Search Results

Although home improvements are often expensive, they can also create tax-saving opportunities. But just as renovations involve many details — measurements, materials, specifications and so forth — applicable tax breaks come with rules and limits all their own. Let's explore some possibilities. Claiming a Mortgage Interest Deduction If you itemize deductions on your return, you can generally write off mortgage interest paid on a principal residence and one other home, such as a vacation home, within specified limits. To qualify for the deduction, though, you must be legally obligated to pay the mortgage secured by a qualified residence. How does all that relate to home renovations? Well, there are two primary kinds of mortgage interest debt: 1. Acquisition debt. This is a financial obligation incurred to buy, build or substantially improve a qualified residence. Before the Tax Cuts and Jobs Act (TCJA), acquisition debt was limited to interest paid on the first $1 million of debt. The TCJA temporarily lowered that threshold to $750,000 ($375,000 for married individuals who file separately). And the One Big Beautiful Bill Act (OBBBA), enacted in July 2025, made the lower threshold permanent. (Note: Certain existing home mortgage debt may be "grandfathered" under the prior-law rules. Contact your tax advisor for further details.) 2. Home equity debt. This generally refers to financing secured by your residence that isn't acquisition debt. (Note: Some home equity debt may still qualify as acquisition debt eligible for the mortgage interest deduction in certain situations.) Most lines of credit, as well as home equity loans and similar arrangements, fall into this category. Before the TCJA, you could deduct interest paid on up to the first $100,000 of home equity debt used for any purpose, including paying off credit cards or buying a car. However, the TCJA temporarily suspended this deduction, and the OBBBA permanently eliminated it. So, interest on home equity loans generally isn't deductible. But there's an exception for proceeds used to buy, build or substantially improve the home that secures the loan. In that case, the portion of the loan used for substantial home improvements — such as building an addition, finishing a basement or attic, or installing an in-ground pool — will likely be treated as acquisition debt, making the related interest potentially deductible as mortgage interest expense within the applicable limits. Adjusting the Basis Every homeowner should learn about the home sale gain exclusion. If you sell a home that you've owned and used as your principal residence at least two out of the last five years, you may exclude from tax up to $250,000 of gain ($500,000 for joint filers). To qualify for the larger $500,000 joint-filer exclusion, at least one spouse must pass the ownership test, and both spouses must pass the use test. Your principal residence for the year is the place where you spend most of your time during that year. In the past, the home sale gain exclusion frequently covered the full amount of gain, but high housing prices in many areas could result in a portion of your gain being subject to tax. Fortunately, you can adjust your basis for calculating the gain to reflect home improvements, thereby reducing (or even eliminating) any taxable gain. For example, say Deborah and Ralph bought a home for $200,000 shortly after they were married, but sell the property for $800,000 sometime this year. Normally, this would generate a gain of $600,000 ($800,000 minus $200,000 of tax basis). And the excess $100,000 above the exclusion amount would be taxable ($600,000 minus $500,000). However, Deborah and Ralph made $150,000 in home improvements over the years. The tax code allows them to adjust their tax basis for the home improvements, so their adjusted tax basis is $350,000 ($200,000 plus $150,000). As a result, their gain on the sale is only $450,000 ($800,000 minus $350,000). This is less than the home sale gain exclusion of $500,000 for joint filers, which means the entire gain is tax-free. Important: Keeping good records is essential. You must be able to back up your home improvement amounts with receipts, contracts or other documentation in case the IRS challenges them. Making Medically Based Improvements Taxpayers who itemize can deduct qualified unreimbursed medical expenses above 7.5% of adjusted gross income (AGI) for the year. So, for instance, if your AGI is $100,000, your annual deduction equals any amount greater than $7,500 (7.5% of $100,000). If you spend $8,000 in qualified expenses, your annual deduction is limited to $500 ($8,000 minus $7,500). For this purpose, a qualified expense must be incurred primarily for the prevention or alleviation of a physical or mental defect or illness. On the other hand, an expense that's merely beneficial to your general health isn't deductible. What's great is that if you make a home improvement that's medically necessary, you can deduct the amount above the resulting increase in the home's value. For example, suppose you install an in-ground pool based on a physician's advice to accommodate swimming by a spouse with a heart condition. The pool costs $25,000 and increases your home's value by $15,000, so you can add $10,000 to your qualified medical expenses. This can increase an existing medical expense deduction (if you're already above the AGI threshold), or it may be enough to put you over the AGI threshold for the year. When possible, try to bunch medical expenses in a tax year in which you expect to clear the annual AGI threshold. Amending Your Return to Claim an Energy Credit The OBBBA generally limited tax credits for energy-efficient home improvements to qualifying property placed in service (installed, not merely purchased) through December 31, 2025. So, these breaks aren't available for improvements made in 2026 or later. However, you may want to inquire with your tax advisor about filing an amended 2025 tax return if you overlooked a credit, claimed too small a credit or failed to include the required information. The IRS generally requires amended returns claiming refunds to be filed within three years after the original return was filed or two years after the tax was paid, whichever is later. The two major credits to ask about are: 1. The Energy Efficient Home Improvement Credit. Under Section 25C of the tax code, eligible taxpayers could receive a 30% tax credit for certain expenses, up to specified limits. These include energy-efficient windows, doors, skylights, insulation materials, heat pumps and home energy audits. There were no income limits on this credit; instead, the available amount depended on the expense. The maximum annual credit was generally up to $1,200 for certain energy-efficient property costs and home improvements, with a separate annual limit of up to $2,000 for qualified heat pumps, water heaters, and biomass stoves or boilers. Bear in mind that the credit is nonrefundable, so amending is generally worthwhile only to the extent that the credit can reduce your 2025 income tax liability. You can't carry forward unused credit amounts. 2. The Residential Clean Energy Credit. Section 25D provided a 30% credit for qualifying renewable energy systems — such as solar electric panels, solar water heaters, fuel cells, wind turbines, geothermal heat pumps and battery storage technology — installed after 2022. Unlike the Energy Efficient Home Improvement Credit, the Residential Clean Energy Credit allows unused credit amounts to be carried forward to future years. So, amending may still be beneficial even if you couldn't use the full credit against your 2025 tax liability. Envisioning Savings Home renovations are often driven by a vision — to beautify a space, to make it more efficient and functional, to allow someone to stay at home longer, or some combination thereof. Taxes probably aren't the first thing on your mind. But don't ignore them. With the right strategies and documentation, you may be able to preserve valuable deductions, reduce future taxable gain or even recover overlooked savings on a previously filed return. Put your tax advisor on your project team.

The One Big Beautiful Bill Act (OBBBA), enacted in 2025, made permanent the federal income tax deduction for qualified business income (QBI). This break was originally introduced under the Tax Cuts and Jobs Act. Many business owners have been curious about whether and how this tax break may apply to their rental real estate activities. If you count yourself among them, here's the scoop. Ground Rules Under current law, self-employed individuals, sole proprietors and owners of the following pass-through entities may be eligible to deduct as much as 20% of their QBI: Partnerships, Most limited liability companies (LLCs), and S corporations. QBI is generally defined as the net amount of qualified items of income, gain, deduction and loss that are effectively connected with the conduct of an eligible U.S. trade or business. It doesn't include certain investment items, reasonable compensation paid to an owner for services rendered to the business, or any guaranteed payments to a partner or LLC member treated as a partner for services rendered to the partnership or LLC. Special Rules and Restrictions The deduction can't exceed 20% of the taxpayer's taxable income. Eligible taxpayers can claim the deduction regardless of whether they itemize deductions or pay the alternative minimum tax. However, an applicable limit begins to phase in when income exceeds certain thresholds. For 2026, these thresholds are: $201,750 for single and head-of-household filers, $201,775 for married individuals filing separately, and $403,500 for married couples filing jointly. For 2026, the limit fully phases out when income exceeds $276,750 ($276,775 for separate filers and $553,500 for joint filers). If your income exceeds the applicable fully phased-in amount, your QBI deduction is limited to the greater of 1) your share of 50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or 2) the sum of your share of 25% of W-2 wages plus 2.5% of the cost (not reduced by depreciation taken) of qualified property. Qualified property is the depreciable tangible property — including real estate — owned by a qualified business as of year end and used by the business at any point during the tax year to produce QBI. (Additional rules apply.) Starting in 2026, the OBBBA also created an inflation-adjusted minimum QBI deduction of $400 for taxpayers with at least $1,000 of QBI from one or more active businesses in which they materially participate. "Material participation" generally requires your regular, continuous and substantial involvement in business operations. (The material-participation concept applies to this new minimum deduction; it isn't a general requirement for claiming the QBI deduction.) The deduction amount and the QBI thresholds will be adjusted annually for inflation. Safe Harbor for Rental Real Estate In 2019, the IRS finalized a safe harbor that allows certain rental real estate to be treated as a trade or business for purposes of the QBI deduction. The safe harbor is available to taxpayers seeking to claim the deduction for a "rental real estate enterprise," which is defined as an interest in real property held to generate rental or lease income. That can mean an interest in a single property or interests in multiple properties. The taxpayer must hold each interest directly or through a so-called "disregarded entity" that isn't considered separate from its owner for tax purposes (for example, a single-member LLC). If you satisfy the safe harbor requirements, the IRS will treat your interest in rental real estate as a single trade or business for purposes of the deduction. And if you don't satisfy all the requirements, your interest may still qualify for the deduction if it otherwise meets the definition of a trade or business under the QBI deduction rules. So, what are the requirements? First, you must maintain separate books and records to reflect income and expenses for each rental real estate enterprise. For eligible enterprises that have existed for less than four years, 250 or more hours of rental services need to be performed annually. For other rental real estate enterprises, 250 or more hours of such services must be performed in at least three of the past five years. Also, you need to maintain contemporaneous records (including time reports, logs or similar documents) that show: A description of rental services performed, The dates on which such services were performed, The number of hours of services performed, and Who performed the services. In addition, you must attach a statement to each tax return filed for any tax year you claim the safe harbor. The statement should include 1) a description of all rental real estate properties included in each rental real estate enterprise, 2) a description of rental real estate properties acquired and disposed of during the taxable year, and 3) a representation that the requirements have been fulfilled. Certain rentals, however, generally don't qualify for the safe harbor. These include real estate used by the taxpayer as a residence or rented or leased under a triple-net lease, where the tenant pays taxes, insurance and maintenance. Rental real estate leased to a commonly controlled trade or business is also excluded from the safe harbor, but such an arrangement may still qualify for the QBI deduction under separate rules. A Closer Look at Rental Services According to IRS guidance, rental services are broadly defined and include: Advertising to rent out the property, Negotiating and executing leases, Verifying information contained in rental applications, Collecting rent, Operating, maintaining and repairing the property (including buying materials and supplies), Managing the property, and Supervising employees and independent contractors. Rental services can be performed by you (the owner) or your employees, agents or independent contractors whom you engage. Note that the term doesn't include financial or investment management activities — such as arranging financing, procuring property, studying and reviewing financial statements or operational reports, improving property, or spending time traveling to and from property. Key Question The good news is that running a sole proprietorship or pass-through business that conducts rental real estate activities doesn't automatically disqualify you from claiming the QBI deduction. And the bad news? It doesn't automatically entitle you to it either. The key question is whether your rental activities rise to the level of a trade or business under the QBI deduction rules or otherwise qualify under the IRS safe harbor for rental real estate enterprises. Your tax advisor can help you evaluate your company's eligibility, maximize any available deduction and maintain detailed records to support the claim.

Because of recent tax law changes, income taxes — not estate taxes — are now a more significant focus in estate planning. And one key planning area is the step-up in basis, which affects the capital gains tax heirs owe when they sell inherited assets. Why Income Taxes Are a Focus The 2026 federal gift and estate tax exemption is $15 million (twice that on a combined basis for married couples). It had been scheduled to revert back to approximately half that amount this year, but the One Big Beautiful Bill Act made the higher exemption permanent. This just means there's no expiration date for the higher exemption; lawmakers could still reduce it in the future. Nevertheless, as long as the higher exemption is in place, only the wealthiest families will be exposed to federal gift or estate tax liability. As a result, most taxpayers are more concerned with the income tax impact of estate planning than the gift and estate tax impact. How Capital Gains Are Taxed Normally, when assets such as securities are sold, any resulting gain is taxable capital gain. If the assets have been owned for one year or less, this is a short-term capital gain that's taxed at the taxpayer's ordinary income tax rate, which may be as high as 37%. Conversely, if the assets have been held for more than one year, it's a long-term capital gain that's taxed at a lower rate. The long-term capital gains rate is typically 15%, but it increases to 20% for certain higher-income individuals. This rate kicks in at lower income levels than the top ordinary-income rate does. In addition, the 3.8% net investment income tax (NIIT) may apply to gains of higher-income taxpayers — even those with a long-term gains rate of 15%. A 0% long-term capital gains rate generally applies to long-term gains that would be taxed at 10% or 12% based on the taxpayer's ordinary-income rate. But the 0% rate applies only to the extent that capital gains "fill up" the gap between the taxpayer's taxable income and the top end of the 0% bracket. Gains and losses are netted against each other when filing a tax return. So gains may be offset wholly or partially by losses. The amount of a taxable gain is equal to the difference between the taxpayer's basis in the asset and the sale price. For example, if you acquire stock for $1,000 and then sell it for $3,000, your taxable capital gain is $2,000. How the Step-Up in Basis Works When assets are passed to the younger generation through inheritance, there generally are no income tax consequences until the assets are sold. For these purposes, the basis for calculating gain is "stepped up" to the assets' value on the deceased's date of death. Thus, only appreciation in value after the individual inherited the assets is subject to tax. Appreciation during the deceased's lifetime is untaxed. Assets affected by the stepped-up basis rules include securities, business interests, real estate and personal property. However, these rules don't apply to retirement assets such as 401(k) plans or IRAs. To illustrate the benefits, let's look at a simplified example. Carol bought stock 15 years ago for $10,000. In her will, she leaves the shares to her son, Jason. When Carol dies, the stock is worth $100,000, so Jason's basis is stepped up to $100,000. When Jason sells the stock one year later, it's worth $110,000. Let's say Jason's income is high enough that he must pay the maximum 20% long-term capital gains rate plus the 3.8% NIIT on his gain. Jason has a $10,000 gain that's taxed at 23.8%. Therefore, he owes $2,380 in taxes. Without the stepped-up basis, his gain would have been $100,000, and his tax would have been $23,800. What happens if an asset is worth less on the date of death than when the deceased acquired it? The adjusted basis of the inherited asset would still be the value on the deceased's date of death. This would be a basis step- down . It could result in a taxable gain on a subsequent sale if the value rebounds after death or a loss if the value continues to decline. Planning for the Step-Up One way to reduce estate tax liability is to make lifetime gifts to family members. Under the gift tax annual exclusion, you can give each recipient gifts valued up to $19,000 in 2026 gift-tax free ($38,000 per recipient for joint gifts by a married couple) without using up any of your lifetime exemption. As with inherited assets, there generally are no income tax consequences for a gift recipient until the assets are sold. But the basis step-up doesn't apply to lifetime gifts. If you give appreciated assets to a family member, your basis carries over to the recipient. Being strategic about which assets you gift during your life and which ones you bequeath after death can save taxes for your family overall. For example, Kevin and Melissa don't expect their estates to be large enough for federal estate taxes to be a concern — they're focused on the income tax aspects of estate planning. They want to give their daughter, Emma, $30,000 of stock so she can sell it and put the proceeds toward a down payment on her first home. They can give her either $30,000 of stock that they paid $5,000 for 10 years ago or $30,000 of a different stock that they paid $25,000 for two years ago. Based on Emma's income, she'll be subject to the 15% long-term capital gains rate but not the NIIT when she sells the stock. If Kevin and Melissa give her the stock with the $5,000 basis and Emma sells it immediately, she'll have a gain of $25,000 and owe $3,750 in taxes. If they give her the stock with the $25,000 basis and Emma sells it immediately, she'll have a gain of $5,000 and owe $750 in taxes. That's clearly the more tax-efficient option in the short term. Now imagine that Kevin and Melissa hold the $5,000-basis stock until their deaths, when they bequeath it to Emma. Let's say the stock is worth $75,000 when she inherits it, and that her income is high enough by then to be subject to the 20% long-term capital gains rate and the 3.8% NIIT on any gain she realizes. Because of the step-up, her basis will be $75,000. So, if she immediately sells the stock, she'll recognize no gain and owe $0 taxes on the $70,000 of appreciation. Without the basis step-up, she'd owe $16,660 in taxes. That's how valuable stepped-up basis can be. However, there are many factors to consider. If, around the time that Kevin and Melissa wanted to make the $30,000 gift to Emma, they also wanted to divest themselves of the $5,000-basis stock (because its future prospects looked dim or they simply wanted to diversify), giving it to Emma could have made tax sense. This might have been the case if: Kevin and Melissa would have been subject to the 20% long-term capital gains rate and the 3.8% NIIT if they sold it, because Emma would pay tax at a lower 15% rate and no NIIT, or Kevin and Melissa would have been subject to the 15% rate, and Emma's income had been low enough that she would have been subject to the 0% long-term rate on some or all of the gain. As you can see, tax-smart planning that accounts for the various tax rates, basis differences within a portfolio and stepped-up basis rules gets complicated quickly. Things get even more complex if you're on the cusp of having an estate that's large enough for federal estate taxes to be a concern. Achieving Your Estate Planning Goals Tax saving is only one estate planning goal. You also want to ensure that your loved ones are provided for as you wish and that you can leave your desired legacy, such as supporting a favorite charity or preserving a family business. Your tax and estate planning advisors can help you assess your family's tax situation and develop an estate plan that fits your goals — or update your existing plan as needed in light of tax law, financial or family changes. Tread Carefully With Trusts An intentionally defective grantor trust (IDGT) is a popular estate planning tool that allows you to remove assets from your estate for estate tax purposes while continuing to be treated as their owner for income tax purposes. All future appreciation in the IDGT assets' value is shielded from estate tax, while you continue to pay the trust's income taxes, further reducing the size of your taxable estate. Normally, when a trust is structured so that its assets are removed from the grantor's estate, the assets don't receive a step-up in basis. Some experts had argued that because assets gifted to an IDGT remain taxable to the grantor for income tax purposes, they're entitled to a stepped-up basis in the hands of beneficiaries. However, in Revenue Ruling 2023-2, the IRS clarified that assets in an IDGT aren't received by bequest, devise or inheritance and, therefore, aren't eligible for a stepped-up basis. This is an important factor to consider if you're thinking about setting up an IDGT — or any other trust where the assets are removed from your taxable estate.

Filing your 2025 federal income tax return can provide valuable insights to help with 2026 tax planning. For example, if you receive a large refund or owe significant taxes for 2025, you can benefit from revisiting your withholding for 2026. Although a large refund can provide an enjoyable cash boost, it really means you were missing money in your pocket during the year and, essentially, giving the government an interest-free loan. At the opposite end of the spectrum, a large tax bill might come with interest and penalties. And paying a big amount all at once could put you in a cash crunch. To achieve a more desirable outcome for 2026, you may want to adjust your withholding and evaluate whether you should begin making estimated tax payments or, if you're already making them, adjust the amount. Explore Your Circumstances If all or most of your income is from wages, whether from a salary or hourly pay, your employer withholds amounts from your paychecks designed to cover your annual income tax liability. However, withholding amounts are estimates based on the IRS withholding tables, which approximate a typical worker's annual tax liability at your compensation level. Your situation may differ from that of a comparably compensated worker for various reasons. You might have additional income from other sources, which could make standard withholding too low. Or you might have larger deductions or credits than is typical, which could make standard withholding too high. One way to minimize overpayments or underpayments is to estimate your tax liability for the year and, if necessary, adjust your withholding by completing a new Form W-4, "Employee's Withholding Certificate." The IRS's Tax Withholding Estimator can help. It now reflects key provisions of the One Big Beautiful Bill Act (OBBBA), including the elimination of taxes on qualified tips and qualified overtime, as well as new deductions for seniors and auto loan interest. It also more accurately accounts for OBBBA changes to tax breaks related to families, homeownership and charitable giving.   You should repeat this exercise later in the year if you have major changes in your income or circumstances. (See "Life Changes Also Warrant a Withholding Review" below.) Evaluate Estimated Taxes Generally, you must make estimated tax payments if you expect to owe $1,000 or more in federal taxes when you file your return. This may be the case if you earn significant income from sources that aren't subject to withholding, such as: Self-employment, Pass-through income from partnerships, S corporations or limited liability companies, Interest, dividends, capital gains or other investment income, or Rentals or royalties. To satisfy your estimated tax obligations, calculate your expected tax liability for the year, subtract any expected withholdings and credits, and pay the remainder in four equal installments. The 2026 estimated tax deadlines are April 15, 2026; June 15, 2026; September 15, 2026; and January 15, 2027. However, you don't have to make estimated tax payments in a given year if you meet all three of these conditions: In the prior tax year, your tax liability was zero, or you weren't required to file a return, You were a U.S. citizen or resident alien for the entire year, and Your prior tax year covered 12 months. It's also possible to avoid having to pay estimated taxes by increasing your withholdings from wages or other income sources. Beware of Penalties The requirement to pay estimated taxes in four equal installments means you can be hit with penalties and interest if you skip or underpay an installment — even if your remaining installments cover your entire tax liability for the year. But it's not always easy to predict your tax liability, especially if your income fluctuates. Fortunately, there are ways to avoid penalties. First, you won't owe penalties if you pay at least 90% of the current year's tax liability through withholding and equal estimated tax installments. However, there's still a risk that you'll underpay your taxes if your income is higher than expected. For greater penalty-avoidance certainty, you can pay 100% of your prior year's tax liability through withholdings and equal estimated tax installments. Or pay 110% if your previous year's adjusted gross income was more than $150,000 ($75,000 for married couples filing separately). But you could end up overpaying current-year taxes, making a large interest-free loan to the government that you might prefer to avoid. If your income fluctuates substantially during the year, there's a way to make unequal estimated tax payments and still avoid or reduce penalties: the annualized income installment method. It allows you to match each payment to your actual income, deductions and other tax attributes during that period. Take Advantage of Withholding's Special Power If you have withholding and owe estimated taxes on other income, you can avoid penalties for skipping or underpaying an estimated payment by increasing your withholding to make up the difference. Unlike estimated tax payments, withholding amounts are treated as paid evenly throughout the year — regardless of when they're actually withheld. Using this strategy, you can increase withholding from your (or, if you're married, your spouse's) wages. Alternatively, increasing withholding from your IRA or other retirement plans may be possible if you're retired and don't have wages from which to withhold taxes. Consult your tax advisor for assistance. Find the Happy Medium Paying "just the right" amount of taxes during the year can be a challenge. You don't want to pay too little and incur interest and penalties. But you also don't want to substantially overpay and have too much of your money tied up during the year in an interest-free loan to the government. Your tax advisor can help you determine how to adjust your withholding, estimated tax payments or both to find the happy medium. Life Changes Also Warrant a Withholding Review Besides reviewing your withholding after you've filed your tax return, you should revisit it again during the year if you: Get married or divorced, Have a child or adopt one, Buy a home, or Have changes in income. To modify your withholding at any time during the year, simply submit a new Form W-4 to your employer. Changes typically go into effect several weeks after a new Form W-4 is submitted.

The Internal Revenue Code has long had much to offer taxpayers who are 50 or older, nearing retirement, or already in their golden years. And the One Big Beautiful Bill Act (OBBBA), enacted last July, expanded several tax breaks and added new opportunities for older taxpayers. Whether you're in this age group and preparing your 2025 federal income tax return or looking to optimize future tax outcomes (or both), here are seven tax breaks to consider. 1. Additional Standard Deduction Regardless of age, taxpayers who choose not to itemize deductions are entitled to the standard deduction for their filing status. The Tax Cuts and Jobs Act (TCJA) of 2017 approximately doubled the standard deduction amounts, and the OBBBA made those increases permanent and further increased the amounts for 2025 to: $15,750 for single filers (up from $15,000 before the OBBBA), $23,625 for heads of households (up from $22,500), and $31,500 for married couples filing jointly (up from $30,000). These amounts will be inflation adjusted for 2026 and beyond. Additional standard deduction amounts are allowed for individuals age 65 or older or blind. For 2025, these amounts are $2,000 for an unmarried individual age 65 or older or blind, or $1,600 for a married person age 65 or older or blind. (These amounts are doubled if the individual is both over age 65 and blind.) So, for instance, if you're a joint filer claiming the standard deduction and you and your spouse are both in your late sixties (and not blind), your additional deduction is $3,200. 2. Senior Deduction The OBBBA provides a new tax break for many taxpayers age 65 or older. For 2025 through 2028, taxpayers in this age group may be able to claim a deduction of up to $6,000. If both spouses of a married couple filing jointly are age 65 or older, each spouse may be eligible for a separate senior deduction of up to $6,000 — for a combined total of up to $12,000. This deduction is available whether you itemize or not. But there's a catch. The senior deduction is phased out based on modified adjusted gross income (MAGI). The phaseout begins at $75,000 of MAGI for single filers or $150,000 for joint filers. It phases out completely when MAGI exceeds $175,000 or $250,000, respectively. 3. Catch-Up Contributions Taxpayers who max out their annual contribution limits for employer-sponsored retirement plans, such as 401(k)s, as well as for IRAs, can up the ante after reaching age 50 with catch-up contributions. These are amounts you can contribute in addition to your regularly allowed contributions and any employer matches you might receive. For instance, in 2026, taxpayers age 50 or older can add: $8,000 to the maximum 401(k) deferral of $24,500 for a total contribution of $32,500, or $1,100 to the maximum traditional or Roth IRA contribution of $7,500 for a total contribution of $8,600. Catch-up contributions are annually indexed for inflation. Important: Beginning in 2026, the SECURE 2.0 Act requires the 401(k) catch-up contributions of higher-income taxpayers to be treated as post-tax Roth contributions. In 2026, the requirement generally applies to taxpayers who earned more than $150,000 in 2025. This threshold will be annually indexed for inflation. 4. Super Catch-Up Contributions Under SECURE 2.0, starting in 2025, a slightly older age group of employees — those who are age 60 to 63 at the end of the tax year — can boost their catch-up contributions to most employer-sponsored plans to 150% of the amount allowed for those age 50 and over. (Once you reach age 64, the regular catch-up contribution limit is reinstated.) The limit for these "super" catch-up contributions in 2026 is $11,250 (the same as in 2025). So, if you'll be 60, 61, 62 or 63 on December 31, 2026, you can potentially contribute up to $35,750 to a 401(k) this year — the maximum deferral of $24,500 plus a super catch-up contribution of $11,250. Important: The aforementioned Roth requirement for higher-income taxpayers, including the annually indexed income threshold, applies to super catch-up contributions, too. 5. Spousal IRAs Married couples can take advantage of a retirement-savings tax break if only one spouse works. That is, the couple may set up an IRA in the nonworking spouse's name — often called a "spousal IRA" — based on the working spouse's earned income. This can be particularly helpful when one spouse has retired and the other is still working. For instance, let's say 55-year-old Irma earns $100,000 a year while her 65-year-old spouse, Irving, has already retired. The couple can contribute up to $17,200 to IRAs in 2026 — $8,600 to Irma's IRA and another $8,600 to Irving's spousal IRA. Depending on income levels and participation in workplace retirement plans, these contributions may be fully or partially deductible under the usual IRA rules. 6. Penalty-Free Retirement Plan Distributions Reaching age 59½ is a key milestone when it comes to taking distributions from IRAs, 401(k)s and other qualified retirement plans. Normally, a 10% tax penalty — on top of your regular income tax liability — is assessed on retirement plan withdrawals before that age unless a special exception applies. If you're retiring before age 59½ and need to make retirement plan withdrawals, consider this penalty exception: You can take substantially equal periodic payments (SEPPs) under one of three IRS-approved methods. SEPPs are based on your life expectancy or the joint life expectancy of you and a designated beneficiary. Complying with the SEPP rules can be complicated. You may want to involve your tax pro if you're considering this option. 7. Qualified Charitable Distributions Generally, distributions from traditional IRAs are taxed at ordinary income rates — even if you subsequently donate the funds to charity. Charitable contributions may be deductible if you itemize, and a more limited deduction will be available to nonitemizers for the 2026 tax year. However, if you're older than 70½, you can transfer IRA funds directly to a qualified charity with no federal income tax consequences. Although you can't claim itemized deductions for these qualified charitable distributions (QCDs), their tax-free treatment equates to a 100% deduction because you'll never be taxed on those amounts. QCDs also count toward required minimum distributions. (See "A Note on Required Minimum Distributions" below.) There is an annual limit for QCDs, but it's indexed for inflation every year. In 2026, the QCD limit is $111,000 (up from $108,000 in 2025). If you and your spouse both qualify, you can transfer twice that amount tax-free. Moreover, QCDs aren't included in your adjusted gross income (AGI) or MAGI. Among other benefits, this lowers the odds that you'll be affected by income-based phaseouts and reductions of various tax breaks, such as the AGI ceiling on charitable contributions or the MAGI limit on the new senior deduction. Also, lowering AGI can potentially limit Medicare premium surcharges, exposure to the net investment income tax and the taxation of Social Security benefits. In addition, SECURE 2.0 authorized eligible taxpayers to make a one-time QCD transfer to a charitable remainder trust or charitable gift annuity. Annually indexed for inflation, the limit on such tax-free transfers is $55,000 in 2026 (up from $54,000 in 2025). Identify and Leverage Tax rules affecting older taxpayers continue to evolve and, as you can see, recent legislation has added several new opportunities for tax savings. Of course, eligibility requirements, income limits and phaseouts can affect how much you'll benefit. Ask your tax advisor for help identifying which tax breaks are available to you and how to leverage their positive impact. A Note on Required Minimum Distributions Once you reach a certain age, you must begin taking required minimum distributions (RMDs) annually from traditional IRAs and most employer-sponsored retirement plans. Under current law, that age is 73 (up from 72 under previous rules). For those born in 1960 or later, the age will increase to 75 in 2033. (With inherited IRAs, RMDs may need to be taken sooner, depending on factors such as the beneficiary's relationship to the original owner and when the beneficiary inherited the IRA.) However, if you're still working full-time and aren't a 5%-or-more owner of the company you work for, you generally can delay RMDs from that employer's plan until you retire. Furthermore, RMDs don't apply to Roth accounts during your lifetime. Generally, RMDs are taxed at ordinary income rates. But any amount attributable to a return of basis (such as from nondeductible traditional IRA contributions) is tax-free.

Divorce or legal separation creates many questions. Among the most important financial considerations for couples with children is who'll be eligible for potentially valuable child-related federal income tax breaks. Claiming the Child The Internal Revenue Code includes rules for determining when a divorced or legally separated parent is the "custodial" parent and can treat a child as his or her qualifying child for federal tax purposes, potentially making that parent eligible for various tax benefits. Usually, the parent with whom the child spends the most nights during the year wins out. However, under the "noncustodial parent rule," a custodial parent may voluntarily release to the noncustodial parent the right to claim the child for certain federal tax breaks. For this to occur, the couple must pass five tests for the tax year in question: 1. The support test. More than half of the child's support needs to come from one or both parents. 2. The divorced or separated test. The parents must be divorced or legally separated, have lived apart for the last six months of the year, or be separated under a private written separation agreement. 3. The custody test. The child needs to have lived with one or both parents for more than half of the year. For federal tax purposes, custody is determined by the child's actual residence — based on overnight stays — rather than by legal custody rights under state law. Temporary absences, such as for school or vacations, are generally treated as time the child lived with the parent who'd otherwise have custody. 4. The written declaration test. The custodial parent must sign a written declaration releasing to the noncustodial parent the right to claim the child as a qualifying child for the year. The required written declaration is typically made by having the custodial parent sign IRS Form 8332, "Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent," to release the claim for one or more years. 5. The return attachment test. The noncustodial parent must attach the signed Form 8332 to his or her Form 1040, "U.S. Individual Income Tax Return." For e-filed returns, Form 8332 is retained but not physically attached. Yes and No When the five tests are passed, the noncustodial parent qualifies for the following federal tax breaks with respect to the qualifying child (assuming all other rules are met): The Child Tax Credit. For 2025, the One Big Beautiful Bill Act increased this credit to $2,200 per eligible child under age 17, subject to an income-based phaseout. The IRS will annually adjust that dollar amount for inflation. An eligible noncustodial parent can claim a smaller credit of $500 for a dependent child who's ineligible for the regular child credit (usually one who's age 17 or older). This smaller credit is subject to the same income-based phaseout but isn't adjusted for inflation annually. Higher education credits. An eligible noncustodial parent can claim the American Opportunity Tax Credit (worth up to $2,500 per student) or the Lifetime Learning Credit (worth up to $2,000 per tax return) for a child's qualified education expenses. Both credits are subject to an income-based phaseout. The student loan interest deduction. An eligible noncustodial parent can claim a deduction of up to $2,500 (per tax return) for qualified education loan interest expense incurred for a child's education, also subject to an income-based phaseout. However, the noncustodial parent rule has its limits. According to the IRS, a noncustodial parent can't claim the following four tax breaks based on a qualifying child: Head of household filing status, The child and dependent care credit, The Earned Income Tax Credit, and Tax-free benefits under an employer-sponsored dependent care assistance program. These tax breaks always belong to the custodial parent. Mutually Claimable Breaks Whether or not the noncustodial parent rule applies to a qualifying child, both parents can generally take advantage of certain other federal tax breaks. These include itemized deductions for the child's medical expenses and tax-free: Distributions from a Health Savings Account for the child's qualifying medical expenses, Employer reimbursements for the child's medical expenses, and Treatment of employee discounts and no-additional-cost services provided to the child. This "both parents rule" applies as long as: 1) the parents provide more than half of the child's support for the year, 2) the child is in the custody of one or both parents for more than half the year, and 3) the child meets the definition of a qualifying child of one of the parents. If these conditions aren't satisfied, and the noncustodial parent rule doesn't apply, the aforementioned mutually claimable tax breaks are off limits to the noncustodial parent. Revoking the Release Under IRS regulations, a custodial parent may unilaterally revoke his or her release of the right to claim a qualifying child, effectively taking back the applicable federal tax breaks. To do so, the custodial parent must provide the noncustodial parent with written notice of the revocation or make reasonable efforts to provide such notice. The revocation can't take effect any earlier than the year after the year in which the custodial parent provides notice or makes reasonable efforts to do so. The custodial parent should keep a copy of the revocation and evidence of delivery (or att empts thereof) of the required notice to the noncustodial parent. Work With Your Advisors Child-related tax breaks can be overlooked or undervalued during divorce or legal separation proceedings. Both custodial and noncustodial parents should work closely with their attorneys and tax advisors to address this matter during negotiations. Your tax advisor can explain the rules further and answer any questions you may have.

Catch-up contributions have long been a way for taxpayers to put more dollars into their retirement accounts as they get older. But the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act, enacted in 2022, included a major change to the catch-up contribution rules for higher-income taxpayers — and employers that sponsor qualified retirement plans. It requires higher-income taxpayers to make catch-up contributions to qualified plans as after-tax Roth contributions. The requirement was scheduled to take effect in 2024, but the IRS delayed it by two years. The IRS has now issued final regulations for the requirement. Here's what employees and employers need to know for 2026 and beyond. Catch-Up Contributions 101 For many years, taxpayers age 50 or older have been allowed to make catch-up contributions to their 401(k) or other employer-sponsored qualified retirement plan accounts, up to an annual limit that's adjusted for inflation. For 2025, eligible individuals can chip in an additional $7,500 on top of the regular $23,500 limit, for a total of $31,000. Under SECURE 2.0, beginning in 2025, those age 60 to 63 can make additional catch-up contributions, for a total catch-up contribution of up to $11,250 (if their retirement plans allow) and a maximum overall contribution up to $34,750 for 2025. In 2026, the catch-up limit rises to $8,000, and the regular limit increases to $24,500, for a total of $32,500. The total catch-up contribution limit for participants age 60 to 63 remains at $11,250, for a maximum overall contribution up to $35,750. The New Roth Requirement The current rules also allow eligible taxpayers to choose whether to make a pretax or after-tax Roth contribution, provided the qualified plan includes the Roth option. But SECURE 2.0 requires that, beginning in 2026, any catch-up contributions made by higher-income participants to 401(k), 403(b) or 457(b) plans be designated as Roth contributions. A plan that allows higher-income participants to make such catch-up contributions must also allow other participants age 50 or older to opt to make Roth catch-up contributions. The Roth requirement was originally scheduled to take effect for tax years beginning after December 31, 2023. But, in 2023, the IRS extended the effective date to January 1, 2026, as transitional relief. That effective date hasn't been extended any further. Finer Points of the Final Regs The final regs provide employers with guidance on implementing the Roth requirement. For example, they explain how employers should determine whether a participant is subject to the higher-income earner rules. That is, for 2026 plan years, the Roth requirement applies to participants whose 2025 Social Security wages from the employer exceed $150,000 as reflected in Box 3 of Form W-2, "Wage and Tax Statement." The $150,000 threshold will be adjusted annually for inflation. The final regs also allow — but don't require — an employer to treat all related organizations as a single employer if all of the organizations are within a controlled group or use a "common paymaster" (that is, a related organization that pays the employees of two or more organizations on their behalf). In such cases, an employee's wages from the employer sponsoring the plan, and from one or more other employers that are aggregated with that employer, will be treated as coming from the employer sponsoring the plan for purposes of determining whether the new catch-up rules apply. In addition, the final regs permit employers to adopt a "deemed election" approach in their plans for employees subject to the new rules. Such employees will be automatically deemed to have made an irrevocable Roth election for catch-up contributions, though they must be given an "effective opportunity" to make a different election — for instance, to not make catch-up contributions. Notably, employers that don't already include a qualified Roth contribution program in their qualified retirement plans face a critical decision. They must either amend their plans to allow Roth contributions or eliminate higher-income participants' ability to make any catch-up contributions. By December 31, 2026, most employers will need to amend their plans to reflect the new rules, as well as update their systems and procedures to comply with the final regs' many administrative requirements. Important: Although the final regs don't officially take effect until 2027, the SECURE 2.0 changes to the catch-up contribution rules are effective for 2026. Impact on Higher-Income Earners As a result of the required Roth treatment of catch-up contributions, higher-income participants making such contributions will have to pay income taxes on them upfront — while they may be in a higher tax bracket than they'll be during retirement. Some people could even be pushed into a higher tax bracket during the years the new rules apply. In addition, the adjusted gross incomes of higher-income earners making catch-up contributions will increase, potentially reducing or eliminating their eligibility for various federal tax breaks with income-based phaseouts. On the bright side, withdrawals of both contributions and earnings from Roth accounts are tax-free, provided the account has been open for five years and the account owner is age 59½ or older. Plus, Roth accounts generally don't have required minimum distributions. Help May Be Needed You may want to re-evaluate some of your tax planning if you're age 50 or older with income high enough to likely subject you to the new catch-up contribution rules coming in 2026. And if you're an employer that offers an affected qualified plan, ensure you make the necessary updates to comply with the final regs. Contact your tax and benefits advisors for help.

Social Security is still taxable , but many seniors mistakenly believe otherwise. This confusion stems from a temporary tax deduction introduced in the 2025 One Big Beautiful Bill Act , which lowers taxable income for seniors—but doesn’t eliminate Social Security taxes altogether. The 2025 tax law grants an enhanced standard deduction—$6,000 for individuals 65+ ($12,000 for couples)—which can significantly lower taxable income for many seniors. This has fueled misinterpretations that Social Security is now tax-free.   Here's what you need to know: Depending on your combined income , up to 85% of your benefits may still be taxable . The misconception arises because most retirees now pay no federal tax on their Social Security income , thanks to that one-time deduction—not because the taxes are gone. Stay informed and plan wisely—mistakes here could lead to surprise IRS bills!   Learn more: IRS reminds taxpayers their Social Security benefits may be taxable | Internal Revenue Service

Starting September 30, 2025 , the federal EV tax credit —up to $7,500 for new electric vehicles and $4,000 for used ones—will expire due to new legislation under the “One Big Beautiful Bill” Act. Don’t worry entirely—if you sign a binding contract and make a payment by September 30 , you may still qualify for the credit even if you take delivery later. New rules also apply and include income caps, vehicle price limits, and North American assembly requirements . Learn More.

Attention! Beginning September 30, 2025 , the U.S. Treasury will no longer send paper checks for most federal payments—including tax refunds, Social Security, and vendor payments. This initiative stems from a recent executive order aimed at reducing fraud, cutting costs, and improving efficiency. If you currently receive paper checks, now is the time to switch to electronic payments like direct deposit, prepaid debit cards, or digital wallets (exceptions may apply). Learn more about what's changing .

Are you ready to move and want to sell your home, but you're worried about a slowing real estate market? You're not alone. Many homeowners want to move up to a bigger home or downsize to a smaller one. However, they're currently unable to sell their homes for the price they want. Fortunately, selling isn't your only option. The current market could be an opportunity to rethink your next step, especially when you take the tax implications into account. Basic Home Sale Rules First, let's review the tax implications if you do sell your home. You may owe capital gains tax on the profit. Fortunately, many homeowners qualify for a capital gains exclusion. If the home was your primary residence for at least two of the last five years, you may generally exclude gain up to: $250,000 if single, or $500,000 if married and filing jointly. This means you won't owe tax on gains below that threshold. Above that amount, you could owe up to 20% capital gains tax, depending on your income, if you owned the house for more than a year. (See "Proposal in Washington to Eliminate Capital Gains Taxes on Home Sales" for information about a bill introduced in Congress that could change the rules.) Different rules apply in the case of a divorce or when a homeowner is on qualified military duty. And you may be eligible for a partial capital gains tax exclusion in certain situations when you don't meet the two-out-of-five-year rule. What happens if you need to sell quickly for a loss — perhaps due to relocation, health issues or financial reasons? Unfortunately, a capital loss for personal-use property like a home isn't deductible on your tax return. Only losses on investment property are deductible under specific rules. Other Routes to Consider With the basic home sale tax rules in mind, here are four options to consider if your home isn't selling, along with the tax issues involved: 1. Rent out the property. If your home isn't generating acceptable offers, turning it into a rental property may provide steady income while you wait for the market to rebound. This approach can help offset mortgage, tax and maintenance costs — and may even offer tax benefits. For tax purposes, once your home becomes a rental, it's treated as an investment property. That means: You'll report rental income on your tax return. You can deduct related expenses, such as mortgage interest, property taxes, insurance, repairs and depreciation. You may lose the ability to exclude capital gains under the $250,000/$500,000 primary residence exclusion if you eventually sell. If you rent for too long, you may forfeit that benefit. Consult with your tax advisor to determine how long you can rent without losing eligibility for this exclusion. Important: The tax rules differ if you rent out your home for 14 days or less during the year. In that case, the rental income is tax-free. You don't have to report it on your tax return, but you can't deduct any rental-related expenses (such as cleaning or advertising) for those days. 2. Offer seller financing. In a seller-financed sale, you act as the lender and receive payments from the buyer over time instead of receiving the full purchase price upfront. In a slow market, this might attract buyers who don't qualify for traditional loans or prefer different terms. For tax purposes, you may qualify to report the gain over time using the IRS installment sale method, spreading out the capital gains tax liability across the payment schedule. You must report the interest portion of each payment as ordinary income on your tax return. Of course, there's potential risk. If the buyer defaults, you may face repossession issues and complex tax treatment depending on how much gain was previously recognized. 3. Make strategic improvements. If your home isn't attracting offers, the problem might not be related to the market alone — it could be the property's condition, layout or features. Investing in key updates could improve your resale value or help it sell faster. Capital improvements made while the property is your primary residence can increase your tax basis, which reduces your taxable gain when you sell. Qualifying improvements must add value, prolong the property's useful life or adapt the home for new uses. Keep detailed records and receipts to prove the basis for capital improvements. Regular maintenance doesn't qualify as an improvement for tax purposes. However, not all upgrades are equal. A real estate agent can identify improvements with a high rate of return on investment, and your tax pro can assess how these costs would impact your eventual capital gains calculation. 4. Engage in a rent-to-own agreement. This arrangement allows the tenant to rent the home with the option to buy it later. A portion of the rent may go toward the eventual purchase price. For tax purposes, you'll report all rent as rental income until the sale occurs. You won't recognize a capital gain until the option is exercised and the sale is finalized. What if the tenant pays an upfront option fee? It's typically treated as advance rent (taxable income) until the sale occurs — or potentially nonrefundable income if the tenant doesn't exercise the option. This structure may affect your ability to claim the primary residence exclusion. Timing is critical. If you rent the property for too long before the sale, you may no longer meet the two-out-of-five-year rule. Moving Forward Figuring out what to do if your home isn't selling is frustrating, especially if your financial plans hinge on the sale. But by understanding your options, you can make a well-informed decision that helps support your financial goals and takes advantage of potential federal tax breaks. State taxes may also apply. Consult with your tax advisor before deciding on the optimal strategy for your situation. Proposal in Washington to Eliminate Capital Gains Taxes on Home Sales If a new bill gains traction, there could be good news ahead for homeowners looking to sell their homes. Currently, qualified sellers can exclude up to $250,000 in capital gains from the sale of a primary residence ($500,000 for married couples filing jointly). This limit was set in 1997.  U.S. Rep. Marjorie Taylor Greene (R-GA) has introduced a bill to raise or eliminate that exclusion, calling the current threshold "an outdated, unfair burden," particularly in today's high-priced housing market. She says the change could boost the housing supply by removing a financial barrier to selling.  The "No Tax on Home Sales Act" is still in its early stages so it's unclear whether it could be enacted. But it has caught the attention of President Trump who said he's "thinking about no tax on capital gains on houses."

New college graduates will face some of the harsh realities of adulthood, including paying taxes, filing their own tax returns and possibly coordinating with their parents to achieve the best overall family tax results. Here are answers to graduates' most common tax questions. Can My Parents Claim Me as a Dependent? Under the current rules, you're a so-called "qualifying child" of your parents and, therefore, their dependent for the year if you meet the following four requirements: 1. You'll be under age 24 at year end, 2. You were a full-time student for some part of at least five months during the year, 3. You don't pay more than half of your own support for the year, and 4. You have the same principal place of residence as your parents for more than half the year, excluding temporary absences while you were in school. If all those requirements aren't met, your parents can still claim you as a so-called "qualifying relative" dependent for 2025 if: • Your gross income for the year is less than $5,200, and • Your parents pay more than half of your support for the year. If My Parents Claim Me as a Dependent, Do I Need to File a Tax Return? Most dependents still must file federal income tax returns to report their taxable income. However, they usually owe little or no federal income tax. Why? First, a dependent can claim a standard deduction against gross income to arrive at taxable income. For an unmarried dependent, the standard deduction for 2025 is the greater of: • $1,350, or • Earned income for the year, plus $450, up to a maximum of $15,000. If a dependent's gross income exceeds the standard deduction, the tax rate on the first $11,925 is only 10%. Important: Earned income for this purpose includes salaries, wages, tips, professional fees and other amounts paid for work the dependent performs. It also includes any part of a taxable scholarship or fellowship grant. (See "Less-Common Tax Issues" below.) For example, 22-year-old Percy graduated in May 2025. He starts a job in September 2025, collecting a salary of $25,000 for the year. He has no other income for 2025. Percy's parents pay more than half of his support for the year, including his education costs and living expenses before he started his job. Therefore, Percy is his parents' qualifying child and, therefore, their dependent for 2025. Assuming Percy isn't eligible for any other tax breaks, his 2025 taxable income will be $10,000 ($25,000 minus $15,000). His federal income tax bill will be $1,000 (10% of $10,000). However, it's possible that Percy could qualify for an education tax credit that would lower his 2025 tax obligation. Can I Claim a Tax Break for Student Loan Repayments? If you're eligible, you can deduct the lesser of $2,500 or the amount of student loan interest you actually paid during the year. To be eligible, your modified adjusted gross income (MAGI) must be below a certain threshold. For 2025, the MAGI threshold for single taxpayers is up to $85,000 for the full deduction, with a phaseout ending at $100,000. For married couples filing jointly, the MAGI threshold is up to $170,000 for the full deduction, with a phaseout ending at $200,000. Who's Eligible for Education Credits — and Who Should Claim Them?   There are two higher education federal income tax credits: the American Opportunity credit and the Lifetime Learning credit. You can't claim both credits for the same student's expenses in the same year. In addition, both credits are phased out (reduced or completely eliminated) at higher income levels. For 2025, the credits are phased out for MAGI between the following ranges: • $80,000 and $90,000 for single taxpayers, and • $160,000 and $180,000 for married couples who file jointly. Should you claim education credits, or should your parents claim them? If your parents' MAGI falls below the lower end of the applicable threshold, it usually makes sense for them to claim the credits (assuming they're in a higher tax bracket than you are). However, if your parents' MAGI exceeds the upper end of the applicable threshold, you can claim the credits (assuming your income isn't too high) because the credits are completely phased out for your parents. Here's a closer look at these education credits: American Opportunity Credit. This credit equals 100% of the first $2,000 of qualified undergraduate education expenses, plus 25% of the next $2,000. The maximum credit is $2,500 per year for a maximum of four years per student. Qualified expenses include: • Tuition, • Mandatory enrollment fees, and • Course materials. You can't count room and board costs or optional fees, such as expenses related to student activities, athletics and health insurance. Qualified expenses are eligible for the credit if you haven't already completed four years of undergraduate work as of the beginning of the tax year. This credit is allowed only for a year during which you carry, for at least one academic period beginning in that year, at least half of a full-time course load in a program that would ultimately result in an undergraduate degree or other recognized credential. You can use the credit to offset your entire federal income tax bill. After reducing your federal income tax bill to zero, 40% of any leftover credit amount is refundable, subject to a refundable limit of $1,000. Lifetime Learning Credit. This credit equals 20% of up to $10,000 of qualified education expenses, for a maximum credit of $2,000 yearly. Unlike the American Opportunity credit, there's no limit on the number of years the Lifetime Learning credit can be claimed and no course-load requirement. It can be used to help offset costs for undergraduate study that drags on for more than four years, for undergraduate years with light course loads or for graduate school courses.      The maximum amount of annual expenses for which the Lifetime Learning credit can be claimed is limited to $10,000, regardless of how many students are in the family. Qualified expenses include college tuition and mandatory enrollment fees. Room, board and optional fees are off limits.   Let's return to our hypothetical example and assume that Percy qualifies for the $2,500 American Opportunity tax credit because 2025 is the fourth year of his undergraduate study. If he claims the credit, the first $1,000 eliminates his federal income tax liability. Of the remaining $1,500, $600 is refundable (40% of $1,500). The rest of the credit ($900) disappears. Alternatively, Percy's parents can claim him as a dependent on their joint tax return. If their income allows them to collect the full $2,500 American Opportunity credit, Percy could agree to let them claim him as their dependent on their 2025 tax return, which in turn allows them to collect the full $2,500 American Opportunity credit. Important: Under the facts in this hypothetical example, the deciding factor in whether Percy's parents claim him as a dependent is who can claim the bigger American Opportunity credit.                  Uncle Sam Welcomes You to Adulthood Taxes are an inevitable financial fact of life. Between figuring out if your parents can still claim you, understanding deductions, and cashing in on education credits and other possible tax breaks, there's a lot to wrap your head around. While we've covered some of the most common questions, the tax world is full of twists and turns. The smartest move? Team up with a tax professional who can help you and your family make the most of the situation.