Tax season is fast approaching. As always, it is important to get every available credit and deduction in hand to put you and your family on a higher financial footing.
There is an important distinction here: Tax credits offer a dollar-for-dollar savings on your tax account. Such a $ 1,000 credit will increase your refund – or reduce your taxes due – by $ 1,000. In the meantime, tax deductions will reduce your taxable income. A $ 1,000 deduction for someone in the 24 percent tax bracket, for example, creates a $ 240 reduction in your liability.
Fortunately, some of the more popular breaks offer a greater benefit than in the past. Here are 20 of the more common tax relief terms parents will want to look for when sitting down with their 2021 return.
1. Child tax credit
The American Rescue Plan Act has increased this income-based credit to as much as $ 3,600 for every child under the age of 6 and up to $ 3,000 for every child from the age of 6 to 17. But most parents have already received half of it in the form of monthly payments from July to December last year. “It was an advance, so you can get a smaller credit when you file your taxes and therefore a smaller refund,” says Lisa Greene-Lewis, a tax expert at TurboTax.
If the calculation of your remaining credit seems confusing, do not worry. The IRS is currently sending out Letter 6419, which lists the amount of child tax credit payments you received in 2021 and the number of children used to calculate those payments.
2. Child and dependent care credit
The child tax credit is not the only parent-focused tax cut that has become more generous in 2021. Working parents who pay for the care of children under the age of 13 – or dependents with mental or physical disabilities – can also claim Child and dependent care credit, which can add up to $ 4,000 to your tax bill. That amount goes up to $ 8,000 for two or more qualifying dependents.
However, not everyone qualifies for full credit. There is a formula that uses a percentage of the expenses you take care of your dependent’s care, and the total credit phases out at higher income levels.
3. Recycling Discount Credit
The third stimulus payment sent out last year was based on family size and income, but Greene-Lewis says the government used information from 2020 or even 2019 tax returns to determine that information. “If you had a baby in 2021, the IRS did not know it,” she says.
You may also have missed out if you had a drop in income last year and are eligible for a larger payment. Those who received less than the full amount can Recycling Discount Credit on their return in 2021 to make the difference.
4. Student loan interest deduction
In a typical year, most student loans would be the student loan interest deduction, which allows you to deduct up to $ 2,500 in financing costs from your taxable income. Given the ongoing freeze on federal student loan payments, you may have nothing to deduct for 2021. But if you still had to make student loan payments last year – you have private loans, for example – you can still claim the deduction.
5. Adoption Credit
As those who have been through the process know full well, adopting a child can be an expensive endeavor. You may be able to get help with the federal adoption credit, which is good for up to $ 14,440 per qualifying child. However, the figure is phasing out for families earning more than $ 216,660 in 2021.
6. 529 Education Savings Plans
As long as you use the money in your child’s 529 plan to pay for qualified education expenses – and that includes up to $ 10,000 a year for private K-12 tuition – your earnings are not taxed by the IRS. Contributions to those accounts are not tax-free at the federal level, but many states offer a tax deduction on their proceeds.
7. IRA, 401 (k) Contribution deduction
Did you contribute money to a qualified retirement plan in 2021? If so, make sure you get the full write-off on qualifying contributions. You can get a deduction of up to $ 19,500 for 401 (k) contributions in 2021, or up to $ 26,000 if you are 50 years or older.
By 2021, you were allowed to put up to $ 6,000 into an IRA (or $ 7,000 if you reached the age of 50). You can deduct that whole amount if you filed a joint return and made $ 105,000 or less – beyond that threshold, the deduction is phased out.
8. Health savings account deduction
High-deductible health plans are not for everyone, but they do offer lower premiums and allow you to deduct contributions to a health savings account. So when you use an HSA, you get essentially a discount every time you pay a doctor or hospital bill. For the 2021 tax year, you were allowed to put $ 3,600 into an account for self-coverage only, or up to $ 7,200 for family coverage.
9. Deduction of medical expenses
If your family was left with ridiculously high medical bills in 2021, Uncle Sam might be able to offer some relief. You can deduct medical expenses which exceeds 7.5 percent of your adjusted gross income. But you have to specify your deductions to get this break, so that means filling out a Appendix A, Specified Deductions.
10. Earnings income tax credit
The Earned income tax credit is a lifeline for low- and middle-income files, providing up to $ 5,980 in relief for families with two qualifying children. But as many as one in five eligible Americans miss out each year, says Greene-Lewis.
Even if you are not at the bottom of the income spectrum, you may qualify if you lost your job last year or saw your wages reduced temporarily, she says. And it’s easier to qualify this tax season than most: for 2021, you’re allowed to use your 2019 income to calculate the EITC if it results in a larger repayment.
11. State and Local Tax Deduction
The state and local tax (SALT) deduction allows you to deduct up to $ 10,000 per annum (or $ 5,000 for married taxpayers who file separately) plus property taxes plus or income or sales tax. But here’s the rubric: you can only claim that SALT deduction if you mention it, something only a fraction of Americans do. Yet it can be a valuable provision for much higher income earners, or those living in states with hefty tax rates.
12. Mortgage interest deduction
Another potential tax reduction if you specify: the interest you paid on a mortgage last year, home equity line of credit (HELOC) or home equity loan. From 2018, you can only deduct interest paid on the first $ 750,000 of debt. However, those with loans made before December 14, 2017, are eligible for the previous limit of $ 1 million.
13. Credits for higher education
Parents who were paid for their child’s college tuition and related materials last year will want to see if they qualify for either the U.S. Opportunity Tax Credit or the Lifelong learning credit. There are some important differences between them. For example, the AOTC can only be used for four years, while the LLC does not have such a limit. The AOTC is also partially repayable – you can get 40 percent of the funds back, even if you owe no tax in 2021.
14. Self-Employment Tax Deduction
The self-employment tax, which consists of Social Security and Medicare taxes, can be a waste of souls for people who hang up their own shingles. This is because 15.3 percent of your income goes to the IRS – both the employer and employee portion of that tax.
But there are a number of tax rules that will help set off your account at the end of the year. For example, you can subtract the employer section of your tax on your own work from your adjusted gross income. In addition, you may be able to write off 20 percent of your qualified business income, or QBI, which further lowers your tax bill.
15. Self-Employment Health Insurance Deduction
An even bigger write-off for many self-employed individuals: your healthcare costs. If you run your own business, you may be able to deduct all the premiums for yourself, your spouse and your dependents, even if you are not giving an item. However, you can not deduct it in months when either you or your spouse have been eligible for an employer-subsidized plan.
16. Home Office Deduction
If going to work means walking down the stairs with your pajamas on, you may be able to cover the cost of your home office. But that workspace must meet the “regular and exclusive use” standard – that is, it can not double as your man cave – and it must be your main place of business.
17. Charity Donations Deduction
Normally you need to specify your deductions to write off donations to charities. But Congress has expanded a CARES law provision that allows each submitter to deduct $ 300 in contributions, even if you take the standard deduction for 2021. If you are married and file a joint return, you can get a deduction of to $ 600 claim.
18. Educator Expenses Deduction
If you are a teacher and pay for things like books, supplies or computer equipment out of pocket, you may be eligible for a break on your Form 1040. Qualifying educators can claim a deduction of up to $ 250, as long as those expenses are reimbursed. Items you used to fight the coronavirus, such as personal protective equipment and disinfectants, also qualify.
19. Residential Energy Credit
Making your home greener can not only reduce your energy bills, but also result in a good discount on your federal taxes. Filers that put devices in place such as solar power systems and geothermal heat pumps in 2021 can get a credit for up to 26 percent of their value.
20. Electric Drive Motor Vehicle Credit
The federal government is trying to encourage the transition from cars that burn fossil fuels to cars that get their power from an electrical connection. Those eco-friendly variants usually do not come cheap, but the IRS at least helps with the bill. The long-established qualified plug-in electric-powered motor vehicle credit offers a tax deduction of up to $ 7,500 on new purchases.
The actual amount of credit depends on the year and model you buy – there is a formula based on how much energy it draws from the battery – but you can easily get your allowable credit on the IRS website.
We hope many of these tax credits and deductions are helpful to you and your family.
