Taxpayers have seen their tax deduction options curtailed in recent years, as the vast majority of taxpayers opt for the standard deduction – which doubled in 2018 – rather than itemized deductions. Yet deductions are a powerful way to lower your tax bill.
Here is your guide to 2021 tax deductions.
What is a tax deduction?
Unlike a tax credit, which reduces the amount of tax owed, a tax deduction reduces the amount of income subject to tax before calculating taxes owed.
Tax deductions generally fall into three main categories:
- The standard deduction.
- Itemized deductions.
- Schedule 1 deductions (also known as above-line deductions).
Filers must choose between the standard deduction and itemized deductions, usually opting for the higher of the two, but may use other deductions from Schedule 1, whether itemized or not.
The standard deduction
The standard deduction is by far the most common route for taxpayers. This deduction is a fixed amount, which is adjusted each year and determined based on factors such as a taxpayer’s reporting status.
“Each year we compare the standard deduction to the itemized deduction and we will always take what is more important,” says Helena Swyter, founder of SweeterCPA. “You don’t have to lock yourself in either. Every year can be different.
Here are the amounts of the standard deductions for 2021 (taxes filed in 2022):
Taxpayers over 65 or blind receive an additional deduction of $ 1,350 and an additional $ 1,700 for people who are also single and not a surviving spouse.
Itemized deductions are eligible expenses subtracted from a taxpayer’s adjusted gross income. Eric Bronnenkant, chartered accountant and tax manager at Betterment, says the people who detail are often homeowners and high-income people.
“The most common reason a person details is that they own a house and have a mortgage. If you don’t own a home, it would be very difficult to itemize unless you have substantial charitable contributions, ”says Bronnenkant. “And the thing you have the most control over besides the mortgage and the mortgage rate is how much you give to charity.”
Charitable contribution deduction: Filers interested in donating to charity can use these contributions to increase the amount of their deduction. To be eligible, contributions must be made in cash to an eligible organization in the 2021 calendar year.
Mortgage interest tax deduction: For debt accrued after December 15, 2017, taxpayers can separately deduct mortgage interest on their first $ 750,000 or $ 375,000 of mortgage debt for marriages. For home loans taken out before December 15, 2017, the previous maximum of $ 1 million or $ 500,000 if the deposit is separate still applies.
Tax deduction for medical expenses: Qualifying health care expenses can be subtracted from a taxpayer’s adjusted gross income as itemized deductions. These can include the costs of diagnosing, treating, or preventing a disease, but do not include unnecessary procedures like cosmetic surgery.
National and local tax deduction: Filers can deduct taxes paid in 2021 up to $ 10,000 or $ 5,000 if married and file state and local taxes separately.
Property tax deduction: A popular state and local tax deduction is that of a filer’s property tax. This deduction applies to taxes on real property, such as a house, and personal property, such as a car or boat.
Other tax deductions
Even if a taxpayer does not itemize the deductions, he can use other deductions. Previously known as “above the line” tax deductions, taxpayers can claim certain deductions on Form 1040 in Schedule 1.
The current Schedule 1 deductions for 2021 are:
- Educator’s expenses.
- Contributions to the health savings account.
- IRA contributions.
- Deductions for self-employment.
- Student loan interest.
- Tuition and higher education fees.
- Charitable donations.
Pension: Taxpayers can deduct alimony payments for divorce agreements dated before December 31, 2018.
Educator’s expenses: Taxpayers who work as educators in schools can deduct up to $ 250 in unreimbursed expenses.
Health savings account contributions: A health savings account, or HSA, is a dedicated health savings account for people enrolled in a qualified, high-deductible health insurance plan. This account benefits from special tax treatments, including the possibility of deducting contributions, which are limited to $ 3,600 for single tax filers and $ 7,200 for families in 2021.
Consider taking advantage of this deduction if you have contributed directly to your HSA. If you fund an HSA through your employer, your contributions can be deducted directly from your paychecks.
IRA contributions: People who make traditional IRA contributions, which are subject to income and participation requirements, can deduct all or part of their contribution limit amount. Roth IRA contributions, however, are not deductible.
Deductions for self-employment: Taxpayers who are self-employed can take advantage of a number of deductions, such as a deduction for health insurance premiums and the deductible portion of self-employment taxes. Those who opt for itemized deductions or additional deductions should prepare for an audit. “When I work with a self-employed person, I make sure their books are in order,” Swyter says, “make sure they understand what can be written off, what a deduction is, if they have a home office, how it works and that we have all the records if needed.
Student loan interest: Borrowers who paid interest on a qualifying student loan in 2021 can deduct the lesser of $ 2,500 or the amount of interest actually paid during the year. However, this deduction is gradually reduced and eventually eliminated as a taxpayer’s modified adjusted gross income reaches the annual limit.
Charitable donations: Taxpayers can deduct charitable contributions to qualifying organizations up to $ 300 for single tax filers and $ 600 for married tax filers.
New tax deductions for 2021
New in 2021: Married taxpayers can claim a larger deduction for charitable donations, even if they opt for the standard deduction. The deduction for charitable donations remains the same for single taxpayers.
“Let’s say you’re married and you’re nowhere near that $ 25,000 in itemized deductions,” Bronnenkant says. “There is a special provision for charitable contributions that allows you to get a deduction even if you take the standard deduction. Last year it was $ 300 whether you’re single or married, and this year they allowed that at $ 600 if you’re married.