Taxpayers have seen their options for tax deductions whittled down in recent years, as the vast majority of taxpayers opt for the standard deduction — which doubled in 2018 — rather than itemized deductions. Still, deductions are a powerful way to lower your tax bill.
Here’s 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 taxation before taxes owed are calculated.
Tax deductions typically fall into three main categories:
— The standard deduction.
— Itemized deductions.
— Schedule 1 deductions (also known as above-the-line deductions).
Filers must choose between the standard deduction and itemized deductions, typically opting for the larger of the two, but can use other Schedule 1 deductions regardless of whether they itemize.
[Read: What’s My Tax Bracket?]
The Standard Deduction
“Every year, we look at the standard deduction compared with the itemized deduction, and we’re alway going to take what’s bigger,” says Helena Swyter, founder of SweeterCPA. “You don’t have to lock in to one or the other. Every year can be different.”
Here are the standard deduction amounts for 2021 (taxes filed in 2022):
|Filing Status||Standard Deduction for 2021|
|Married Filing Jointly||$25,100|
|Head of Household||$18,800|
|Married Filing Separately||$12,550|
Taxpayers who are over 65 or blind receive an additional deduction of $1,350 and an additional $1,700 for those individuals who are also unmarried and not a surviving spouse.
Itemized deductions are qualified expenses subtracted from a taxpayer’s adjusted gross income. Eric Bronnenkant, a certified public accountant and head of tax at Betterment, says individuals who itemize are often homeowners and high-income earners.
“The most common reason someone itemizes is they own a home and have a mortgage. If you don’t own a home, it would be very difficult to itemize unless you had substantial charitable contributions,” Bronnenkant says. “And the thing you have the most control over outside of the mortgage and mortgage rate is how much money you donate to charity.”
Charitable contribution deduction: Filers interested in donating to charity can use these contributions to boost their deduction amount. To qualify, contributions must be made in cash to a qualifying organization during the 2021 calendar year.
Mortgage interest tax deduction: For debt accrued after Dec. 15, 2017, taxpayers can deduct home mortgage interest on their first $750,000 or $375,000 of mortgage debt for married filing separately. For home loans taken out before Dec. 15, 2017, the previous maximum of $1 million or $500,000 if married filing separately still applies.
Medical expenses tax deduction: Qualified health care expenses may be subtracted from a taxpayer’s adjusted gross income as itemized deductions. These might include costs for diagnosis, treatment or prevention of a disease but do not include unnecessary procedures like cosmetic surgery.
State and local tax deduction: Filers can deduct taxes paid in 2021 up to $10,000 or $5,000 if married filing separately for state and local taxes.
Property tax deduction: One popular state and local tax deduction is that for a filer’s property tax. This deduction applies to taxes on real estate property, like a home, and personal property, like a car or boat.
Other Tax Deductions
Even if a taxpayer doesn’t itemize deductions, there are some other deductions they may utilize. Previously called “above-the-line” tax deductions, taxpayers can take certain deductions on the 1040 Schedule 1 form.
Common Schedule 1 deductions for 2021 are:
— Educator expenses.
— Health savings account contributions.
— IRA contributions.
— Self-employment deductions.
— Student loan interest.
— Higher education tuition and fees.
— Charitable contributions.
Alimony: Taxpayers can deduct alimony payments for divorce agreements dated before Dec. 31, 2018.
Educator expenses: Taxpayers who work as educators in schools can deduct up to $250 of unreimbursed expenses.
Health savings account contributions: A health savings account, or HSA, is a dedicated health care savings account for individuals enrolled in a qualified high-deductible health insurance plan. This account receives special tax treatments, including the option to deduct contributions, which are limited to $3,600 for single filers and $7,200 for families in 2021.
Consider taking advantage of this deduction if you contributed to your HSA directly. If you fund an HSA through your employer, your contributions may be deducted directly from your paychecks instead.
IRA contributions: Individuals who make traditional IRA contributions, which are subject to income and participation requirements, can deduct some or all of the amount of their contribution limit. Roth IRA contributions, however, are not deductible.
Self-employment deductions: Taxpayers who are self-employed can take advantage of a number of deductions, such as a deduction for health insurance premiums and the deductible part of self-employment taxes. Those who opt for itemized deductions or additional deductions must be prepared for an audit. “When I’m working with someone who is self-employed, I work on making sure their books are in order,” Swyter says, “making sure they understand what can be written off, what’s a deduction, if they have a home office, how that works, and that we have all the records if needed.”
Student loan interest: Borrowers who paid interest on a qualified 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 contributions: Taxpayers can deduct charitable contributions to qualified organizations of up to $300 for single filers and $600 for married filers.
New Tax Deductions for 2021
New in 2021: Married taxpayers can enjoy a larger charitable contribution deduction, even if they opt for the standard deduction. The charitable contribution deduction remains the same for unmarried taxpayers.
“Let’s say you’re married and nowhere near that $25,000 in itemized deductions,” Bronnenkant says. “There’s a special provision for charitable contributions that allows you to still get a deduction even if you take the standard deduction. Last year it was $300 regardless of whether you are single or married, and this year they allowed that to go to $600 if you are married.”
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Update 12/14/21: This story was published at an earlier date and has been updated with new information.