for your children or other dependents to enable you to work or you incur other dependent care expenses, you may be eligible for a tax credit of up to $2,100. More specifically, this credit is a percentage of eligible dependent care expenses (explained later). The credit percentage ranges from a low of 20% to a high of 35%. The maximum amount of expenses that can be taken into account in figuring the credit is $3,000 for one qualifying dependent and $6,000 for 2 or more qualifying dependents. If your employer pays for your dependent care expenses, you may be able to exclude this benefit from income up to $5,000.

Conditions for the Tax Credit

There are a number of conditions for claiming the dependent care credit; you must satisfy all 6 of them to claim the credit:

Incur the expenses to earn income.

Pay expenses on behalf of a qualifying dependent.

Pay over half the household expenses.

File a joint return if you are married.

Have qualifying expenses in excess of employer reimbursements.

Report information about the child care provider.

INCUR THE EXPENSES TO EARN INCOME

The purpose of the dependent care credit is to enable you to work. This generally means that if you are married, you both must work, either full time or part time.

A spouse who is incapacitated or a full-time student is not required to work in order to claim the credit; he or she is treated as having earned income of $250 per month if there is one qualifying dependent or $500 per month if there are 2 or more qualifying dependents.

Example

You are a single mother and a full-time student with 1 child. You are treated as having earned income of $3,000 for the year ($250 × 12). You can use this income in figuring your credit, even though you didn’t actually receive this income.

PAY EXPENSES ON BEHALF OF A QUALIFYING DEPENDENT

This is for your child under the age of 13, your incapacitated dependent of any age, or your spouse who is incapacitated.

If your child has his or her 13th birthday during the year, you can take into account expenses incurred up to this birthday.

Only certain types of child care expenses can be taken into account in figuring the credit. Qualifying expenses can be incurred in your home or outside the home (using a day care center). You cannot include amounts paid to you, your child who is under age 19 at the end of the year, your spouse, or any other person you can claim as a dependent.

EXAMPLES OF QUALIFYING EXPENSES

Babysitter

Day camp, including a specialty camp such as one for soccer or computers

Day care center

Housekeeper (the portion of compensation allocated to dependent care)

Nursery school

Private school (The costs for first grade and higher do not qualify unless the child is handicapped, provided the child spends at least 8 hours per day in your home.)

Transportation, if supervised (so that it is part of care), such as to a day camp or after-school program not on school premises, but not the cost of personally driving a dependent to and from a dependent care center