Steven B. Zelin, CPA, Managing Member at Zelin & Associates CPA in New York City and The Singing CPAⓇ, reports that more than 45 million people itemize deductions on 1040s claiming $1.2 trillion dollars -worth of tax deductions. Taxpayers who claimed the standard deduction accounted for $747 billion. “These taxpayers may have had the opportunity of paying fewer taxes by itemizing deductions. Those who turned age 65 in 2021 or earlier have a bigger standard deduction,” says Mr. Zelin. “Use Schedule A (Form 1040) to figure your itemized deductions. In most cases, your federal income tax will be less if you take the larger of your itemized deductions or your standard deduction.”
“Most Americans received a series of stimulus payments via direct deposit. If you never received them and are eligible, they can be claimed them when you file your 2021 taxes. The stimulus payments were actually advance payments of a tax credit; if you’re still entitled to yours, you can receive them in the form of a tax credit when you file your return. As a tax credit, the payments will act as a dollar-for-dollar reduction of any tax liability you may have. If you’re due more than you owe, the rest will come in the form of a tax refund,” Mr. Zelin adds.
Here are some tax deductions you might consider for your 2021 tax return.
- Out-of-Pocket Charitable Contributions
If you make cash contributions, you might not get a receipt or remember your donation at tax time but those contributions are still tax-deductible. Some things you might consider as a charitable contribution are out-of-pocket costs you incur while doing good deeds such as ingredients for casseroles you regularly prepare for a qualified nonprofit organization’s soup kitchen, or the cost of stamps you buy for your school’s fundraiser. If you drove your car for charity in 2021, remember to deduct 14 cents per mile.
- State and Local Taxes
Taxpayers who file a Form 1040 and itemize deductions on Schedule A are allowed to deduct either their state and local income taxes or their state and local sales taxes, but not both, on their federal tax return. For most citizens of income-taxing-states, the state and local income tax deduction is usually the better deal. For those in an income-tax-free state, you can claim the sales tax deduction on your tax return. Use the IRS tables provided for your state to determine what you can deduct. Taxpayers living in states without an income tax can choose to deduct their sales taxes instead. However, depending on your state tax rates, income level and other factors, even if you’re in a state that assesses income taxes, you might be better off deducting your sales taxes instead.
- Healthcare Workers
These workers have taken a special spotlight with COVID. Their medical equipment, protective gear, shoes, sanitizing supplies, etc. — can be deducted as long as they have a receipt for items purchased.
Being licensed is a common requirement for professionals in the healthcare industry. They can also write-off the fee associated with getting and maintaining their license and a local business license if they have one.
- Child and Dependent Care Credit
The Child and Dependent Care Credit underwent some major changes for tax year 2021. What was formerly a nonrefundable credit for 20% to 35% of childcare expenses is now a fully refundable credit worth up to 50% of qualifying childcare expenses. The limit also more than doubled, from $3,000 for one child or $6,000 for two or more children to $8,000 for one child or $16,000 for two or more children. The phase-out based on income also doesn’t start until $125,000. While most parents are aware of this credit, they may not know of the elevated limits for tax year 2021.
- Support for a Parent
Families who offer financial support to aging parents may be able to claim them as dependents. They must meet certain requirements to qualify including that a parent’s gross income for the year cannot be higher than the IRS exemption amount, that you provided more than half of your parent’s support for the year and that your parent is not being claimed as a dependent on someone else’s return.
- Medical Expenses
The deduction for medical expenses doesn’t kick in unless you have some significant bills. You can take a tax deduction for substantial medical bills that exceed 7.5% of your adjusted gross income and aren’t covered or reimbursed by any other source.
- Student Loan Interest Paid by You or Someone Else
In the past, if parents or someone else paid back a student loan incurred by a student, no one received a tax break. To get a deduction, the law said that you had to be both liable for the debt and actually pay it yourself. But now there’s an exception. You should know that you might be eligible to take a deduction even if someone else pays back the loan. The IRS treats it as though they gave you the money, and you then paid the debt. A student who is not claimed as a dependent can qualify to deduct up to $2,500 of student loan interest paid by you or by someone else.
- Earned Income Tax Credit (EITC)
Millions of lower-income people take this credit every year. However, 25% of taxpayers who are eligible for the EITC fail to claim it, according to the IRS. Some people miss out on the credit because the rules can be complicated. Others simply aren’t aware that they qualify.
The EITC is a refundable tax credit—not a deduction— with maximum amounts for different filing statuses ranging from $1,502 to $6,728 for 2021. The credit is designed to supplement wages for low-to-moderate income workers but the credit doesn’t just apply to lower income people. Tens of millions of individuals and families previously classified as “middle class”—including many white-collar workers—are now considered “low income” because they lost a job, took a pay cut or worked fewer hours during the year.
The exact refund you receive depends on your income, marital status and family size. To get a refund from the EITC you must file a tax return, even if you don’t owe any taxes. Moreover, if you were eligible to claim the credit in the past but didn’t, you can file any time during the year to claim an EITC refund for up to three previous tax years.
- Housing Expenses
Mortgage interest is a well-known tax deduction, but many Americans are unaware that there are additional housing expenses that qualify for a tax write-off. If you pay points to get your mortgage interest rate lowered, for example, you can deduct that expense on your taxes. Similarly, the annual property tax you pay is also a qualifying tax deduction. Just remember that these types of deductions are itemized, meaning they’ll have to exceed the standard deduction before they’re worthwhile for you to take.
When you buy a house, you often get to deduct points paid to obtain your mortgage all at one time. When you refinance a mortgage, you have to deduct the points over the life of the loan. That means you can deduct 1/30th of the points a year if it’s a 30-year mortgage—that’s $33 a year for each $1,000 of points you paid. Also, in the year you pay off the loan—because you sell the house or refinance again—you get to deduct all the points not yet deducted, unless you refinance with the same lender.
If you get frustrated every year you have to pay registration taxes for your car, RV or boat, there’s at least some relief at tax time. You can generally deduct the personal property tax amount of your registration on these types of vehicles. Just bear in mind that you cannot usually deduct the full amount that you pay for your registration, only the personal property tax amount.
- Retirement Savings Contributions Credit
Most Americans understand that they may be entitled to a tax deduction if they make a contribution to an IRA or other retirement account. However, what many overlook is the Retirement Savings Contributions Credit, also known as the Saver’s Credit.
Depending on your adjusted gross income, you may qualify for a tax credit of up to 50% of the amount you contribute to a qualifying retirement plan. The minimum available credit is 10% of the amount of your contribution.
For tax year 2021, joint filers can qualify for the full 50% credit with an AGI of up to $39,500. The credit is 20% for an AGI of $39,501 to $43,000 and 10% for up to $66,000. The credit is based on a maximum contribution of $2,000 for singles or $4,000 for joint filers.
If you have any questions about these or other tax issues, please contact steven.zelin@zelincpa.com or 646-678-4496, x101.
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