Leonard J. Andorfer & Co., LLP - Certified Public Accountants

The Internal Revenue Service recently announced updates to several amounts that are updated annually for inflation. The tax year 2025 adjustments described below generally apply to income tax returns to be filed starting tax season 2026.

The tax items for tax year 2025 of greatest interest to many, include the following dollar amounts:

• Standard deductions. For single taxpayers and married individuals filing separately for tax year 2025, the standard deduction rises to $15,000 for 2025, an increase of $400 from 2024. For married couples filing jointly, the standard deduction rises to $30,000, an increase of $800 from tax year 2024. For heads of households, the standard deduction will be $22,500 for tax year 2025, an increase of $600 from the amount for tax year 2024.

• Marginal rates. For tax year 2025, the top tax rate remains 37% for individual single taxpayers with incomes greater than $626,350 ($751,600 for married couples filing jointly). The other rates are:

  • 35% for incomes over $250,525 ($501,050 for married couples filing jointly).
  • 32% for incomes over $197,300 ($394,600 for married couples filing jointly).
  • 24% for incomes over $103,350 ($206,700 for married couples filing jointly).
  • 22% for incomes over $48,475 ($96,950 for married couples filing jointly).
  • 12% for incomes over $11,925 ($23,850 for married couples filing jointly).
  • 10% for incomes $11,925 or less ($23,850 or less for married couples filing jointly).

• Alternative minimum tax exemption amounts. For tax year 2025, the exemption amount for unmarried individuals increases to $88,100 ($68,650 for married individuals filing separately) and begins to phase out at $626,350. For married couples filing jointly, the exemption amount increases to $137,000 and begins to phase out at $1,252,700.

• Earned income tax credits. For qualifying taxpayers who have three or more qualifying children, the tax year 2025 maximum Earned Income Tax Credit amount is $8,046, an increase from $7,830 for tax year 2024. The revenue procedure contains a table providing maximum EITC amount for other categories, income thresholds and phase-outs.

• Qualified transportation fringe benefit. For tax year 2025, the monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking rises to $325, increasing from $315 in tax year 2024.

• Health flexible spending cafeteria plans. For the taxable years beginning in 2025, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements rises to $3,300, increasing from $3,200 in tax year 2024. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount rises to $660, increasing from $640 in tax year 2024.

• Medical savings accounts. For tax year 2025, participants who have self-only coverage the plan must have an annual deductible that is not less than $2,850 (a $50 increase from the previous tax year), but not more than $4,300 (an increase of $150 from the previous tax year).

  The maximum out-of-pocket expense amount rises to $5,700, increasing from $5,550 in tax year 2024.

  For family coverage in tax year 2025, the annual deductible is not less than $5,700, increasing from $5,550 in tax year 2024; however, the deductible cannot be more than $8,550, an increase of $200 versus the limit for tax year 2024. For family coverage, the out-of-pocket expense limit is $10,500 for tax year 2025, rising from $10,200 in tax year 2024.

• Foreign earned income exclusion. For tax year 2025, the foreign earned income exclusion increases to $130,000, from $126,500 in tax year 2024.

• Estate tax credits. Estates of decedents who die during 2025 have a basic exclusion amount of $13,990,000, increased from $13,610,000 for estates of decedents who died in 2024.

• Annual exclusion for gifts increases to $19,000 for calendar year 2025, rising from $18,000 for calendar year 2024.

• Adoption credits. For tax year 2025, the maximum credit allowed for an adoption of a child with special needs is the amount of qualified adoption expenses up to $17,280, increased from $16,810 for tax year 2024.

Unchanged for tax year 2025

By statute, certain items that were indexed for inflation in the past are currently not adjusted:

• Personal exemptions for tax year 2025 remain at 0, as in tax year 2024. The elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act of 2017.

• Itemized deductions. There is no limitation on itemized deductions for tax year 2025, as in tax year 2024 and preceding, to tax year 2018. The limitation on itemized deductions was eliminated by the Tax Cuts and Jobs Act of 2017.

• Lifetime learning credits. The modified adjusted gross income amount used by taxpayers to determine the reduction in the Lifetime Learning Credit provided in Sec. 25A(d)(1) of the Internal Revenue Code is not adjusted for inflation for taxable years beginning after Dec. 31, 2020. The Lifetime Learning Credit is phased out for taxpayers with modified adjusted gross income in excess of $80,000 ($160,000 for joint returns).

The Internal Revenue Service recently announced that the annual contribution limit for employees who participate in 401(k), 403(b), governmental 457 plans, and the federal government’s Thrift Savings Plan is increased to $23,500 in 2025, up from $23,000 in 2024.

The limit on annual contributions to an IRA remains $7,000. The IRA catch‑up contribution limit for people aged 50 and over was amended under the SECURE 2.0 Act of 2022 (SECURE 2.0) to include an annual cost‑of‑living adjustment but remains $1,000 for 2025.

The catch-up contribution limit that generally applies for employees aged 50 and over who participate in most 401(k), 403(b), governmental 457 plans, and the federal government’s Thrift Savings Plan remains $7,500 for 2025. Therefore, participants in most 401(k), 403(b), governmental 457 plans and the federal government’s Thrift Savings Plan who are 50 and older generally can contribute up to $31,000 each year, starting in 2025. Under a change made in SECURE 2.0, a higher catch-up contribution limit applies for employees aged 60, 61, 62 and 63 who participate in these plans. For 2025, this higher catch-up contribution limit is $11,250 instead of $7,500.

You can deduct contributions to a traditional IRA if you meet certain conditions. If during the year either you or your spouse was covered by a retirement plan at work, your deduction may be reduced, or phased out, until it is eliminated, depending on your filing status and income. (If neither you nor your spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase‑out ranges for 2025:

• For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to between $79,000 and $89,000, up from between $77,000 and $87,000.
• For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to between $126,000 and $146,000, up from between $123,000 and $143,000.
• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range is increased to between $236,000 and $246,000, up from between $230,000 and $240,000.
• For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
• The income phase-out range for taxpayers making contributions to a Roth IRA is increased to between $150,000 and $165,000 for singles and heads of household, up from between $146,000 and $161,000. For married couples filing jointly, the income phase-out range is increased to between $236,000 and $246,000, up from between $230,000 and $240,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
• The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $79,000 for married couples filing jointly, up from $76,500; $59,250 for heads of household, up from $57,375; and $39,500 for singles and married individuals filing separately, up from $38,250.
• The amount individuals can generally contribute to their SIMPLE retirement accounts is increased to $16,500, up from $16,000. Pursuant to a change made in SECURE 2.0, individuals can contribute a higher amount to certain applicable SIMPLE retirement accounts. For 2025, this higher amount remains $17,600.
• The catch-up contribution limit that generally applies for employees aged 50 and over who participate in most SIMPLE plans remains $3,500 for 2025. Under a change made in SECURE 2.0, a different catch-up limit applies for employees aged 50 and over who participate in certain applicable SIMPLE plans. For 2025, this limit remains $3,850. Under a change made in SECURE 2.0, a higher catch-up contribution limit applies for employees aged 60, 61, 62 and 63 who participate in SIMPLE plans. For 2025, this higher catch-up contribution limit is $5,250.

If you would like help determining your eligibility for any of these programs, please contact our office. We would be happy to help.

The IRS has opened a second round of the Employee Retention Credit Voluntary Disclosure Program (or “ERC VDP”) for businesses who may have improperly claimed the ERC in the past. The ERC VDP is open now and runs through Nov. 22, 2024. This ERC VDP helps businesses repay credits they received after filing ERC claims in error.

The program allows businesses to correct improper payments at a 15% discount and avoid potential compliance action in the future such as audits, full repayment, penalties and interest. This second round of the program is open for tax periods in 2021. Employers can’t use the second ERC VDP to disclose and repay ERC money from tax periods in 2020.

If your business claimed the ERC, and you fear that the claim may have been in error, please contact our office. We can review your claim and help you determine if the ERC VDP is a good option.

Crowdfunding is a method of raising money through websites by soliciting contributions from a large number of people. The contributions may be solicited to fund businesses, for charitable donations, or for gifts. Sometimes, the money raised through crowdfunding is solicited by crowdfunding organizers on behalf of other people or businesses. In other cases, people establish crowdfunding campaigns to raise money for themselves or their businesses.

Form 1099-K and crowdfunding

If the amount raised through crowdfunding meets certain limits, the crowdfunding website or its payment processor may be required to report distributions of money raised by filing Form 1099-K, Payment Card and Third Party Network Transactions, with the IRS.

If required to file a Form 1099-K with the IRS, the crowdfunding website or its payment processor must also furnish a copy of that form to the person to whom the distributions are made. The American Rescue Plan Act (ARPA) clarifies that the crowdfunding website or its payment processor is not required to file Form 1099-K with the IRS or furnish it to the person to whom the distributions are made if the payments are not made in exchange for goods or services.

The reporting thresholds for a crowdfunding website or payment processor to file and furnish Form 1099-K are:

• Calendar years 2023 and prior – Form 1099-K is required if the total of all payments distributed to a person exceeded $20,000 and resulted from more than 200 transactions.
• Calendar year 2024 – The IRS announced a plan for the threshold to be reduced to $5,000 as a phase-in for the lower threshold provided under the ARPA.

Note: The ARPA lowered the reporting threshold for third party settlement organizations (TPSOs) so that TPSOs are only required to report on Forms 1099-K if the total of all payments distributed to a payee in a calendar year exceeds $600, regardless of the number of transactions. However, implementation of this lower threshold has been delayed.

Crowdfunding distributions may be made to the crowdfunding organizer, or directly to individuals or businesses for whom the organizer solicited funds. A Form 1099-K must be filed with the IRS and furnished to the person or entity that received the payments if the reporting threshold is met for the year in which the distributions were made.

The person receiving a Form 1099-K for distributions of money raised through crowdfunding may not recognize the filer’s name on the form. Sometimes the payment processor used by the crowdfunding website, rather than the crowdfunding website itself, will furnish the Form 1099-K and will be listed as the filer on the form. If you receive a Form 1099-K and don’t recognize the filer’s name or the amounts included on the Form 1099-K, you can use the filer’s telephone number listed on the form to contact a person knowledgeable about the payments reported.

Tax treatment of money raised through crowdfunding

Under federal tax law, gross income includes all income from whatever source derived unless it is specifically excluded from gross income by law. Whether crowdfunding distributions are includible in the gross income of the person receiving them depends on all the facts and circumstances of the distribution.

In most cases, property received as a gift is not includible in the gross income of the person receiving the gift.

If crowdfunding contributions are made as a result of the contributors’ generosity, and without the contributors receiving or expecting to receive anything in return, the amounts may be gifts and therefore may not be includible in the gross income of those for whom the campaign was organized. But some contributions to crowdfunding campaigns are not necessarily a result of detached and disinterested generosity, and therefore may not be gifts. Additionally, contributions to crowdfunding campaigns by an employer for the benefit of an employee are generally includible in the employee’s gross income.

If a crowdfunding organizer solicits contributions on behalf of others, distributions of the money raised to the organizer may not be includible in the organizer’s gross income if the organizer further distributes the money raised to those for whom the crowdfunding campaign was organized.

Because determining the taxable status of funds received as part of a crowdfunding campaign can be complicated, we encourage you to contact our office if you find yourself the beneficiary or organizer of such a campaign. We can look at all the facts and circumstances involved, and help you determine how to handle these funds.

If you’d like to avoid surprises next year at tax time, consider doing an end-of-summer tax update and make any tax withholding or payment updates that are necessary.

While most people get a refund after filing their taxes, many also find they unexpectedly owe taxes. This is often due to a life or job change for which they did not make the necessary tax adjustment during the year.

Those who should be especially careful are:

• Gig economy workers.
• People with a “side hustle.”
• Anyone earning income not subject to withholding.

If this sounds like you, be sure to check the amount you pay, or the amount you withheld throughout the year, and make adjustments as needed to bring the tax you pay or withhold closer to what you owe.

Here are some important things to keep in mind:

How refunds work

The federal tax system is pay-as-you-go. You should pay tax as you earn wages or receive income during the year. For many, taxes are withheld from their paycheck by their employer and then given over to the IRS on their behalf. Others, such as gig economy workers, should make quarterly estimated tax payments throughout the year to stay current. A refund normally results when too much is withheld or paid throughout the year.

Avoid an unexpected bill

On the other hand, some people end up with estimated tax penalties because they underpay throughout the year. The penalty amount varies but for some it can be several hundred dollars. Adjusting withholding on paychecks or the amount of estimated tax payments can help prevent penalties. This is especially important for self-employed people, including those in the gig economy, those with more than one job, and those with major changes in their life, like a recent marriage or a new child.

With that in mind, we encourage you to take a look at your current withholding and estimated tax payments and make adjustments as necessary to bring them into alignment with the tax you will owe. If you need help doing this, please contact our office. We would be happy to help.

With the new school year upon us, teachers should remember that they may be eligible to deduct up to $300 for classroom expenses in 2024.

This deduction allows educators to offset the cost of supplies, materials and other classroom essentials, providing some financial relief for those who spend their own money to improve their students’ learning experience.

Who qualifies for educator expense deductions?

This deduction is available for teachers, instructors, counselors, principals and aides who work at least 900 hours a school year in a school providing elementary or secondary education. Educators filing jointly can claim up to $600 if both spouses are eligible, but no more than $300 per person. Educators can claim this deduction even if they take the standard deduction, and both public and private school educators qualify.

What’s deductible?

Educators can claim deductions for out-of-pocket expenses on classroom items like books, supplies, equipment (including computers and software) and COVID-19 safety measures such as masks, disinfectants and air purifiers. They may also deduct costs for professional development courses relevant to their teaching.

Expenses for homeschooling or nonathletic supplies for health or physical education are not eligible. The IRS recommends educators maintain detailed records, such as receipts and canceled checks, to substantiate their deductions.

Many parts of the country are approaching peak air conditioning season, which often means higher utilities. If your utility bill has recently caught your attention, you may be considering home improvements to lower those bills. Luckily there are tax credits availble that are meant to encourage people to make energy efficient home improvements. With the help of these tax credits, your home improvements can save on your utility bills and even put some money in your pocket.

Eligibility

If you make improvements to your principal or, in some cases, secondary residence, you may be eligible for these credits. In some cases, renters may also be able to claim specific costs. Landlords can’t use these credits for improvements made to any homes they rent out.

There are two tax credits to help offset the costs of making energy efficient improvements:

Energy Efficient Home Improvement Credit

You can claim the Energy Efficient Home Improvement Credit only for improvements, additions or renovations to an existing home. It doesn’t apply to newly constructed homes. Qualifying costs may include:

• Exterior doors, windows, skylights and insulation materials.
• Central air conditioners, water heaters, furnaces, boilers and heat pumps.
• Biomass stoves and boilers.
• Home energy audits.

The amount of the credit you can take is a percentage of the total improvement expenses in the year of installation:

• 2023 through 2032: 30%, up to a maximum of $1,200 annually.
• Biomass stoves and boilers have a separate annual credit limit of $2,000 annually with no lifetime limit.

Residential Clean Energy Credit

You can also claim the Residential Clean Energy Credit for qualifying costs for either an existing home or a newly constructed home. Qualifying costs may include:

• Solar, wind and geothermal power generation equipment.
• Solar water heaters.
• Fuel cells.
• Battery storage.

The amount of the credit you can take is a percentage of the total improvement expenses in the year of installation:

• 2022 – 2032: 30%, no annual maximum or lifetime limit.
• 2033: 26%, no annual maximum or lifetime limit.
• 2034: 22%, no annual maximum or lifetime limit.

To claim these credits, you will need to file file Form 5695, Residential Energy Credits, with your tax return.

If you have questions about these credits and whether you qualify, please contact our office. We would be happy to discuss your individual case, and complete your Form 5695 as part of your next tax return.

Summer wedding season has arrived, and newlyweds can make their tax filing easier by doing a few things now. Your marital status as of December 31 determines your tax filing options for the entire year, but that’s not all newlyweds need to know.

Report a name change

If you or your spouse are changing a name, be sure report the change to the Social Security Administration. The name on your tax return must match what’s on file at the SSA. If it doesn’t, it could delay any tax refund. To update information, you should file Form SS-5, Application for a Social Security Card. It’s available on SSA.gov, by phone at 800-772-1213, or at a local SSA office.

Update address

Notify the United States Postal Service, employers and the IRS of any address change. To officially change your mailing address with the IRS, you must compete and submit Form 8822, Change of Address.

Check withholding

Newly married couples must give their employers a new Form W-4, Employee’s Withholding Certificate, within 10 days. If both you and your spouse work, you may move into a higher tax bracket or be affected by the additional Medicare tax.

Review filing status

Married people can choose to file their federal income taxes jointly or separately each year. While filing jointly is usually more beneficial, it’s best to figure the tax both ways to find out which makes the most sense. Remember that if you are married as of December 31, the law says that you are married for the whole year for tax purposes.

Beware of scams

Everyone should be aware of and avoid tax scams, but that goes double for newlyweds. The IRS will never contact a taxpayer using email, phone calls, social media or text messages. First contact generally comes in the mail. To find out if you owe money to the IRS, taxpayers can view their tax account. If you still have questions, contact our office and we would be happy to help.

It seems like “side hustles” are all the rage these days. But come tax day, the tax treatment of these endeavors can be a big question mark — especially since these often aren’t the primary source of income for those who take part in them.

Hobbies and businesses are treated differently when it comes to filing taxes. The biggest difference between the two is that businesses operate to make a profit while hobbies are for pleasure or recreation.

Whether you are having fun with a hobby or running a business, if you are paid through payment apps for goods and services during the year, you may receive an IRS Form 1099-K for those transactions. These payments are taxable income and must be reported on federal tax returns.

There are a few other things you should consider when deciding whether your project is a hobby or business. No single thing is the deciding factor. All factors need to be taken into consideration and weighed when deciding if your project is a hobby or business.

How to decide if it’s a hobby or business

These questions can help you decide whether you have a hobby or business:

• Does the time and effort you put into the activity show that you intend to make a profit?
• Does the activity make a profit in some years, and if so, how much profit does it make?
• Can you expect to make a future profit from the appreciation of the assets used in the activity?
• Do you depend on income from the activity for your livelihood?
• Are any losses due to circumstances beyond your control or are the losses normal for the startup phase of your type of business?
• Do you change your methods of operation to improve profitability?
• Do you carry out the activity in a businesslike manner and keep complete and accurate books and records?
• Do your and your advisors have the knowledge needed to carry out the activity as a successful business?

Whether you have a hobby or run a business, good recordkeeping throughout the year will help when you file taxes. If you need any help determining whether your project is a hobby or a business, please contact our office. We would be happy to help.

With summer on our doorstep, the thoughts of many people go to home improvements that should be done now that the weather is improving. If this sounds like you, you should be aware that certain energy efficient updates to your home could qualify you for home energy credits.

What you need to know

You can claim the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit for the year that qualifying expenditures are made.

Homeowners who improve their primary residence will find the most opportunities to claim a credit for qualifying expenses. Renters may also be able to claim credits, as well as owners of second homes used as residences. Landlords cannot claim this credit.

Energy Efficient Home Improvement Credit

If you make qualified energy-efficient improvements to your home after Jan. 1, 2023, you may qualify for a tax credit up to $3,200.

As part of the Inflation Reduction Act, beginning Jan. 1, 2023, the credit equals 30% of certain qualified expenses:

• Qualified energy efficiency improvements installed during the year which can include things like:
  • Exterior doors, windows and skylights.
  • Insulation and air sealing materials or systems.
• Residential energy property expenses such as:
  • Natural gas, propane or oil water heaters.
  • Natural gas, propane or oil furnaces and hot water boilers.
• Heat pumps, water heaters, biomass stoves and boilers.
• Home energy audits of a main home.

The maximum credit that can be claimed each year is:

• $1,200 for energy property costs and certain energy efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600) and home energy audits ($150).
• $2,000 per year for qualified heat pumps, biomass stoves or biomass boilers.

The credit is nonrefundable which means you cannot get back more from the credit than you owe in taxes and any excess credit cannot be carried to future tax years.

Residential Clean Energy Credit

If you invest in energy improvements for your main home, including solar, wind, geothermal, fuel cells or battery storage, you may qualify for an annual residential clean energy tax credit.

The Residential Clean Energy Credit equals 30% of the costs of new, qualified clean energy property for a home in the United States installed anytime from 2022 through 2032.

Qualified expenses include the costs of new, clean energy equipment including:

• Solar electric panels.
• Solar water heaters.
• Wind turbines.
• Geothermal heat pumps.
• Fuel cells.
• Battery storage technology (beginning in 2023).

Clean energy equipment must meet the following standards to qualify for the Residential Clean Energy Credit:

• Solar water heaters must be certified by the Solar Rating Certification Corporation or a comparable entity endorsed by the applicable state.
• Geothermal heat pumps must meet Energy Star requirements in effect at the time of purchase.
• Battery storage technology must have a capacity of at least 3 kilowatt hours.

This credit has no annual or lifetime dollar limit except for fuel cell property. You can claim this credit every year you install eligible property on or after Jan. 1, 2023, and before Jan. 1, 2033.

This is a nonrefundable credit, which means the credit amount received cannot exceed the amount you owe in tax. You can carry forward excess unused credit and apply it to any tax owed in future years.