With the turn of the calendar year, tax season is right around the corner. Whether or not your tax situation has changed, each year we are reminded of how deductions can help lower our taxable income.
Just like with anything that you do on an annual basis, it’s easy to forget which forms to fill out in order to take a deduction or credit – not to mention the fact that the tax code is ever changing. This makes it difficult to figure out how to minimize your tax liability and if you’re expecting a refund, how to make sure you are getting the maximum refund you deserve.
Tax deductions are allowable deductions and expenses you can claim on your tax return that will lower your taxable income and as a result, your tax liability will also be reduced. You can elect to either take the standard deduction on your tax return or itemize your deductions. When you opt to take the standard deduction, you’re taking the allowable flat rate deduction from your adjusted gross income. The standard deduction amount will be based on your filing status. On the contrary, if you elect to itemize your deductions, you can select from many applicable deductions available to you, and the more that you deduct, the less taxes you will have to pay. Recently the standard deduction has gone up, so that may be the best option for many – but for higher income earners with a mortgage, high out of pocket medical expenses, state and property taxes…etc, it may not.
To help you decide which way may be best for you this tax season, we’ve pulled together a list of some of the most common tax deductions that you can use to file your 2021 taxes. As this is not an all-encompassing list of deductions, keep in mind that there may be several other deductions that may apply to you and your situation.
IRA contributions deduction
Many employees have IRA accounts, so if this is you, you can qualify for an IRA deduction. To qualify, you’ll need to have contributed to a traditional IRA with money that you have already paid income tax on.
Health savings account (HSA) contributions
Whenever you contribute to an HSA, that contribution is tax-deductible if the contributions are made from the money you have already paid income tax on. Any withdrawals for qualified medical expenses are also tax-free, so you won’t need to worry about paying taxes on those.
Charitable donations deduction
Any philanthropic contributions you make throughout the year can be itemized so that you can subtract the total value of your contributions from your taxable income. If you opt for the standard deduction of $300 for a single filer, or $600 for a joint filer, you won’t need to itemize these contributions though.
Student loan interest deduction
If you’re a taxpayer with student loans, you can deduct up to $2,500 of the interest that has been incurred. You’ll qualify for this deduction if you have made payments on these loans and if the loans are either for yourself, a spouse, or a dependent.
Tuition and fees deduction
If your gross income is $80,000 or less as a single filer or $160,000 or less as a joint filer, you can deduct up to $4,000 for any expenses related to tuition for yourself, your spouse, or your dependent.
American opportunity tax credit (AOTC)
AOTC allows you to claim up to $2,500 of the expenses you have endured for tuition, books, equipment, classroom supplies, and school fees. What is not included are any living or transportation expenses, but what is unique about this deduction is that you can claim AOTC on expenses that were not directly paid to the school.
As a K-12 school teacher or eligible educator, you can deduct up to $250 for educator-related expenses. Approved expenses include classroom supplies or a professional development course related to your curriculum. This year, educators can also deduct any unreimbursed expenses that they incurred for protective items used to combat the spread of COVID-19.
Home office deduction
With remote work on the rise, more Americans will be taking the home office deduction. This deduction is for those who have used a part of their home consistently for business-related activity. Approved expenses for this include repairs, rent, utilities, a new security system, maintenance, or even renter’s insurance. While utilities are included in this, you are unable to deduct your full utility bills. Instead, you must determine what portion of that bill applies to your home office space.
Credit for sick leave for self-employed individuals
As a self-employed worker, every day you are out of work can affect your income. With this deduction, you can submit for a refundable tax credit of up to $200 for each day you were unable to work if you had COVID-19 (between 04/01/21 and 09/31/2021).
Child and dependent care tax credit
For working parents, childcare is often a common expense. If you spend money on childcare so that you could work in 2021, you can deduct up to 50% of your expenses – although the maximum credit is $8,000 if you have one dependent under 13, and $16,000 if you have two or more dependents under 13. Childcare goes beyond daycare with this deduction and can also include the cost of a housekeeper, babysitter, or even a cook.
Child tax credit (CTC)
If you have a child under the age of 17 whose care you pay for, you can qualify for the CTC. For 2021, this credit is worth up to $3,600 per child ages 5 or younger, and $3,000 per child ages 6 to 17. You may have already received half of your 2021 CTC through advance monthly payments, so if you have, you will only receive the second half of this credit with your tax return.
Credit for family leave for self-employed individuals
With COVID-19, if you had to care for a family member who caught the virus and were unable to work as a self-employed individual, you can claim this deduction.
Tax season is right around the corner. Choosing which deductions are best for your tax situation is where ATC Income Tax can help. We’ll look at both your standard deduction and your itemized deduction to guarantee you are getting your highest return.
To schedule your free tax review with one of our ATC Tax Professional, Book-an-Appointment today to make sure you get the most out of your taxes this year.