Identity Protection PIN
The Internal Revenue Service announced that the service is making it easier for taxpayers to protect their information and avoid refund delays by accepting certain e-filed tax returns that claim dependents who have already been claimed on another taxpayer’s return. This change will benefit filers claiming important tax credits like the Earned Income Tax Credit and Child Tax Credit.
Beginning in the 2025 filing season, the IRS will accept Forms 1040, 1040-NR and 1040-SS even if a dependent has already been claimed on a previously filed return as long as the primary taxpayer on the second return includes a valid Identity Protection Personal Identification Number (IP PIN). This change will reduce the time for the agency to receive the tax return and accelerate the issuance of tax refunds for those with duplicate dependent returns.
With the new changes being made by the IRS, the IP PIN will also help protect taxpayers when someone fraudulently claims a taxpayer’s dependent. In previous years, the second tax return had to be filed by paper. Using an IP PIN is a way for taxpayers to help protect themselves against identity theft.
- Standard Deduction versus Itemized Deductions
For 2024, the standard deduction amounts are: $14,600 (single); $21,900 (head of household); $29,200 (married filing jointly); and $14,600 (married filing separately). If the total of your itemized deductions in 2024 will be close to your standard deduction amount, we should evaluate whether alternating between bunching itemized deductions into 2024 and taking the standard deduction in 2025 (or vice versa) could provide a net-tax benefit over the two-year period. For example, you might consider doubling up this year on your charitable contributions rather than spreading the contributions over a two-year period. If these contributions, along with your mortgage interest, medical expenses (discussed below), and state income and property taxes (subject to the $10,000 deduction limitation on such taxes that applies to both single individuals and married couples filing jointly; and the $5,000 limitation on such expenses for married filing separately returns), exceed your standard deduction, then itemizing such expenses this year and taking the standard deduction next year may be appropriate.
- Child Tax Credit
For 2024, a child tax credit of as much as $2,000 is available for each child under age 17, depending on your modified adjusted income. In addition, a $500 nonrefundable credit is available for qualifying dependents other than qualifying children. Where the credit exceeds the maximum amount of tax due, it may be refundable. The maximum amount refundable for 2024 is $1,700 per qualifying child. The $500 credit applies to two categories of dependents: (1) qualifying children for whom a child tax credit is not allowed, and (2) qualifying relatives. The amount of the credit is reduced for taxpayers with modified adjusted gross income over $200,000 ($400,000 for married filing jointly) and eliminated in full for taxpayers with modified adjusted gross income over $240,000 ($440,000 for married filing jointly).
- Earned Income Credit
The earned income tax credit (EITC) is determined by multiplying your earned income for the year (but only up to a maximum amount of earned income) by a credit percentage that varies depending on whether you have any qualifying children and, if so, the number of qualifying children. The EITC is also subject to a limitation based on your adjusted gross income. For 2024, the maximum amount of the EITC is (1) $632 for a taxpayer with no qualifying children, (2) $4,213 for a taxpayer with one qualifying child, (3) $6,960 for a taxpayer with two qualifying children, and (4) $7,830 for a taxpayer with three or more qualifying children. In addition, the EITC cannot be claimed if your investment income (including interest, dividends, capital gain net income, and net rental income) exceeds $11,600 for 2024.
- Dependent Care Credit
If you incurred expenses to care for a child or another dependent so that you can work, you may be eligible for the child and dependent care credit. This credit is available to individuals who, in order to work or to look for work, have to pay for childcare services for dependents under age 13. Credit is also available for amounts paid for the care of a spouse or a dependent of any age who is physically or mentally incapable of self-care. The credit is not available for amounts paid to a dependent or a taxpayer under age 19. The amount of the credit is a specified percentage of your total employment-related expenses – generally, 35 percent reduced (but not below 20 percent) by one percentage point for each $2,000 by which your adjusted gross income for the tax year exceeds $15,000. Employment-related expenses incurred during any tax year which may be taken into account cannot exceed $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals.
- Premium Tax Credit
A health insurance subsidy is available in the form of a premium assistance tax credit for eligible individuals and families who purchase health insurance through the Health Insurance Marketplace, also known as the “Exchange.” The provision is the result of the Patient Protection and Affordable Care Act (PPACA). This credit is refundable and payable in advance directly to the insurer on the Exchange. In the past, individuals with incomes exceeding 400 percent of the poverty level were not eligible for these subsidies. However, the cap has been eliminated through 2025 and therefore, anyone can qualify for the subsidy. In addition, the percentage of your income paid for health insurance under a PPACA plan is limited to 8.5 percent of income. Thus, if you buy your own health insurance directly through an Exchange, you can receive increased tax credits to reduce your premiums.
- Education-Related Deductions and Credits
Certain education-related tax deductions, credits, and exclusions from income may be available for 2024. For example, tax-free distributions from a qualified tuition program, also referred to as a Section 529 plan of up to $10,000 are allowed for qualified higher education expenses. Qualified higher education expenses for this purpose include tuition expenses in connection with a designated beneficiary’s enrollment or attendance at an elementary or secondary public, private, or religious school, i.e. kindergarten through grade 12. It also includes expenses for fees, books, supplies, and equipment required for the participation in certain apprenticeship programs and qualified education loan repayments in limited amounts. A special rule allows tax-free distributions to a sibling of a designated beneficiary (i.e., a brother, sister, stepbrother, or stepsister). As a result, a 529 account holder can make a student loan distribution to a sibling of the designated beneficiary without changing the designated beneficiary of the account.
Depending on your modified adjusted gross income for the year, you may also qualify for: (1) an American Opportunity Tax Credit of up to $2,500 per year for each eligible student; (2) a Lifetime Learning credit up to $2,000 for tuition and fees paid for the enrollment or attendance of yourself, your spouse, or your dependents for courses of instruction at an eligible educational institution; (3) an exclusion from income for education savings bond interest received; and (4) a deduction for student loan interest.
If you qualified for any student loan forgiveness in 2024, the forgiven amount will generally be excludible from your income for federal tax purposes. You may, however, be liable for state or local income taxes as a result of the discharge.
- Medical Expenses, Health Savings Accounts, and Flexible Savings Accounts
For 2024, your medical expenses are deductible as an itemized deduction to the extent they exceed 7.5 percent of your adjusted gross income. To be deductible, medical care expenses must be primarily to alleviate or prevent a physical or mental disability or illness. They don’t include expenses that are merely beneficial to general health, such as vitamins or a vacation. Deductible expenses include the premiums you pay for insurance that covers the expenses of medical care, and the amounts you pay for transportation to get medical care. Medical expenses also include amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term care insurance contract.
- Discharge of Qualified Principal Residence Indebtedness
If you had any qualified principal residence indebtedness which was discharged in 2024, it is not includible in gross income.
- Deductions for Excess Business Losses
Taxpayers other than corporations can deduct excess farm losses; however, such taxpayers cannot deduct excess business losses. An excess business loss for the tax year is the excess of aggregate deductions attributable to your trades or businesses over the sum of your aggregate gross income or gain plus a threshold amount. The threshold amount for 2024 is $305,000 or $610,000 for joint returns.
- Qualified Business Income Passthrough Tax Break
Under the qualified business income tax break, a 20 percent deduction is allowed for qualified business income from sole proprietorships, S corporations, partnerships, and LLCs taxed as partnerships. If you qualify for the deduction, which is available to both itemizers and nonitemizers, it is taken on your individual tax return as a reduction to taxable income. This tax break is subject to some complicated restrictions and limitations, but the rules that apply to individuals with taxable income at or below a certain threshold ($383,900 for joint filers; $191,950 for other taxpayers) are simpler and more permissive than the rules that apply to individuals with income above those thresholds.
- Clean Energy Credit
For 2024, the clean energy tax credits available include (1) residential energy property credits (the energy efficient home improvement credit and the residential clean energy credit) and (2) vehicle-related credits (the new clean vehicle credit, the previously owned clean vehicle credit, and the alternative fuel refueling property credit). These credits were significantly expanded by the Inflation Reduction Act of 2022.
The energy efficient home improvement credit is credit for 30 percent of the costs of all qualified energy efficiency improvements and residential energy property expenditures you make during the year. This credit is subject to an annual limit of $1,200, and there are also limits for specific types of qualifying improvements. These limits are: (1) $250 for any exterior door ($500 total for all exterior doors), (2) $600 for exterior windows and skylights, (3) $600 for other qualified energy property (including central air conditioners; electric panels and certain related equipment; natural gas, propane, or oil water heaters; oil furnaces; water boilers), and (4) a higher $2,000 annual limit for heat pumps and heat pump water heaters, biomass stoves, and boilers. The Inflation Reduction Act also added a credit of up to $150 per year for home energy audits. Roofs do not qualify for the credit.
The residential clean energy credit equals 30 percent of the cost of certain qualified property installed on or used in connection with your home. Qualifying properties are: (1) solar electric property, (2) solar water heating property, (3) fuel cell property, (4) small wind energy property, (5) geothermal heat pump property, and (6) battery storage technology. There is no annual or lifetime limit on the residential clean energy credit except with respect to fuel cell property, which is limited to $500 for each half kilowatt of capacity. In addition, if more than one person lives in your home, the combined credit for all residents can’t exceed $1,667 for each half kilowatt of fuel cell capacity.
A new clean vehicle credit of up to $7,500 may be available if you acquired a qualified electric vehicle in 2024. To qualify, the vehicle must have been assembled in North America. The credit amount equals $3,750 for vehicles meeting a critical minerals requirement plus $3,750 for vehicles meeting a battery component requirement. Price limits (i.e., MSRP limitations) apply depending on the vehicle type ($80,000 for vans, SUVs, and pickup trucks; $55,000 for other vehicles). The Department of Energy provides a list at FuelEconomy.gov of eligible clean vehicles that meet the requirements to claim this credit, including the applicable MSRP limitation. The credit is not available if your adjusted gross income for the year is over $300,000 (married filing jointly), $225,000 (head of household), and $150,000 (single).
A tax credit is also available for the purchase of a previously owned clean vehicle. The credit amount is the lesser of (1) $4,000, or (2) 30 percent of the cost of the vehicle. In order to qualify for the previously owned clean vehicle credit, the vehicle must be sold by a dealer for a sale price not in excess of $25,000, and the sale must be the first transfer of the vehicle since August 16, 2022. In addition, the buyer must be an individual taxpayer who cannot be claimed as a dependent by another taxpayer, who purchases the vehicle for use and not for resale, and who has not been allowed the previously owned clean vehicle credit in any of the 3 years preceding the sale of the vehicle. The credit is not available to taxpayers with adjusted gross income over $150,000 (married filing jointly), $112,500 (head of household), and $75,000 (single).
The alternative fuel vehicle refueling property credit is allowed with respect to any single item of qualified alternative fuel vehicle refueling property placed in service during the tax year in a qualifying location (generally, a low-income community or non-urban area). The credit amount is limited to (1) $100,000 in the case of depreciable property, and (2) $1,000 in any other case. Qualifying property includes bidirectional charging equipment, and the credit can also be claimed for electric charging stations for two- and three-wheeled vehicles that are intended for use on public roads.
- Retirement Planning
If you have a SIMPLE 401(k), the maximum pre-tax contribution for 2024 is $16,000. That amount increases to $19,500 if you are 50 or older. The maximum IRA deductible contribution for 2024 is $7,000 and that amount increases to $8,000 if you are 50 or over.
There are several new retirement plan rules for 2024 as a result of the SECURE 2.0 Act, which was enacted in 2022. For example, if you are making student loan payments, your employer can now make matching contributions to your retirement account based on those payments. In addition, penalty-free retirement plan distributions of up to $1,000 are permitted for certain emergency expenses and up to $10,000 for certain victims of domestic abuse. Another new provision allows taxpayers who have money saved in a Section 529 plan to convert a portion of the funds to a Roth IRA. The Roth IRA is required to have the same beneficiary as the Section 529 plan. In addition, the taxpayer must have held the Section 529 account for at least 15 years, and a lifetime limit of $35,000 applies (in addition to the annual Roth IRA rollover limits).
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