Don't Mess With Taxes

Taking advantage of these inflation-adjusted tax breaks could put more money in your hands instead of Uncle Sam's bank account. (Photo by Osarugue Igbinoba on Unsplash)

Many taxpayers look forward to tax filing season because they are getting a refund. Others just want to pay the smallest possible tax bill.

Some Internal Revenue Code provisions, ranging from tax deductions to tax credits to income exclusions, can help in both cases.

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 tax credits, which are better than deductions. Credits reduce tax liability dollar-for-dollar. If your credits are large enough, they can erase what you owe Uncle Sam. A few tax credits, the refundable ones, can get you a refund if the credit amount is more than what you owe Uncle Sam.

And don't overlook income exclusions. In these cases, the tax code says that a portion of your income isn't taxed at all.

The IRS adjusts many of these tax-lowering options every year for inflation. Here's a look at the applicable 2025 revisions to these tax breaks in this, Part 3 of the 2025 tax year 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.

But the pre-pandemic credit still has a refundable component, meaning it could net qualifying taxpayers a refund. The portion of the CTC in 2025 that is refundable is $1,700. That’s the same level as in 2024.

Adoption tax credit, employer assistance: The CTC is popular because as every family knows, kiddos cost a lot. That’s why lawmakers have added, in addition to the CTC, a variety of family-friendly breaks to the tax code.

Two of them are for adoptive parents. There’s a tax credit and tax-free employer assistance for folks who grow their families through adoption.

Next year, eligible adoptive parents can claim a tax credit of up to $17,280 to help cover the costs of adding a new family member. The credit is available for all adoptions, including a child with special needs. The 2025 credit amount is an increase from the $16,810 adoption credit allowed in 2024.

Some adoptive parents also might get help from their employers. In 2025, a company can provide eligible adoptive parents up to $17,280 in tax-free help to cover the costs associated with adding to their families. Yep, that’s the same as the credit maximum. Also as with the tax credit, the income exclusion amount next year is a bump from the $16,810 allowed in 2024.

Both the adoption income exclusion and tax credit amounts will begin to phase out in 2025 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 $259,190. That’s an increase from 2024's MAGI phase-out starting point of $252,150.

The adoption credit or income exclusion is eliminated in 2025 once adoptive parents hit MAGI of $299,190 or more. This tax benefit ends in 2024 when adoptive parents' MAGI hits $292,150 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, although the EITC does offer more help for larger families.

And the inflation adjustments for 2025 will help all eligible EITC taxpayers. For 2025, the maximum EITC amounts, determined by your family size, will be:

• $8,046 for taxpayers filing jointly who have three or more qualifying children, up from $7,830 in 2024;
• $7,152 with two qualifying children, up from $6,960 this tax year;
• $4,328 with one qualifying child, up from the current $4,213; and
• $649 if you don't have any qualifying children, up from $632 in 2024.

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 2025, inflation adjustments mean that your earned and adjusted gross income (AGI) next year each must be less than the following maximum earnings amounts:

In addition, if you have what the IRS deems is "excessive investment income," you're not eligible for the EITC. For 2025, that earnings amount is $11,950.

For comparison, the 2024 tax year maximum EITC claim earnings limits are:

In 2024, the excessive investment income amount is $11,600.

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 was able to provide some students and their families with relief, as their loans were forgiven through various government relief programs.

But if your college debt didn’t qualify, or you still owe after some of what you owe erased, 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 2025, you can claim the full $2,500 student loan interest deduction as long as you, as a single taxpayer, have MAGI of $85,000 or less. The income threshold for the full deduction goes to $170,000 next year for married filing jointly taxpayers with college debt.

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 for married filing jointly couples with student debt is $165,000 this year.

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 2025 if your MAGI as a single filer is $100,000 or more. The deduction will be unavailable for married filing jointly taxpayers with MAGI of $200,000 or more.

This year, the loan interest deduction is eliminated for single filers who make $95,000. The educational assistance tax break for married joint filers with MAGI of $195,000 or more in 2024.

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 2025 for single filers with MAGI of more than $99,500. That’s a nice hike from 2024’s $96,800 earnings level. The income trigger for joint filers in 2025 is $149,250. That’s up from this year’s $145,200 MAGI on joint returns.

The tax-free savings bond interest exclusion is completely phased out in 2025 for single taxpayers with MAGI of $114,500. There's no savings bond exclusion for single filers in 2024 when their MAGI hits $111,800.

Jointly filing couples with income of more than $179,250 in 2025 can’t get any tax benefit for their educational use of savings bonds. That’s up from the 2024 MAGI limit for joint filers with of $175,200.

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.

U.S. Department of Education photo

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 2025, this amount remains at the 2024 level of $300.

Not that 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, and could 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 the IRS mentions the Lifetime Learning tax credit in its announcement of the 2025 inflation adjustments. Also because some folks might not have yet realized the change to the tuition and fees/Lifetime Learning Credit.

Small businesses pass-through break: The TCJA, aka the Republican tax reform bill back in 2017, included a new Section 199A tax deduction for certain small businesses.

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 2025, the QBI threshold will be $394,600 for married couples filing joint returns, and up to $197,300 for single taxpayers, heads of households, and married couples filing separate tax returns and who operate pass-through businesses.

Those are increases from 2024's QBI thresholds of $383,900 for married couples filing joint returns, and to $182,100 for all other pass-through operators who use the other filing statuses.

As with many tax breaks, the QBI limitations are phased out as income increases. The §199A tax break won't be available in 2025 once the pass-through taxpayer's MAGI exceeds $494,600 if filing jointly as a married couple, and surpasses $247,300 for married individuals filing separate returns, single taxpayers, and heads of households who operate pass-through businesses.

The §199A tax benefit in 2024 ends for pass-through entities once the 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.

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 offer workers the vehicular commuting benefits and cover the costs themselves.

In 2025, employers can provide up to $325 a month to employees to offset their commuter highway vehicle travel, any transit pass or qualified parking. That's $10 more than the $315 a month allowed this year.

More inflation tax info on the way: The travel-related fringe benefit is a fitting exit point for this third entry into the ol’ blog’s annual 10-part tax inflation series.

As the box below notes, 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!

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