Each of our tax situations is unique. But every taxpayer can agree on one thing.
We all want to pay the least amount of tax as possible.
That universal goal can be reached by taking advantage of tax deductions, tax credits, and income exclusions.
Deductions, like the standard amounts discussed in Part 2 of the ol' blogs annual tax inflation series, are a relatively easy, and popular, way to reduce a tax bill.
Deductions also include the itemized expenses claimed on Form 1040 Schedule A, as well as adjustments to income on Form 1040 Schedule 1 that are popularly known as above-the-line deductions. Where you qualify for above-the-line tax breaks, you can claim them regardless of whether you itemize or take the standard deduction.
Then there are the even better tax credits, which reduce tax liability dollar-for-dollar reductions. If your credits are large enough, they can erase what you owe Uncle Sam. A few even provide a refund if there's more left after you zero out your tax bill.
And don't overlook income exclusions. In these cases, the tax code says that a portion of your income isn't taxed at all.
Even better, the Internal Revenue Service adjusts many of these tax-lowering options every year for inflation. Here's a look at the applicable 2024 revisions to these tax breaks in this, Part 4 of the tax inflation series.
Child tax credit: Let's start with one of the year-in-year-out most popular family-related tax breaks, the Child Tax Credit (CTC).
The CTC has been around in some form since 1997. It was increased to $2,000 per qualifying dependent child as part of the Tax Cuts and Jobs Act (TCJA) of 2017. It was expanded in 2021 as part of the American Rescue Plan Act (ARPA), which was enacted help folks deal with the COVID-19 economic downturn.
The bad news is that the ARPA increases expired on Dec. 31, 2021. The good news is that the portion of the CTC in 2024 that is refundable, meaning you could get excess credit back as a refund, goes from 2023's $1,600 to $1,700 in 2024.
There's still a chance that the CTC could be returned to the larger 2021 tax year levels, but that possibility is growing slimmer as Congress currently is struggling just to keep the federal government funded. The new GOP House Speaker also has said he's not a fan of massive catch-all, end-of-year legislation into which CTC revisions could be added.
So for now, the IRS and all us taxpayers must operate and plan based on the existing, not possible, tax law. And for the CTC, that's a possible refundable credit this year of $1,600 and $1,700 in 2024.
Adoption tax credit, employer assistance: It's no secret, even to those of us without children, that kiddos cost a lot. That's why Uncle Sam offers a variety of family-friendly breaks in addition to the CTC to help moms and dads cover all their youngster-related expenses.
One of them offers financial help in the form of a tax credit and tax-free employer assistance for folks who grow their families through adoption.
In 2024, a company can provide eligible adoptive parents up to $ 16,810 in tax-free help to cover the costs associated with adding to their families. This new income exclusion amount is a bump from the $15,950 allowed in 2023.
Even if adoptive parents don't get help from their employers in 2024, they can claim next year an adoption credit of up to that same maximum of $16,810. Again, this if for all adoptions, including a child with special needs. And again, this is an increase from the 2023 amount of $15,950.
Both the adoption income exclusion and tax credit amounts will begin to phase out in 2024 when individuals have modified adjusted gross income (MAGI; shameless plug for the ol' blog's glossary, which explains MAGI as well as many other tax term definitions) greater than $ 252,150. That's an increase from 2023's MAGI phase-out starting point of $239,230.
The adoption credit or income exclusion is eliminated in 2024 once adoptive parents hit MAGI of $292,150 or more. This tax benefit ends in 2023 when adoptive parents' MAGI hits $279,230 or more.
Depending on the adoption's cost, you may be able to claim both the tax credit and the exclusion. However, you can't double dip; that is, you cannot claim both a credit and exclusion for the same adoption expenses.
Note, too, that the tax credit is not refundable. Any extra adoption credit left after you reduce your tax bill to zero won't come back to you as a refund.
Earned Income Tax Credit, or EITC: The Earned Income Tax Credit (EITC), which was created in the 1970s as an outgrowth of President Lyndon B. Johnson's War on Poverty, is a major tax break for middle- and lower-income workers.
While it's a great benefit for families, one common misperception about the EITC is that you must have children to claim it. Not true. In fact, ARPA also upped EITC amounts for single filers. But as with the enhanced CTC, that boost ended at the end of 2021.
Still, the coming inflation adjustments will help all eligible EITC taxpayers. For 2024, inflation adjustments mean the maximum EITC amounts, determined by your family size, will be:
- $7,830 for taxpayers filing jointly who have three or more qualifying children, up from $7,430 in 2023;
- $6,960 with two qualifying children, up from $6,604 this tax year;
- $4,213 with one qualifying child, up from the current $3,995; and
- $632 if you don't have any qualifying children, up from $600 in 2023.
All of these EITC amounts are refundable, meaning any credit that is more than your tax bill comes back to you as, per its name, an IRS refund.
Of course, the key to claiming the EITC is to fall within its earnings' guidelines. If you don't make enough money, you can't claim it. Make more, and the credit amount is reduced. And if you make what is deemed too much, you can't claim the EITC at all.
To claim any EITC amount in 2023, inflation adjustments mean that your earned and adjusted gross income (AGI) next year each must be less than the following amounts:
3 or More Children
In addition, if you have what the IRS deems is "excessive investment income," you're not eligible for the EITC. For 2024, that earnings amount is $11,600.
For comparison, the 2023 tax year maximum EITC claim earnings limits are:
3 or More Children
For 2023, the excessive investment income amount is $11,000.
Student loan interest: Paying for higher education is a major expense, for students and their families. That's why so many students and/or their families take out loans to pay for college.
The Biden Administration's effort to forgive up to $20,000 in student loan debt for millions was blocked by the Supreme Court. So the White House tried an alternate route, with many of those federal student loans being eliminated through other government relief programs.
But if you don't qualify, or will still owe after some of your college debt is canceled, you might be able to claim a tax break for the interest on the remaining loan amount.
You can offset a portion of that educational debt by using the Schedule 1 write-off for student loan interest. This $2,500 tax break, which is found on Form 1040 Schedule 1, is set by law, so it doesn't change each year based on inflation.
However, the ability to claim this above-the-line deduction is based on your income and those earnings thresholds can be affected by inflation.
In 2024, you can claim the full $2,500 student loan interest deduction as long as you, as a single taxpayer, have MAGI of $80,000 or less. The income threshold goes to $165,000 next year for married filing jointly taxpayers with college debt.
In 2023, the full student loan interest deduction is available to single taxpayers with MAGI of $75,000 or less, and $155,000 for jointly filing married couples.
If you make more than these amounts for your filing status in either year, the loan deduction amount is reduced.
The loan interest deduction is totally eliminated in 2024 if you, as a single filer, make $95,000. The tax break ends next year for married joint filers with MAGI of $195,000 or more.
For 2023 filings, it's not available for single taxpayers with MAGI of $90,000 or more, or $185,000 plus for married joint filers.
Savings Bond exclusion for higher education: Savings bonds are another way to help pay for some higher education costs.
Interest earned on eligible Series EE and I bonds issued after 1989 is not taxed as long as the bond owner uses the redeemed bonds to pay qualified higher education expenses at an eligible institution.
In addition to meeting certain requirements, there's also an income limit for the education-related savings bond interest exclusion.
This exclusion will start phasing out in 2024 for single filers with MAGI of more than $96,800. That's a nice hike from 2023's $91,850 earnings level. The income trigger for joint filers next year is $145,200. That's up from this year's $137,800 on joint returns.
The tax-free savings bond interest exclusion is completely phased out in 2024 for joint filers with MAGI of $175,200. That's again up substantially from the 2023 earnings cap of $167,800.
There's no Savings Bond exclusion for single filers in 2024 when their MAGI hits $111,800. In 2023, these single bond redeemers face a $106,850 elimination cap.
Educators' expenses deduction: Tax breaks are for more than just students. Elementary and secondary school teachers, along with certain other educators, can claim some of their out-of-pocket classroom expenses as an above-the-line deduction.
This tax break was made a permanent part of the tax code as part of 2015 tax extenders bill (formally known as the Protecting Americans from Tax Hikes or PATH Act). PATH set the baseline deduction at $250, but also initiated inflation tweaks to this amount.
In 2024, this amount remains at the 2023 level of $300.
Not that I or any teacher will complain about any tax break, even a modest one like this, but the truth is that this paltry tax break generally isn't nearly enough to cover out-of-pocket classroom costs.
Lifetime Learning Credit: The Lifetime Learning Credit (LLC) is great not just for full-time younger college students, but also covers continuing education courses once you're out of school, such as a class you took to improve your workplace skills.
This educational tax credit was expanded so that more could claim it under the Taxpayer Certainty and Disaster Tax Relief Act of 2020. The change was made to account for the end of the tuition and fees above-the-line deduction.
That swap actually is a better tax break. The now defunct tuition and fees deduction reduced income, which may or may not (depending on your tax bracket) have helped cut your taxes. But the LLC is a tax credit, which as noted earlier means a dollar-for-dollar reduction of any tax you owe. In this tax credit's case, it can zero out any tax you owe.
The LLC still is calculated as 20 percent of the first $10,000 in tuition expenses paid per year, up to a maximum credit of $2,000.
Like many tax breaks, the LLC maximum is reduced and ultimately phased out if you make what the IRS considers a lot of money. The phase-out begins at MAGI of $80,000 for single filers and $160,000 for jointly filing married taxpayers. The credit is unavailable for single taxpayers making $90,000 and joint filers earning $180,000.
These phase-out ranges used to be adjusted for inflation, but beginning in 2021, the law change set them at these now increased, but fixed, MAGI amounts.
So if there's no inflation adjustment, why is this here? Because sometimes I get tax nostalgic, and because some folks might not have yet realized the Lifetime Learning Credit/tuition and fees change.
The §199A tax break allows eligible businesses, known as pass-through entities, to deduct up to 20 percent of qualified business income, or QBI. Limits, however, apply based on income and type of business.
In 2024, the QBI threshold will be $383,900 for married couples filing joint returns, and to $191,950 for married individuals filing separate returns, single taxpayers, and heads of households who operate pass-through businesses.
Those are increases from 2023's QBI thresholds of $364,200 for married couples filing joint returns, and $182,100 for married individuals filing separate returns, single taxpayers, and heads of households who operate pass-through businesses.
The QBI limitations are phased in as income increases. The §199A tax break won't be available in 2024 once the pass-through taxpayer's MAGI exceeds $483,900 for married couples filing joint returns, and to $241,950 for married individuals filing separate returns, single taxpayers, and heads of households who operate pass-through businesses.
The 2023 QBI elimination amounts are more than $464,200 for married couples filing joint returns, and to $232,150 for married individuals filing separate returns, single taxpayers, and heads of households who operate pass-through businesses.
Transportation fringe benefits: Commuting can tax your patience. Some companies countered this stress by offering their workers a tax-free benefit that covered some getting-to-and-from-work travels (and travails).
No more. Under the TCJA, and through tax year 2025, employers cannot deduct fringe benefits they offer commuting employees by subsidizing some or all of their parking, transit and van pooling costs. The law also suspended bicycle commuting reimbursement from the definition of qualified transportation fringe benefits.
Some businesses, however, still have the option to offer workers the vehicular commuting benefits and cover the costs themselves.
In 2024, employers can provide up to $315 a month to employees to offset their commuter highway vehicle travel, any transit pass or qualified parking. That's $15 more than the $300 a month allowed this year.
Retirement Saver's Credit: It's tough sometimes to save for retirement when you've got lots of other day-to-day expenses to meet. Uncle Sam wants to help encourage you to stash at least a little for your golden years via this special tax credit.
Changes in 2024 to the Saver's Credit were discussed in Part 3 of the current inflation series. But since it's often overlooked, it deserves another mention in this deduction, credit, and income exclusion post.
The Saver's Credit is worth a maximum $1,000. You claim it based on the money you put into IRAs and workplace (both as an employee or as the self-employed boss) plans. However, it's limited to folks who meet the annual earning requirements.
In 2024, the Saver's Credit maximum earnings caps go to:
- $38,250 for singles and married filing separately taxpayers, up from $36,500 in 2023;
- $57,375 for heads of household, up from $54,750 this year; and
- $76,500 for married couples filing jointly, up from the 2023 limit of $73,000.
Again, there's more, including 2023 and 2024 Saver's Credit tax year tables showing the full income phase out ranges, in Part 3 of the inflation series.
More inflation tax info on the way: Speaking of more, as I mentioned at the top of the post (many, many paragraphs ago), this is just one part, Part 4 to be exact, of the ol' blog's annual look at how inflation might affect our taxes in the upcoming year.
As the box below indicates, you can find a directory to all 10 parts in the first post of the series.
Thanks for reading. And thanks especially for your tax inflation interest and explanation patience!
|This post on inflation's effects on 2024 deductions, credits, and exemptions
is Part 4 of the ol' blog's annual series on myriad tax-related inflation adjustments.
The 10-part series started with a look at next year's
income tax brackets and rates.
At the end of that first item there is a directory
of all of the 2024 tax-related inflation changes.
Note: The 2024 figures in this post apply to that tax year's return to be filed in 2025.
For comparison purposes, you'll also find 2023 amounts that apply
to this year's 2023 tax returns that will be due April 15, 2024.
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