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Tax Options for Vacation Home Owners Who Want to Sell

In many areas, vacation home prices have skyrocketed, along with property insurance costs. If you own a highly appreciated vacation property, is it time to cash out and simplify your life? You could simply sell the property and accept the tax hit on your gain. (See “Get the Timing Right” below.) Or you could explore the following three tax-saving strategies.

Computing Nonexcludable Gains on Vacation Homes If you converted your vacation home into your principal residence, you might think you’re in the clear for claiming the home sale gain exclusion (see main article). Not so fast! Part of the gain from selling the property may be ineligible for the exclusion under current tax law. Follow these four steps to calculate the nonexcludable gain from the sale: Compute the gain attributable to any depreciation deductions claimed against the property for any rental periods after May 6, 1997. This is referred to as the unrecaptured Section 1250 gain, and it’s taxed at a maximum federal rate of 25%. After subtracting any unrecaptured Sec. 1250 gain from the total gain, carry the remaining gain to the third step. Calculate the nonexcludable gain fraction. The numerator is the period of time after 2008 during which the property wasn’t used as your principal residence. The denominator is your total ownership period for the property. Calculate the nonexcludable gain by multiplying the gain from the first step by the nonexcludable gain fraction calculated in the second step. After subtracting any unrecaptured Sec. 1250 gain and the nonexcludable gain, the remaining gain is eligible for the principal residence gain exclusion privilege if you pass the ownership and use tests explained in the main article. Important: If you have a significant overall gain, the remaining gain after making the two subtractions in the fourth step could be big enough to take full advantage of the home sale gain exclusion. Your tax advisor can help you crunch the numbers correctly.

Option 1: Convert the Property into Your Principal Residence

One possible tax-smart option is to move into your vacation home. If you live there for at least two years before selling, the property can become your principal residence, potentially qualifying it for the federal income tax home sale gain exclusion.

This exclusion is one of the biggest personal tax breaks on the books. Eligible single taxpayers can exclude home sale gains up to $250,000, and eligible married joint-filing couples can exclude gains up to $500,000. Married people who file separately can potentially qualify for two separate $250,000 exclusions.

To be eligible for the home sale gain exclusion, you must pass the following two tests:

1. Ownership test. You must have owned the property for at least two years during the five-year period ending on the sale date.  

2. Use test. You must have used the property as your principal residence for at least two years during the same five-year period.

Important: 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.

Beware, however, of a little-known rule that may reduce your allowable gain exclusion. (See “Computing Nonexcludable Gains on Vacation Homes” at right.)

Option 2: Leverage a Tax-Favored Section 1031 Exchange

Another tax-smart strategy is to arrange a Section 1031 (like-kind) exchange. This option is available only for properties used for business or rental purposes. So, if you haven’t been renting your vacation home, you’ll first need to convert it to what qualifies as a rental property under the tax law.

When available, a Sec. 1031 exchange allows you to unload an appreciated property (the “relinquished” property) and acquire another one (the “replacement” property) without triggering a current federal income tax bill on the relinquished property’s appreciation. The gain is rolled over into the replacement property, where the gain is deferred until you sell the replacement property in a taxable transaction.

What happens if you still own the replacement property when you die? Under current federal income tax rules, the tax basis of a deceased person’s share of the property is “stepped up” to its date-of-death value. In that situation, your share of any taxable gain accrued during your lifetime would be completely washed away.

The IRS established a “safe harbor” that allows tax-deferred Sec. 1031 exchange treatment for swaps of vacation properties, including “mixed-use” vacation homes that you’ve rented out part-time and used personally part-time. To be eligible, both the relinquished and replacement properties must meet the safe-harbor requirements.

Specifically, the relinquished property must pass two tests:

• You must have owned it for at least 24 months immediately before the exchange.
• Within each of the two 12-month periods during the 24 months immediately before the exchange: 1) you must have rented out the property at market rates for at least 14 days, and 2) your personal use of the property can’t have exceeded the greater of 14 days or 10% of the days the property was rented out at market rates.

In addition, the replacement property, which can be virtually any kind of real estate, must pass two tests:

• You must continue to own it for at least 24 months after the exchange, and you must hold it for rental or business purposes.
• If the replacement property is another vacation home, within each of the two 12-month periods during the 24 months immediately after the exchange: 1) you must rent out the property at market rates for at least 14 days, and 2) your personal use of the property can’t exceed the greater of 14 days or 10% of the days the property is rented out at market rates.

Executing this strategy is complicated. Consult your tax advisor for the details.

Option 3: Hold the Property

Sometimes, doing nothing might actually be the best move. Holding on to your vacation property until you pass away could be a tax-smart choice because of the step-up in basis rule. When you die, the tax basis of your share of the property is adjusted to its fair market value at the time of your death, eliminating your share of any taxable gain that accrued during your lifetime.

If your heirs subsequently sell the property, they’ll be taxed only on any post-death appreciation. However, if you and your spouse co-own the property, the basis step-up rule can be tricky. Consult your tax advisor for full details on how it works in that scenario.

It’s Not All About Taxes

While taxes are important, they shouldn’t be the only factor in your decision. Vacation homes often carry strong emotional significance. The right strategy depends on various factors such as:

• Your age and health,
• Family members’ emotional ties to the property, and
• Your financial situation and long-term goals.

For instance, the considerations for a retired couple may differ from those of a young couple with busy young kids. Consult your tax, financial and legal advisors to discuss what’s right for your situation.

8 Life Events that May Change Your Tax Situation

Life is full of changes, and many significant milestones can affect your tax situation in unforeseen ways. Whether you’re getting married, welcoming a new child, starting a new job or making other changes, it’s important to understand how these events can affect your taxes. Timely tax planning can help you avoid surprises and comply with the IRS rules.

Here’s a brief look at eight common life events and how they could change your tax obligations.

1. Getting Married: New Filing Status and Tax Bracket

Tying the knot is more than a personal commitment — it also changes your tax filing options. Once you’re married, you can file jointly or separately. Most couples benefit from the “married filing jointly” status due to lower combined tax rates and higher deduction thresholds. But some exceptions may make it better to file separately.

Consider these essential tax-related issues when you get married:

• You must report your marital status as of December 31 of the tax year.
• Your combined income could push you into a higher or lower tax bracket.
• You may need to adjust your withholding by submitting a new Form W-4 with your employer. Your tax advisor or the IRS Tax Withholding Estimator can help.

Review and update your withholding as soon as possible after your wedding to avoid underpayment or overpayment of taxes.

2. Divorce: Fresh Start with Tax Implications

Divorce often involves financial restructuring, and your tax situation is no exception. After divorce, your filing status typically changes to “single” or, if you qualify, “head of household,” which comes with different tax brackets and standard deductions.

Some tax-related changes for those getting divorced include:

• Alimony payments for divorces finalized after 2018 aren’t deductible by the payer or taxable to the recipient.
• Child support remains nondeductible and nontaxable.
• You may need to update your withholding to reflect your new filing status and income level.

If your income has changed significantly and you don’t withhold enough, you may need to make estimated tax payments to avoid penalties.

3. Childbirth or Adoption: New Credits and Deductions

Welcoming a new child into your family can bring joy — and tax benefits, including:

• The partially refundable Child Tax Credit (up to $2,000 per qualifying child),
• The adoption credit,
• The child and dependent care credit for child care expenses, including day care and day summer camp, and
• Potential eligibility for the Earned Income Tax Credit (EITC).

Update your W-4 to reflect an additional dependent and maximize your credits. This ensures appropriate withholding levels throughout the year.

Additionally, it’s never too soon to think about establishing a tax-advantaged savings plan to fund your child’s private K-12 and/or college expenses. While contributions aren’t deductible for federal tax purposes, some states offer breaks for contributing. The plans usually offer high contribution limits, and there are no income limits for contributing. Generally, any growth is tax-deferred, and distributions made to pay for qualified expenses are tax-exempt. Contact your tax advisor to evaluate your education savings options.

4. New Job: Income and Withholding Adjustments

Starting a new job may increase your income and affect your tax bracket. Your employer will ask you to fill out a new W-4 form. Accurate information is critical to ensure your new employer withholds the correct amount.

If you have multiple jobs or a working spouse, consult your tax advisor or use the IRS’s online estimator to avoid under-withholding. Don’t forget to include other sources of income, such as freelance or investment income. If you’re self-employed or have side income, you may need to make quarterly estimated tax payments.

5. Retirement: From Earning to Drawing Income

Retirement generally marks a shift from earning a paycheck to drawing from retirement accounts, which changes your taxable income sources.

Some tax considerations for new retirees include the following:

• Distributions from traditional IRAs and 401(k)s are generally taxable.
• Required minimum distributions (RMDs) currently start at age 73; failing to take timely RMDs can result in significant penalties.
• Social Security benefits may be taxable, depending on your total income.

It’s a good time to recalculate your income and potential tax liability. Retirees often need to adjust or begin making estimated tax payments, especially if taxes aren’t withheld from retirement distributions.

6. Buying a Home: Potential Tax Breaks

Purchasing a home is a major financial event that can affect your taxes. If you already itemize, your annual deductions will likely increase. If you’ve previously taken the standard deduction, it may be advantageous to start itemizing deductions after you buy a home.

Homeowners may be eligible for the following tax breaks:

• Itemized deductions for mortgage interest and property taxes, subject to tax law limits.
• Itemized deductions for points paid to obtain a mortgage in the year paid or over the life of the loan.

Additionally, if you’re a first-time homebuyer, you can withdraw up to $10,000 from a traditional IRA penalty-free to help purchase the home. (Normally, an early withdrawal before age 59½ results in a 10% penalty.) Consult your tax advisor to ensure you claim all eligible homeownership tax breaks.

7. Selling a Home: Tax-Free Profit

If you meet the qualifications, the profit from selling your principal residence can be free from federal income tax. An unmarried homeowner can potentially sell a home for a gain of up to $250,000 without owing any federal income tax. If you’re married and file jointly, you can potentially pay no tax on up to $500,000 of gain. However, to qualify, you generally must pass two tests:

1. Ownership Test.You must have owned the property for at least two years during the five-year period ending on the sale date.
2. Use Test.You must have used the property as a principal residence for at least two years during the same five-year period.

You must pass both tests to qualify for the home sale gain exclusion, but periods of ownership and use don’t need to overlap. This is one of the best tax breaks available. Other rules and requirements may apply.

8. Inheritance: Taxable or Not?

Receiving an inheritance can feel like a windfall, but the tax consequences vary based on what you inherit. For example:

• Inherited property generally receives a “step-up” in basis, minimizing or eliminating capital gains taxes if you sell it shortly after receiving it.
• Life insurance proceeds are typically tax-free.
• Retirement account inheritances (like IRAs) may require you to take taxable distributions under IRS rules, especially after changes made under the SECURE Act.

Consult your tax professional promptly to understand how an inheritance will affect your tax liability and plan any estimated tax payments.

Stay Ahead of Tax Changes

Life events can quickly shift your financial landscape. Being proactive with tax planning can save you time and money. Each of these milestones can affect your filing status and the amount of tax you owe — or get refunded.

Contact your tax advisor if you’re unsure how a life change may affect your taxes. He or she can help you adjust your withholding, plan estimated payments and make other tax-smart moves to preserve your long-term wealth.

JCCS offices closed on Memorial Day

In observance of Memorial Day, our offices will be closed on Monday, May 26. This day is dedicated to honoring and remembering the brave individuals who have served our country. We encourage everyone to take this time to reflect, celebrate, and spend quality moments with loved ones.

We will resume normal business hours on Tuesday, May 27.

Dept. of Labor Expands Voluntary Fiduciary Compliance Program

Earlier this year, the Department of Labor (DOL) released new rules for its Voluntary Fiduciary Compliance Program (VFCP). Happily, the rules include a new, long-awaited self-correction feature for plan sponsors.

What is VFCP? The DOL’s VFCP is a program that enables employers and plan sponsors to correct fiduciary breaches and other prohibited transactions while also generally avoiding DOL civil enforcement actions and penalties.

Certain violations corrected under VFCP are also eligible for relief from excise taxes associated with the breach or prohibited transaction. Though not entirely comparable, the DOL’s VFCP is often thought of as similar to the IRS’s Voluntary Corrections Program (VCP): VFCP allows plans to correct violations related to duties under Employment Retirement Income Security Act (ERISA), and VCP allows plans to correct violations related to requirements under the Tax Code.

Who is eligible for VFCP? Employers are generally eligible so long as: (1) they are not under investigation by a relevant government agency, (2) the application does not show evidence of possible criminal violations of ERISA, and (3) the employer has not been subject to a DOL investigation related to this matter for which the DOL sent a referral to the IRS.

Pursuant to the DOL’s VFCP guidelines, a plan or other VFCP applicant is generally considered “under investigation” if:

(1) The DOL has notified a plan official of a plan investigation or an investigation of the potential VFCP applicant or plan sponsor in connection with an act or transaction directly related to the plan.

(2) A governmental agency is conducting a criminal investigation of the plan, the potential VFCP applicant, or plan sponsor in connection with an act or transaction directly related to the plan.

(3) The IRS Tax Exempt and Governmental Entities division is conducting an examination of the plan, or

(4) The Pension Benefit Guaranty Corporation (PBGC), any state attorney general, or any state insurance commission is looking into the plan, the potential VFCP applicant, or the plan sponsor in connection with an act or transaction directly related to the plan (unless the VFCP applicant gives the DOL sufficient notice).

What can plan sponsors self-correct? Until very recently, there were no self-correction options under VFCP— meaning that all corrections pursuant to VFCP required filing a correction application with the DOL and waiting on DOL approval. Beginning in May of this year, plan sponsors may now self-correct failures related to: (1) late-deposited participant contributions and (2) plan loans. Additionally, for certain types of errors that are eligible under VFCP, the DOL release expands Prohibited Transaction Exemption (PTE) 2002-51 to permit retroactive excise tax relief.

The issue of late-deposited participant contributions is one plan sponsors frequently encounter — and, until this year, generally required correction via a lengthy filing with the DOL. Now, plan sponsors may generally self-correct these errors so long as: (1) the total lost earnings amount due to the plan is $1,000 or less and (2) the correction is made within 180 days of the initial withholding. This 180-days limit has been the subject of some industry frustration. For small plans, it is often common practice to look for late contributions only at year-end during a TPA’s review of plan data — meaning that some late contributions may fall outside of the 180-day window by the time the plan sponsor finds the error.

Plans may also self-correct “eligible inadvertent” plan loan mistakes — generally meaning that the loan failure must have occurred despite reasonable policies and procedures, the loan failure cannot be “egregious,” and the loan failure cannot represent abusive tax avoidance or a misuse of plan assets.

What does the self-correction process look like? VFCP’s new self-correction process doesn’t mean plan sponsors and officials don’t have to file anything with the DOL. The new amendments to VFCP require that notice of self-correction be filed with the DOL and include brief information about the plan, the plan sponsor, the error, and the number of impacted participants. Applicants who submit the notice will receive confirmation of the DOL’s receipt but need not wait on DOL approval. Applicants hoping to take advantage of the new retroactive excise tax relief under PTE 2002-51 must also provide a notice of the correction to certain interested parties. Especially regarding late deposited participant contributions, plan sponsors should be excited to hear that the DOL now permits them to correct fiduciary errors without a formal application filing.

By Hannah Munn, Partner, Poyner Spruil (Plan Sponsor Quarterly Update)

Business Owners: It’s a Good Time for Stock Redemptions

If you’re a shareholder of a closely held corporation, you may be interested in converting your ownership interest into cash with a so-called “stock redemption.” That’s where your company buys back (redeems) some or all of your shares. If you’re interested in using this strategy, you should consider redeeming your shares while the individual federal income tax rates are relatively low by historical standards. Here’s how to make this strategy work for you.

Important: The favorable individual federal income tax rates established by the Tax Cuts and Jobs Act (TCJA) will be in place at least through the end of 2025. With Republicans controlling Congress and the White House, it’s expected that the TCJA tax rates will be extended beyond 2025 — or possibly made permanent or reduced even further. However, Congress hasn’t yet passed any tax legislation.

C Corporation Stock Redemption Basics

The general federal income tax rule is that cash payments by a C corporation to redeem shares are treated as corporate distributions to the recipient shareholder. So, if your corporation redeems your shares, the payments will be treated as taxable dividends paid to you to the extent of your corporation’s current or accumulated earnings and profits (E&P). E&P is a tax accounting concept similar to the financial accounting concept of retained earnings.

Once a corporation’s E&P has been exhausted, any remaining stock redemption payments will reduce the recipient shareholder’s tax basis in the redeemed shares. After the recipient shareholder’s tax basis has been exhausted, any remaining redemption payments will be considered capital gain. This corporate distribution treatment applies unless an exception is available under the tax code. Slightly different rules apply to redemptions of S corporation shares. (See “S Corporation Stock Redemption Basics” at the bottom of the article.)

5 Possible Exceptions to Corporate Distribution Treatment

Under current tax law, there are five exceptions to the general rule that C corporation stock redemption payments are treated as corporate distributions:

1. When the redemption payment isn’t substantially equivalent to a dividend,
2. When there’s a substantially disproportionate redemption of the shareholder’s stock,
3. When the stock of a noncorporate shareholder is redeemed as part of a partial liquidation,
4. When the redemption payments are used to pay death taxes or certain funeral and administrative expenses of a deceased shareholder, and
5. When all your stock in the corporation is redeemed.

If an exception applies, stock redemption payments will be treated as proceeds from a garden-variety stock sale. Stock sale treatment is usually the preferred tax outcome because your basis in the redeemed shares can offset the redemption payments.

Of these five exceptions, you’re most likely to qualify for the last one — and it’s the only one you can generally rely on with an adequate degree of certainty. A complete termination happens when all your stock in the corporation is redeemed. However, beware: This exception can be negated by stock ownership attribution rules that treat you as constructively owning stock owned by another party.

Stock Ownership Attribution Rules

The stock ownership attribution rules stipulate that, for federal income tax purposes only, you’re deemed to constructively own stock that your spouse, parents, children or grandchildren actually own. Additionally, you may be deemed to constructively own stock that’s actually owned by certain related entities, such as a partnership in which you own an interest or another corporation you control.

You’re ineligible for the complete termination exception if you actually or constructively own any stock in the redeeming corporation after completing the redemption transaction. That means the stock redemption payments will be taxed under the general corporate distribution rules (unless another stock sale exception applies).

Fortunately, a special family attribution waiver rule can often be used to make shareholders in family corporations eligible for the complete termination stock sale exception. Contact your tax advisor for details about the family attribution waiver rule.

Corporate Distributions vs. Stock Sales

Suppose you don’t have a significant tax basis in the redeemed shares or any significant capital losses. In that case, there’s usually only a minor distinction between dividend treatment and stock sale treatment under today’s individual federal income tax rate structure. Under current tax law, both dividends and long-term capital gains (LTCGs) are taxed at the same maximum federal rate of 23.8%. This includes the 20% maximum rate for LTCGs and qualified dividends, plus another 3.8% for the net investment income tax (NIIT). This maximum rate applies only to high-income taxpayers. Here are the thresholds for the maximum rate for 2025:

2025 Taxable Income Thresholds for 20%

LTCGs and Qualified Dividends Tax Rate

Most people are subject to a 15% LTCG and qualified dividend tax rate, plus 3.8% for the NIIT if applicable. Taxpayers with modified adjusted gross income (MAGI) over $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately) are subject to the extra 3.8% NIIT on the lesser of their net investment income or the amount by which their MAGI exceeds the applicable threshold. Net investment income can include capital gains, dividends, interest and other investment-related income (but not self-rental income from an active trade or business).

Timing Issue

An individual C corporation shareholder will get relatively favorable federal income tax treatment for stock redemption payments received in 2025, even if they’re treated as corporate distributions. However, depending on tax law changes, the tax treatment of stock redemption payments received in future years may not be as favorable. Today’s favorable rates are expected to remain at least until after the 2028 general election, but that’s not yet a certainty. Higher maximum federal income tax rates could apply in later years.

It’s possible that the maximum federal rate on redemption payments classified as dividends could be increased to equal the maximum rate on ordinary income. For example, in 2017, the maximum ordinary income rate was 39.6%, plus another 3.8% for the NIIT.

Ready, Set, Redeem

Stock redemptions take time to implement properly. If you’re interested in taking advantage of this strategy, contact your tax advisor to understand the tax implications fully and get the ball rolling.

7 Ways to Cut Nonprofit Costs Rather Than Staffers

It wasn’t long ago that the not-for-profit sector was struggling to find enough staffers to hire. Now that many organizations are losing federal grants and facing budget shortfalls, they may be considering layoffs. If you’re in this situation, you probably don’t want to lose valuable employees — and the mission-critical programs they help run.

There may be another option — cut expenses. Here are seven ideas to consider:

1. Suspend benefits and wages. Before laying off workers, consider reducing hours or suspending some employee benefits. You might trim wages or management-level salaries. Staffers may object to such measures, so be careful to explain that you’re trying to prevent layoffs. If possible, provide a timeline or benchmarks that will potentially trigger a “return to normal.”

2. Send staffers home. Allowing employees to work remotely may lower overhead costs for the leased space, utilities, insurance and maintenance you’ll no longer need to pay for.

3. Renegotiate your lease. If you rent and need your workers on-site, approach your landlord about renegotiating better lease terms, especially if you’re nearing the end of the lease’s term. Many commercial real estate markets have failed to recover from COVID-19 vacancies, and landlords may be more amenable to rent reductions, abatements or holidays.

4. Consolidate sites. Nonprofits that run more than one site might be able to consolidate facilities into a single location and shutter the rest.

5. Monetize real estate. If your nonprofit owns office buildings or other facilities, consider selling, downsizing or renting unused space to other organizations.

6. Review vendor contracts. If you’ve consolidated worksites or shifted to remote work, your organization may have less need for some goods and services. But before you terminate any contracts, check for penalty or fee provisions that could make canceling costly. Look into consolidating purchases of goods and services with fewer vendors to obtain discounts. Also, be assertive and ask vendors to offer nonprofit discounts or donate their services.

7. Partner up. Think about entering cost-sharing agreements with other organizations, nonprofit or not. You might also want to merge with another charity that shares or complements your mission and programming.

If you’re facing funding cuts and a possible budget crisis, now isn’t the time to go it alone. We can help you slash expenses as well as find new revenue sources. Contact us.

Real-World Tax Advice for Recent College Grads

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.

Don’t Let Quarterly Estimated Tax Payment Obligations Catch You Off Guard

If you’re self-employed, run your own small business, or have rental or investment income, there’s a good chance you must make quarterly estimated tax payments. These payments include income tax and, if applicable, self-employment tax. Failing to make them — or miscalculating how much you owe — can result in penalties and interest.

Who Needs to Pay Quarterly Estimated Taxes?

Anyone who receives income that isn’t subject to withholding may be required to make estimated tax payments. This typically includes:

• Independent contractors, such as freelancers, consultants and gig workers,
• Sole proprietors and small business owners,
• Partners in a partnership,
• S corporation shareholders,
• Landlords with rental income, and
• Investors with capital gains or dividend income.

Generally, you must make estimated payments if you expect to owe at least $1,000 in federal tax for the year after subtracting any withholding and refundable credits. This includes income tax and, to the extent applicable, self-employment tax (Social Security and Medicare).

When Are Quarterly Tax Payments Due?

The IRS divides the year into the following four payment periods, but the deadlines don’t align exactly with calendar quarters:

Estimated Tax Payment Schedule

If a due date falls on a weekend or holiday, it’s extended to the next business day. For example, June 15, 2025, falls on a Sunday, so the deadline is Monday, June 16, 2025.

How Are Estimated Taxes Calculated?

Calculating estimated taxes requires projecting total income, deductions, credits and withholding for the year. Specifically, here are six steps for the calculation:

1. Estimate total annual income from all sources.
2. Subtract deductions, such as above-the-line deductions (e.g., retirement plan contributions, self-employment deductions), the standard deduction or projected itemized deductions, and eligible business expenses.
3. Apply the appropriate federal income tax rate to determine your income tax.
4. Add self-employment tax, if applicable, which is 15.3% on net earnings from self-employment up to $176,100 for 2025 and 2.9% on net self-employment earnings over that amount.
5. Subtract any expected tax credits and withholding.
6. Divide the total by four to determine each quarterly payment.

Some quarters cover more months than others. For example, the June deadline covers just two months, while the January deadline covers four. Even so, the IRS generally expects equal payments throughout the year.

However, if your income is seasonal or fluctuates significantly, you may qualify for the annualized income installment method. Under this method, your payment amounts are adjusted based on when income was actually earned. This approach can help prevent penalties, but it’s more complex.

As you can see, properly estimating your income and deductible expenses and determining whether to use the annualized installment method is no small undertaking. Your tax advisor can help you with income and expense projections and the proper tax calculations.

What Happens If You Don’t Pay Enough?

Underpaying your estimated taxes can result in IRS penalties — even if you end up getting a refund when you file your return. Penalties are based on the underpayment amount, the length of the delay and the current IRS interest rate.

Common situations that trigger penalties are:

• Missing a payment,
• Paying after the due date, and
• Underestimating income and paying too little.

Safe harbor rules can help you avoid penalties. You’re generally in the clear if, through estimated taxes and withholding, you pay at least:

• 90% of your current year’s tax liability, or
• 100% of your previous year’s tax liability (110% if your adjusted gross income was over $150,000, or, if married filing separately, over $75,000).

If you have any income from which taxes are withheld, increasing your withholding might help you avoid penalties — and provide other benefits. See “An Alternative: Increase Withholding If You Also Have W-2 Income” below.

Tips for Staying on Top of Quarterly Tax Payments

Managing quarterly tax payments doesn’t have to be daunting. With some organization and a few smart habits, you can build a system that minimizes both the risk of penalties and your stress.

First, regularly set aside money for taxes. Consider opening a dedicated savings account to keep funds for taxes separate and automating regular transfers to the account if your income is steady.

How much should you save? A common rule of thumb is 25% to 30% of net income. But, depending on your marginal tax bracket, you may need to set aside more. If you have enough cash on hand, consider putting aside 5% to 10% beyond your estimates to cover unexpected income spikes or tax law changes.

How can you ensure you’re accurately estimating your taxes? Accounting tools or apps, such as QuickBooks, Xero and FreshBooks, can automatically track income and calculate estimated taxes. But these tools are only as good as the data you enter into them. If you aren’t properly recording all income and expenses, these solutions won’t provide accurate tax estimates.

It’s also critical to reassess your income and estimates every quarter and adjust your payments accordingly. Otherwise, you could end up underpaying taxes and owing penalties and interest — or overpaying taxes and giving the federal government an interest-free loan.

If keeping track of deadlines isn’t your strong suit, you may want to automate your quarterly payments. You can use the Electronic Federal Tax Payment System (EFTPS) or IRS Direct Pay to set up automatic payments. This will ensure you make quarterly payments on time, but you still risk underpaying.

Easing the Compliance Burden

Estimating quarterly taxes may sound straightforward. However, it can be challenging to remember payment deadlines, project income and eligible deductions, and make any adjustments needed due to tax law changes. That’s why partnering with a knowledgeable tax professional isn’t just helpful — it’s smart business. Contact your tax advisor to stay compliant and avoid costly missteps.

What To Know About Pet Insurance Before You Buy

No matter the species or breed, pets improve many people’s lives. Our animal friends, however, come with financial costs. Just like humans, they need annual check-ups and occasional or regular medications. Sometimes, they run into serious health issues that require surgery or other advanced treatments.

All that costs money. Indeed, according to a study by the American Pet Products Association, pet owners in the United States spent more than $35 million on veterinary care in 2023. One way to mitigate the financial impact of managing your pet’s health is through insurance. However, it’s important to fully understand the total price and precise coverage of a policy before you buy.

Plan Types

Pet insurance works much like health insurance for human beings. For the cost of a policy, which generally includes monthly premiums and a deductible, you’ll obtain coverage for various eligible medical expenses. Examples may include prescriptions, surgeries, emergency care and even routine checkups. But it all depends on the specific plan you’re buying. Pet insurance typically falls into one of three buckets:

1. Accident-only policies that cover unexpected mishaps such as injuries, poisoning or ingestion of foreign objects,

2. Accident and illness policies that cover mishaps and certain medical issues, such as infections, chronic conditions and hereditary diseases, and

3. Wellness or routine care policies that cover preventive care, such as vaccinations, flea treatments and annual checkups.

Accident and illness policies tend to be the most popular because they offer the broadest coverage.

Major Factors to Consider

Pet insurance aims to protect you, the insured, from getting hit by substantial expenses for your animal friend’s medical care. However, as you might expect, the policies come with costs and risks that you must consider carefully.

For starters, you’ll have to pay monthly premiums to maintain coverage. You’ll also have to pay a deductible every time you wish to use the policy for veterinary care — up to a certain amount. Once you reach that amount, your policy should cover qualifying expenses up to a stated limit. Some plans may offer partial coverage before then, but most do not.

As of this writing, premiums typically range from $20 to $50, depending on your pet’s species, breed, age and preexisting conditions. Some policies cost even more. To complicate matters further, some policies allow you to go to only certain veterinarians.

You’ve probably heard the expression, “Make sure you read the fine print.” It certainly holds true for pet insurance. Every policy will include exclusions and limitations regarding the conditions and treatments provided. As mentioned, many policies exclude preexisting conditions. For this reason, it’s usually best to insure young, healthy pets. Some policies place a cap (limit) on the amount of coverage provided in a year or over the lifetime of the covered animal.

Finally, bear in mind that pet insurance premiums generally aren’t tax-deductible for individuals. If you happen to own a business that uses animals for operational purposes, you may be able to deduct your premiums as a business expense. Contact your tax advisor for further details.

Personal Choice

Whether or not to buy pet insurance is a personal choice. You may be able to cope with major veterinary costs by creating a savings account expressly for that purpose. Then again, obtaining pet insurance might better suit your needs and risk tolerance. If you decide to shop for a policy, be sure to identify all the costs involved and fully understand what’s covered and what isn’t.

Seniors: Smart Ways to Avoid Scammers’ Tricks

Perhaps because they know seniors remember a time when technologies were simpler, criminals increasingly prey upon them. But with age comes wisdom, and many older people are fast to remind would-be criminals that they weren’t born yesterday. Increasingly, they know how to spot possible fraud but law enforcement warns they should pay closer attention.

Here are some tips and considerations to help protect yourself.

At the Front Door

Sometimes trouble really does come knocking at your front door, but it’s also your side door you have to watch. Talking to someone at your front door can give an accomplice valuable time to run around back and break in. So, if the front doorbell rings, first check the other doors.

Frequently, people at the front door misrepresent themselves as delivery persons, or the cable company or an electrician. Does the person have a real identification card that matches his or her driver’s license? Is there a truck to go with the uniform? If not, don’t open the door — your biggest piece of security equipment.

Carry your cell phone to the door with you, so you can speed dial 911 just in case of a problem — or use your pendant if you have central-station security. If you have a car with a remote “panic” button, you can hold that just in case. Any noise behind you, especially the other doors, and you can sound the alarm. A honking car alarm is annoying but may cause neighbors to check on you. Even if they don’t respond, thieves depend on not attracting attention, so the noise alone may be enough to scare them off or at least buy you some time to alert the authorities.

On the Telephone

The telephone lets people enter your home without a door. But, are callers who they say they are? If someone sounds suspicious, hang up. Charities need our help, but you never know who’s calling. Don’t give out personal information or do business with a stranger without first checking them out.

One common scam says the caller is from “The Help Desk” or “IT Department.” He has detected a problem with your computer and tries to sell you software to fix a problem that doesn’t really exist. Someone may call claiming to be from the IRS or the police department or your bank. Then, the caller asks you for your account information. The federal government will only notify you of a problem by mail, and other organizations will give you a real phone number where you can check them out. If you get these kinds of calls, they are probably scams.

Even caller ID is not always a safe bet. Scam artists make “spoof calls,” where they are able to put anything on your caller ID in the hope you will trust them as they steal your identity.

If a call seems to be from the police, call information and ask for the business number of your local police department (don’t tie up 911 with business calls), and then call them and ask them to check out if the caller was real. They never ask for account information.

If a caller says he or she is from your bank, the individual should already know your account number. You can phone the bank’s main number to check on the validity of the call. Or ask at your local branch where you know the bank employees and they know you.

Tax Scams

The IRS warns that scammers attempt to mislead taxpayers about tax refunds, credits and payments. They may pressure you for personal, financial or employment information. In some cases, they threaten victims with arrest or deportation if they don’t make a payment for a fake tax bill. Click here for more about the types of tax scams the IRS has identified.

Vendor Calls (live and phone)

When having work done on your home, get at least three solid bids. Seek bids from known vendors who have done good work for an acquaintance of yours. If someone comes to you unsolicited, be suspicious. Check the person out with the local town hall. See if he or she is licensed for the type of work you want done, and check with the local Better Business Bureau. Has anyone complained about the person online? Use a search engine to check it out.

Never give a partial payment to anyone before checking references. Speak to previous customers in your neighborhood. If the vendor has no references you can check, say no. Too many people have given someone a $5,000 deposit for a $100,000 contract — and never heard from these so-called vendors again. You may wonder why anyone would enter such a deal in the first place. Generally, the vendor presents a price that is too good to pass up. For example, he may look for a house with a roof that is badly in need of repair. He knocks on your door, tells you he’s replacing a roof on the next block and happened to pass by your house on his way home. He just happens to have materials left over and will do your roof for a fraction of the price if you can give him a deposit. Say no. Even if he is legitimate, he shouldn’t be asking for money up front.

Email and “Phishing”

Never respond to an email with money. If your credit card or bank tells you there’s a problem, don’t click on the email. Call the bank directly. Their number is on your last statement. There are just too many scammers asking you to do something right from the email. In fact, don’t even open an email until you know who sent it, because it could contain dangerous software or “malware.”

Another email scam is a new spin on the “confidence game,” where a con artist sends you a check, and in response you wire him much less cash. Often, it’s someone from Nigeria looking for the heirs of a wealthy industrialist who just died. The check always turns out to bounce after a recipient sends in a few thousand dollars of his or her money. If it sounds too good to be true, it probably is.

One heinous fraud comes when an emailer first hacks personal information about a relative. Then, the criminal positions the email as if he or she is the relative, stranded in an airport, unable to get home safely, without access to a phone, and must get $1,000 wired to a certain address immediately.

Under the pressure of a simulated threat to a relative, many will panic and send money. In reality, the relative has no knowledge this is even going on, and a simple phone call might prove that. Sometimes it comes as a phone call but be suspicious of any such situation.

Keep Your Guard Up

The scams described above are only some of the ways that thieves steal from honest people. New scams are being introduced all the time. We’re blessed to live in a golden era of technology. But where there’s gold, there will likely be criminals looking for people who will let down their guard. This is where wisdom and experience become invaluable.