Tax deductions guide: 2021 tax year

Getting a tax deduction or credit helps you keep more money in your pocket come tax time. But they both work in completely different ways. Here’s a cheat sheet on how they apply and an overview of 36 tax deductions and credits you could use to lower your tax bill this year.

What is a tax deduction?

The US uses a tiered tax bracket system, so the more you earn, the more you pay. Tax deductions are expenses that you subtract from your total taxable income.

They usually reduce your tax bill by a percentage. For example, if you’re in the 22% income bracket and you’ve got a tax deduction of $1,000, you’d save $220.

Standard deductions vs. itemized deductions

Standard and itemized are two major categories of deductions available to US citizens. Here’s what you need to know about each:

Standard deductions for 2021 include:

Should I itemize or take the standard deduction?

Choose whichever method saves you the most money. To figure this out, add up all your itemized deductions, including mortgage interest, property taxes, state income or sales tax, charitable contributions, medical expenses and more.

If the total of your itemized deductions exceeds your standard deduction limit, you’re better off itemizing. But if your itemized total is below this limit, you’ll save more money if you stick with the standard deduction.

What is a tax credit?

Tax credits are rare gems of the tax world because they reduce your tax bill dollar-for-dollar. If you get a tax credit worth $500, then your tax bill would be reduced by exactly $500.

There are two major types of tax credits: refundable and non-refundable. If a credit is refundable, you receive a refund if the credit reduces your tax bill to $0 and there’s still some leftover. Non-refundable tax credits only reduce your tax bill by the amount owed.

If you owe $500 but your tax credit is worth $1,000, you don’t receive a refund for the extra amount.

21 tax deductions and credits for individuals

There are tons of deductions and credits you may qualify for as an individual. Here’s a look at 21 popular tax breaks:

Credits

• Earned income tax credit. If your adjusted gross income is less than $57,414, you could get a credit worth $1,502 to $6,728 depending on your filing status and number of dependents.
• Child and dependent care credit. If you pay for dependent care for a child under 13 or an incapacitated spouse or parent, you could be entitled to a credit up to 50% of your care expenses.
• Child tax credit. The child tax credit pays $3,600 for each qualifying dependent under age 5, $3,000 for children between ages 6 and 17 and $500 for each qualifying child age 17 to 24.
• Adoption credit. For 2021, you could get a refund for up to $14,440 in adoption costs per child depending on your adjusted gross income.
• Saver’s credit. You could get a credit worth up to $1,000 if you contributed to an IRA or ABLE account this year.
• Electric vehicle tax credit. If you bought a new electric or plug-in vehicle, you could get a credit worth up to $7,500 depending on the size of your car’s battery.
• Residential energy credit. Taxpayers who make qualified energy efficiency improvements could get a credit of up to $500.
• American opportunity tax credit. Undergraduate students and their parents can claim 100% of the first $2,000 they spent on tuition, books and fees and 25% of the next $2,000 they spent, making this credit worth $2,500 in total.
• Lifetime learning credit. Undergraduate, graduate and vocational students can get a refund for 20% of the first $10,000 they spend on tuition, fees, books and supplies. But you can’t claim both the American Opportunity tax credit and the Lifetime Learning credit in the same year.

Deductions

• SALT deductions (state and local taxes). For 2021, you can write off up to $10,000 in state and local income tax or state and local sales tax. If you’re married and filing separately, you can deduct up to $5,000.
• Personal property tax. Those who itemize their taxes can deduct up to $10,000 worth of state and local property taxes they paid for real estate, cars, boats, planes, land and more. Taxpayers who are married and filing separately can deduct up to $5,000.
• Charitable contributions. Generally, you can deduct all of your qualified charitable contributions as long as they don’t exceed 100% of your adjusted gross income. Although there may be some exceptions.
• Gambling loss deduction. Deduct gambling losses up to the amount equal to your gambling winnings. So, if you bought $500 worth of lottery tickets, you can deduct those expenses if you have at least $500 in winnings.
• Mortgage interest deduction. Homeowners who itemize their taxes can write off mortgage interest on the first $750,000 to $1 million of their secured loan depending on when they bought the home.
• Moving expenses. Due to the Tax Cuts and Jobs Act of 2017, only members of the military can now deduct moving expenses.
• Student loan interest. Deduct what you paid during the year up to $2,500 with this deduction.
• Teacher educational expenses. Teachers can deduct up to $250 worth of classroom expenses each year. And under the COVID-related Tax Relief Act of 2020, teachers can now deduct out-of-pocket expenses for items like hand sanitizer, soap, face masks, air purifiers and more if classroom purchases were made after March 12, 2020.
• Medical and dental expenses. If your medical expenses exceeded 7.5% of your adjusted gross income for the year, you may be able to claim these expenses using the medical expense deduction.
• Health savings account (HSA) deduction. You may be able to deduct 100% of your health savings contributions, which are capped at $3,600 for individual plans and $7,200 for family plans in 2021.
• IRA contribution deduction. If you contributed to an IRA this year, you may qualify for a full or partial deduction depending on your income and whether you or your spouse had access to an employer-sponsored retirement plan.
• Capital losses. If your capital losses were more than your capital gains, you could write off up to $3,000 in 2021. If you’re married filing separately, you can write off up to $1,500. If your losses are over these limits, you may be able to carry them over into future tax years.

17 tax deductions and credits for businesses

As a business owner, there are several deductions and credits you can take advantage of to reduce your tax bill.

Credits

• Paid sick leave credit. If you have an employee who is unable to work due to COVID-19 symptoms or self-quarantine, you may be eligible to receive a refundable credit for the employee’s regular rate of pay, up to $511 a day for a total of 10 days. To qualify, you must have an American business with fewer than 500 employees.
• Child care leave credit. If an employee is unable to work because their child’s school was closed due to the coronavirus outbreak, you may receive a refundable credit equal to two-thirds of the employee’s regular pay for up to 10 weeks of qualifying leave. The credit is capped at $200 a day or $10,000 total for each employee. You must have an American business with fewer than 500 employees to qualify.
• Manufacturers’ energy-efficient appliance credit. You could receive a credit for select dishwashers, clothes washers and refrigerators manufactured in 2011 or later.
• Plug-in electric drive vehicle credit. You could get a credit worth up to $7,500 if you bought an electric or plug-in vehicle in 2010 or later and used it for your business.
• Research credit. Businesses can use the research credit to deduct the cost of qualified research and offset the FICA portion of payroll taxes.

Deductions

• Home office deduction. Small business owners, freelancers and self-employed workers can deduct mortgage interest, rent, utility bills, insurance and more under the home office deduction.
• Self-employed health insurance deduction. Self-employed workers who aren’t eligible for health insurance through their employer or their spouse’s employer can deduct 100% of health care premiums for themselves, their spouses and their dependents.
• Start-up costs. New business owners can deduct up to $5,000 in start-up and organizational costs.
• Employee business expenses. If you have any full-time or part-time employees, you can deduct their wages from your taxes.
• Retirement plans. If you set aside money for you or your employees’ retirement accounts, you may be able to deduct these expenses.
• Interest. Any interest you paid on borrowed money needed to run your business is tax deductible.
• Taxes. If you paid any federal, state, local or foreign taxes on behalf of your business, you can deduct these as a business expense.
• Insurance. If you bought any insurance for your trade, business or profession, you can deduct these from your taxes.
• Vehicle expenses. If you use your vehicle for business purposes, you can deduct the price of gas, maintenance, parking, tolls and more.
• Business meals and entertainment deduction. If you’ve spent any time wining and dining your clients this year, you can generally deduct 50% to 100% of those expenses.
• Office supplies and expenses. Routine office expenses such as computer software, phone lines, website services, merchant account fees and more are tax deductible. Office supplies, such as pens, paper and cleaning supplies are also deductible as long as you use them during the year they’re purchased.
• Unreimbursed employee expenses. In the past, employees could write off cash they spent buying a uniform for the workplace. But the Tax Cuts and Jobs Act of 2018 eliminated this deduction.

Qualified business income

Business owners can deduct up to 20% of their QBI, or qualified business income, as a pass-through deduction. That means you can write off 20% of income earned as a result of a business, though you must be an owner through either a sole proprietorship, partnership, S corporation, trust or estate.

More guides on tax deductions

Standard deduction

Mortgage interest deduction

IRA deduction

Sales tax deduction

Is your insurance tax deductible?

State and local tax deductions

What’s not claimable as a tax deduction?

Eligible tax deductions get updated by the US government from time to time, and the 2018 Tax Cuts and Jobs Act rendered the following deductions obsolete:

• Tuition and fees deduction
• Casualty and theft losses deduction (unless losses were caused by a disaster officially declared by the federal government)
• Unreimbursed employee expenses
• Tax preparation costs
• Hobby expenses
• Employer-subsidized parking and transportation reimbursement
• Above-the-line deduction for moving expenses related to a job
• Above-the-line deduction for alimony payments related to divorces that happened after December 31, 2018

Finally, all deductions that had previously been listed under the IRS’s “miscellaneous deductions” category no longer exist.

How do income tax deductions work in the US?

Your taxable income is the total amount of money that you’re required to pay tax on. By claiming an expense as a tax deduction, you are reducing your taxable income and therefore reducing the amount of tax you’re legally required to pay.

The US uses a tiered tax bracket, so the more money you make the more taxes you’re required to pay.

Taxable income table for 2021

Here’s what the tax rates look like for single or married individuals filing separately.

What are above-the-line deductions?

Above-the-line deductions are essentially adjustments to your income — expenses you subtract before calculating the adjusted gross income (AGI). Some common examples include educator expenses, student loan interest, the health savings account deduction and the IRA deduction. Below the AGI line are the standard deduction and itemized deductions.

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Bottom line

Income tax deductions are meant to alleviate the burden of what you owe the government. It’s worth exploring all avenues where you might save. For more help, check with an accountant or compare tax software that can guide you through filing your income tax return.

Frequently asked questions

• How has the coronavirus outbreak changed how much I can contribute to my HSA?

Even though high-deductible health plans now cover any COVID-19-related expenses, this doesn’t change your HSA eligibility. You can still keep contributing to your HSA, up to $3,600 for individual plans and $7,200 for family plans in 2021.

• When can I claim self-education expenses?

According to the IRS, if your self-education is work-related, then you might be able to deduct it as a business expense if it meets one of the following criteria:

• The education is required by your employer or the law to keep your present salary, status or job.
• The required education must serve a bona fide business purpose of your employer.
• The education maintains or improves skills needed in your present work.*

However, if the answer to one of the following caveats is “yes,” that disqualifies the self-education expense from being deductible:

• Is needed to meet the minimum educational requirements of your present trade or business or
• Is part of a program of study that will qualify you for a new trade or business.*

If you’re not sure, best practice is to get in touch with a tax professional.

*Quotes sourced from the IRS website, June 2019

• When is my accountant’s services tax-deductible?

Under the 2018 Tax Cuts and Jobs act, you can no longer deduct tax preparation services, which includes accountants.

• When are life insurance premiums tax-deductible?

Life insurance premiums aren’t typically tax deductible – but special exclusions may apply for business owners.

• When are personal loans tax-deductible?

Personal loans aren’t typically tax-deductible. But if your loan has been forgiven, learn more about personal loan exclusions for tax deductions.

Is my car tax-deductible?
Cars used for business purposes might be eligible for tax deductions such as mileage deductions, but payments made towards typical personal vehicles are not.

• How can I tell if something is tax-deductible?

The US tax system is very complicated with lots of fine print, so the best way to know whether or not you can claim something as a deduction is to work with an accountant.

If you’re set on flying solo, visit the IRS’ Credits and Deductions for Individuals page for a list of the types of deductions you might be eligible for.