Tax season can be very stressful. Not only do you have to meet deadlines to avoid costly penalties, but you also have to keep up with the latest changes to tax laws. Well, we’ve got good news: we’re here to make the process easier. Here is a guide to the tax deductions and credits available for taxpayers this year.
The U.S. tax code is so complex an entire industry exists to help Americans file their taxes. According to the IRS Commissioner, John Koskinen, 90% of taxpayers require assistance when filing their taxes. It is particularly confusing in years of tax reform, like 2019 and 2020, because taxpayers are required to reassess their tax strategy for tax deductions on both federal and state income taxes.
We have compiled this comprehensive list of tax deductions and tax credits to help you plan ahead. If you have questions about tax deductions and credits, check our FAQ at the end of the article. Although it is no substitute for talking to a tax professional, it is a good start. At the very least, this list of frequently asked questions will make you an informed taxpayer when you shop around for tax preparation or tax relief companies.
How do you claim tax deductions?
There are two main ways to claim tax deductions. You can either take the standard deduction or itemized deductions on your tax return. Unfortunately, you can do both. Most Americans choose to take the standard deduction because it is worth more than the tax deductions they can claim. This means that most of us don’t get to claim some of the most well-known tax deductions, such as mortgage interest, state and local taxes, and medical expenses. The good news is there are few tax deductions you claim even if you take the standard deductions. More on that late.
What is the standard tax deduction for 2020?
The standard deduction is the dollar amount that non-itemizers may subtract from their income before income tax is applied. The standard deduction for 2020 is $12,400 for single filers and married filers filing separately. For married filers filing jointly with their partners, the standard deduction is $24,800 and $18,650 for heads of household.
Example Salary: Starting with your salary of 40,000, your standard deduction of $12,000 is deducted (the personal exemption of $4,050 is eliminated for 2018-2025). This makes your total taxable income amount $28,000.
Should I itemize my tax deductions?
The short answer is you should itemize your tax deductions if your allowable itemized deductions are greater than your standard deduction.
Determining whether you should itemize or take the standard deduction does require a little math. The first step is to calculate the total value of the expenses you can deduct. Then compare it to the standard deductions for the current year. The next step is to determine whether itemizing is worth your time. The IRS requires you to provide receipts of your deductions throughout the year if you are audited. It’s worth highlighting that the IRS can audit a return even after six years of being filed. Taking the standard deduction does not require as much math and you don’t need to collect and store receipts.
What is the difference between a tax deduction and a tax credit?
Both tax deductions and tax credits help lower your taxes. However, a deduction can only lower your taxable income used to calculate your tax liability. A tax deduction can result in a larger refund, but only if you already paid taxes (either estimated taxes or taxes your employer withheld). A tax credit, on the other hand, gives you a dollar-for-dollar reduction of the tax you owe. Some tax credits can even give you a tax refund if you haven’t paid taxes throughout the year. The bottom line is that both are great ways to lower your taxes but a tax credit can make a much bigger dent in your tax bill.
List of tax deductions for 2021
There are hundreds of deductions you can claim. Here is a list of some of the most common ones.
Tax deductions are subtracted from your gross annual income to reduce your taxable income. The more deductions you have, the less you’ll pay in taxes. Here are the different types of deductions available for individuals and businesses:
- Health savings account (HSA): Contributions to HSAs are tax-deductible.
- Medical and dental expenses: You can deduct qualifying dental or medical expenses that haven’t been reimbursed.
- Sale of home: When you sell your home, you may be able to deduct associated costs. These include legal fees, real estate agent commissions, advertising costs, home staging fees, and escrow fees.
- Capital losses: If your capital losses for a tax year are greater than your capital gains, you can deduct the difference. Limits apply.
- Bad debt: If you lend money to someone and are unable to collect it, you can deduct the amount on your tax return.
- Individual retirement arrangements (IRA): You can deduct the sum of money that you contributed to a traditional IRA. Again, limits apply.
- Student loan interest: If you paid interest on student loans, you can deduct up to the yearly limit.
- Teacher educational expenses: Teachers can deduct up to a set limit each year for qualified expenses. These expenses include supplies, books, professional development courses, computer equipment, supplementary materials for the classroom, and other equipment.
- Work-related educational expenses: Did you pay to obtain work-related education to maintain or improve your job skills? Or did you pursue education to maintain your current status or occupation? You may qualify to deduct those expenses.
Itemized tax deductions
- Property tax, sales tax, and state and local income tax: You can deduct a set amount of the listed tax types ($10,000 for 2018).
- Charitable contributions: If you make charitable donations, you can subtract their value from your taxable income.
- Gambling loss: You can deduct your gambling losses up to the amount you have won in a tax year.
- Interest expenses: Interest is the amount you pay to borrow money. There are many types of interest that you may be able to write off, including:
- Investment interest.
- Qualified mortgage interest.
- Student loan interest.
- Non-farm business interest.
- Farm business interest.
- Interest for producing royalties or rents.
- Moving expenses: As of 2018, moving expenses are only deductible for military members.
Work-related tax deductions
- Home office: Do you use part of your home exclusively for business, and is this home office your principal place of business? If so, you can deduct expenses for the business use of your home. These expenses might include:
- Mortgage interest.
- Self-employment tax deductions. If you’re self-employed, the following expenses are tax deductible:
- Tax preparation fees.
- Self-employment tax.
- Qualified Business Income (QBI).
- Home office (see above).
- Retirement plans.
- Office supplies.
- Educational expenses.
- Health insurance.
- Communication expenses.
- Other travel expenses.
- Promotional expenses.
- Bank fees.
- Business-related interest charges.
- Contract labor costs.
- Business tax deductions. Businesses can deduct a variety of expenses, including:
- Insurance premiums.
- Taxes paid.
- Interest on business loans.
- Payments to retirement plans.
- Employee’s pay.
- Business use of a car.
- Business use of your home (see above).
- Miscellaneous expenses.
- Miscellaneous business expenses
It is impossible to list every possible miscellaneous business expense, but these are the most common examples.
- Accounting fees.
- Affiliate commissions.
- Banking fees.
- Board meetings.
- Charitable contributions.
- Cleaning services.
- Consulting fees.
- Costs of goods sold.
- Credit card convenience fees.
- Customer gifts (limits apply).
- Education and training of employees and self.
- Impairment-related expenses.
- Franchise, trade name, and trademark expenses (in some cases).
- Internet-related expenses.
- Interview expense allowances.
- Legal fees.
- Leased vehicle.
- Professional fees.
- Licenses and regulatory fees.
- Moving machinery.
- Penalties and fines for late performance or non-performance.
- Pension plans.
- Prizes for contests.
- Outplacement services.
- Research and development.
- Storage rental.
- Telephone (second line or long distance phone calls).
- Trade shows.
- Video equipment and other tech.
- Website design and development.
Now that we’ve gone over tax deductions, let’s take a closer look at tax credits.
How to deduct charitable donations?
Donations to qualified charities are considered tax-deductible expenses, so they can reduce your taxable income. Generally, you can deduct contributions up to 30 or 50 percent of your adjusted gross income depending on the nature and tax-exempt status of the charity you’re giving it to. However, to get the deduction, you must file Form 1040, the form you use for an individual or joint income tax return. You also must itemize your deductions on Schedule A on Form 1040.
Medical-related tax deductions
There are many different types of medical and health-related deductions depending on your individual situation. Check out this section to make sure you are taking advantage of every possible deduction.
Medical insurance premiums
The premium tax credit is a refundable tax credit designed to help eligible individuals and families with low or moderate income afford health insurance purchased through the Health Insurance Marketplace, also known as the Exchange.
Yes, medical insurance premiums, co-pays, and uncovered medical expenses are deductible as itemized deductions. However, you can only deduct medical expenses that exceed 7.5% of your adjusted gross income.
Braces and orthodontics
The medical and dental expenses deduction, which includes your deductible orthodontics costs, only allows a deduction for costs above 7.5% of your adjusted gross income.
Tax deductions for business owners
If you’re a business, most expenses are tax-deductible. If an expense is “ordinary, necessary, and reasonable” and helps to earn business income, it’s deductible. The IRS defines these as “ordinary, necessary, and reasonable expenses” that are “helpful and appropriate” for a business.
Corporations may not legally deduct the dividend payments before taxes.
Car and driving-related business expenses
The standard mileage rate for using a car, van, pickup, or panel truck is 58 cents per mile for business miles driven. Tolls and gas are not deductible for regular personal transportation to work but are deductible for work-related trips. Further, if you are self-employed and use a car for business purposes, you may deduct the cost.
Meals and entertainment
Meal and entertainment (M and E) deduction. Taxpayers used to be able to deduct 50% of the costs of meals and entertainment directly related to or associated with a business.
Tools and equipment
You can only deduct tools and other expenses exceeding 2% of your adjusted gross income, and they must be necessary for your job. However, if you are self-employed, you can deduct tools as a business expense.
Hosting a function
If your private function is held at a qualified organization, you may be able to deduct membership fees or dues you pay. It may also qualify as a business expense.
Sponsorships can be a tax write-off.
Deductions for small businesses
There are too many small business tax deductions to list here, but the top tax deductions for a small business are car and truck expenses, salaries and wages, supplies, depreciation, rent on business property, utilities, and taxes.
Deductions for a new LLC
LLC members can deduct startup and organizational expenses incurred during a company’s first year of operation. However, there is a limit of $5,000.
Deductions for 1099 independent contractors
The top deductions for 1099 workers are mileage, health insurance premiums and medical costs, home office deduction, supplies, travel, car expenses, cell phone, and business insurance.
Some of the deductions for Uber drivers are standard mileage, car payment, depreciation, interest on auto-loans, and gas.
Deductions related to family, children, and dependents
For 2020, the recently passed GOP tax reform bill doubled the Child Tax Credit amount from $1000 to $2000 per qualifying child. The Child and Dependent Care Credit can get you 20% to 35% of up to $3,000 of child care and similar costs for a child under 13, an incapacitated spouse or parent, or another dependent so that you can work.
The new changes to the child tax credit will temporarily increase the money parents get by up to $1,600 more per child: $3,000 per child under 17 and $3,600 per child under 6. These changes apply to 2021, but parents can get an advance on half of their 2021 credit with monthly payments of up to $300 per child starting in July 2021.
Daycare and childcare
If you paid a daycare center, babysitter, summer camp, or another care provider to care for a qualifying child under 13 or a disabled dependent of any age, you might qualify for a tax credit of up to 35 percent of qualifying expenses of $3,000 for one child or dependent, or up to $6,000 for two or more children.
Depending on your income, you can claim a tax credit for up to 35 percent of your preschool expenses, up to $3,000 for one child, or $6,000 for two or more children.
The IRS allows the paying spouse to deduct the alimony payments for tax deduction purposes.
Can grandparents get a tax deduction for contributing to a 529 savings plan?
Yes, grandparents can claim the deduction for contributing to a 529 if they live in one of the 34 states that offer a state income tax deduction for 529 college-savings plan contributions.
Our government has introduced many education-related deductions to help out students. These include a student loan interest deduction, the lifetime learning credit, and deductions for books, materials, and fees. They are mostly targeted to college and post-secondary students, but some also apply to those in K-12.
Tuition and fees
Yes, the Tuition and Fees Deduction can reduce the amount of your income subject to tax. This deduction, reported on Form 8917, Tuition and Fees Deduction, is considered an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040).
Books and materials
The tuition and fees deduction allows you to write off up to 4,000 dollars of qualified higher education expenses, including books and other necessary materials.
Retirement plan and savings account deductions
There are many types of retirement and savings accounts available. Each has its own tax implications; some are pre-tax deductions, while others are not. This section highlights a few of the main types of retirement and savings accounts and which deductions they are eligible for.
Last will and testament
No, having a last will and testament prepared is not deductible, nor are the preparation fees.
You can deduct your contribution as long as you earn income during the year.
Roth IRA deductions aren’t tax-deductible.
Qualified contributions to a 401K are deducted from your taxable income. Distributions from a 401K are tax-free and not included in your taxable income.
Pension plan contributions
Contributions to IRS-qualified pension plans are often tax-deductible, whether it is the employer or employee making contributions.
Now that we’ve gone over tax deductions, let’s take a closer look at tax credits.
List of tax credits for 2021
A tax credit also reduces the amount of tax you owe. But unlike a deduction, it’s applied after your tax liability is calculated. In other words, you subtract tax credits from the taxes that you owe, rather than from your taxable income. There are two types of tax credit: nonrefundable and refundable.
What is the difference between refundable and nonrefundable tax credits?
Both reduce the amount of tax that you owe. The distinction becomes relevant when you have enough tax credits and deductions to reduce your tax liability to zero. In this situation, any amount of nonrefundable tax credit remaining is not refunded to you. On the other hand, any amount of refundable tax credit remaining is refunded to you. For example, if you owed $500 in taxes and received a nonrefundable tax credit of $600, you would pay no taxes, but would also receive no compensation. But if you owed $500 and received a refundable tax credit of $600, you’d get $100 as a tax refund.
Now let’s look at the tax credits available for individual taxpayers.
- American Opportunity Credit: A partially refundable tax credit to help cover the expenses of up to four years of an undergraduate college education.
- Lifetime Learning Credit: A nonrefundable tax credit that covers a percentage of the money spent on qualified education expenses for a given year.
- Health coverage tax credit (HCTC): This refundable tax credit helps qualifying individuals to afford health insurance by refunding most of what they pay for qualified health insurance premiums.
- Premium tax credit (PTC): This refundable tax credit helps eligible individuals and families with low to moderate income to pay for health insurance plans purchased through the Health Insurance Marketplace.
- Low-income housing tax credit LIHTC (for owners): Homeowners who participate in the LIHTC program receive a reduction in their federal tax liability through allotments generally paid over 10 years.
- Nonbusiness energy property credit: Individuals can receive this tax credit if they make eligible improvements to their home which improve its energy efficiency.
- Residential renewable energy property credit: Homeowners can earn non-refundable tax credits to cover a percentage of their investments into approved renewable energy upgrades for their homes. If unused due to a lack of tax liability, these credits can be rolled over.
Family and dependent credits
- Child and dependent care credit: Do you pay for the care of a qualifying dependent so you can work or look for work? If so, this non-refundable tax credit can cover up to 35% of your expenses.
- Adoption credit: Parents of adopted children receive one non-refundable tax credit per child for adoptions finalized during the tax year.
- Child tax credit: A tax credit is available for each qualifying child you have. A portion of the child tax credit is refundable.
- Credit for the disabled or elderly: Are you a qualifying elderly or disabled person who has received taxable disability income for the tax year? If so, you can claim this non-refundable tax credit.
Income and savings credits
- Retirement savings contribution credit: Available for people who make eligible contributions to a qualifying retirement plan or individual retirement arrangement (IRA). This credit is nonrefundable.
- Earned income tax credit (EITC): A refundable tax credit for employed taxpayers who earn a low-to-moderate income. Each year, different income limits are set, which govern who qualifies (along with other requirements).
- Excess social security and RRTA tax withheld: Employers withhold social security tax from your wages, and possibly Tier 1 RRTA or Tier 2 RRTA tax. If you had more than one employer and too much social security or RRTA tax was withheld, you can claim the excess as a credit on your tax return.
- Foreign tax credit: If you pay or accrue qualifying foreign taxes to a U.S. possession or foreign country and also paid tax to the U.S. on the same income, this credit will reduce your U.S. tax liability.
- Credit for tax on undistributed capital gain: Are you a shareholder of a mutual fund that does not distribute all of its capital gains? If so, you will have to report them even though you don’t receive them. The mutual fund is responsible for the tax on the gains so you can claim this credit for the taxes they pay.
- Credit to holders of tax credit bonds: Investors of tax credit bonds receive tax credits for a set number of years.
- Nonrefundable credit for prior year minimum tax: Did you pay Alternative Minimum Tax (AMT) in a year prior and don’t owe any AMT for the current year? If so, you may be able to claim a tax credit.
- Qualified plug-in electric and electric vehicle credit: Receive a tax credit for purchasing a new electric vehicle for use in the U.S.
- General business credit.
The general business credit offers credits for the following:
- Biodiesel and renewable diesel fuels.
- New markets.
- Small employer pension plan startup costs.
- Disabled access.
- Renewable electricity, refined coal, and Indian coal production.
- Empowerment zone and renewal community employment.
- Indian employment.
- Employer social security and Medicare taxes paid on certain employee tips.
- Contributions to selected community development corporations.
- Employer-provided childcare facilities and services.
- Low sulfur diesel fuel production.
- Mine rescue team.
- American Samoa economic development.
- Work opportunity.
- Alcohol and cellulosic biofuel fuels.
- Increasing research activities.
- Qualified railroad track maintenance.
- Distilled spirits.
- Energy-efficient home.
- Alternative motor vehicle.
Learn more about the general business credit here.
By identifying the credits you qualify for and claiming them on your tax return, you can help to reduce your tax liability and even get a tax refund.
Want help maximizing your tax credits and deductions?
There are a lot of deductions and credits to keep track of! If you need help, consider hiring an expert that understands all of the ins and outs of tax laws. Review and compare the industry-leading companies below.
Frequently asked questions about tax deductions
Do you still have questions? That’s ok! The US tax code is incredibly complex. The questions below are some other common tax deduction situations that may apply to you. However, it would be impractical to list all possible tax situations here. If you still need further help or clarification, it is probably best to contact a tax professional who can analyze your individual situation further.
What tax deductions are available for homeowners?
Deductions related to real estate and real estate taxes for homeowners are as follows: mortgage interest, private mortgage insurance, points home equity loan interest, property taxes, home office deduction (standard deduction of $5 per square foot of home used for business up to 300 square feet., selling costs, capital gains exclusion, and the mortgage tax credit.
What is the tax deduction for a mortgage or a rental property?
If you rent a property as a business, you can deduct eligible expenses. These include expenses that are deemed appropriate, such as interest, taxes, advertising, maintenance, utilities, and insurance. You can also deduct the cost of certain materials, supplies, repairs, and maintenance you make to your rental property to keep your property in good operating condition. These include loan interest, property tax, insurance premiums, depreciation, maintenance and repairs, utilities, legal and professional fees, and travel and transportation. Taxpayers can deduct the interest paid on the first and second mortgage up to $1,000,000.
What can you deduct when donating a car to charity?
If the charity sells your car for $500 or less, you can deduct $500 or your car’s fair market value, whichever is less.
Are donations to religious organizations, such as tithes, tax-deductible?
Yes, as long as the donations are made to an eligible organization.
Is tax preparation deductible?
You can usually deduct tax preparation fees on the return for the year in which you pay them.
What is a tax account number?
An employer account number is an identification number assigned by the state government to an employer to track payroll tax liabilities and payments.
What is a tax deduction card?
A tax deduction card is an electronic document that shows how much tax your employer must deduct before paying your salary.
How do deductions affect my gross income?
Your gross income is the total amount of money you made throughout the year. Some of that money will not be taxable because of deductions and other credits, depending on your financial activity. In short, tax deductions reduce your taxable income but don’t affect your gross income.
Can I use deductions if I don’t have a receipt?
Yes, however, it is always advisable to have documentation of any deduction that you claim on your income tax return in case the IRS decides to take a closer look at it. Donations valued at less than $250 don’t require a receipt if it’s impractical to get one.
What types of income are non-taxable?
Although most types of income are taxable, there are exceptions. These include (with exceptions) income from the sale of your primary residence, life insurance money, non-taxable gifts, child support, and personal injury awards.
What is the difference between a deduction and a tax credit?
An income tax credit is a dollar-for-dollar reduction of your income tax liability. A deduction lowers your taxable income. Here are some examples of both tax deductions and credits.
What is the difference between a deduction and an exemption?
Exemptions relate to people; deductions are usually expenses.
What is the difference between a tax offset and a deduction?
A deduction is a reduction in your taxable income. An offset directly lowers the tax you owe. For example, $1,000 in deductions will only reduce your tax owed by a percentage dependent on your tax bracket. An offset (sometimes called a rebate) will directly reduce the tax owed.
Can a tax deduction affect my tax return?
Yes, if you have less taxable income, this will reduce the total amount you owe in taxes. So, it is likely that the amount of your tax return will increase, depending on how much your employer withheld throughout the year.
Can a tax deduction be carried over?
You cannot carry forward most itemized deductions. You can carry forward charitable contributions that exceed 50% of your AGI, investment interest, and in some cases, points paid to obtain a mortgage.
What is tax-deductible interest?
It’s interest paid that you can deduct from your taxable income, such as the interest paid on a mortgage or student loans.
Missed something in this article?
Although this list is not comprehensive and is certainly no substitute for talking to a tax professional, it is a good start. At the very least, this list of frequently asked questions will make you an informed taxpayer and help you save money on your taxes in 2021.
If you owe a lot of money to the IRS and have a significant tax bill, it can help to have a tax relief company on your side. The best tax relief companies have tax lawyers and enrolled agents on-site, provide a money-back guarantee, and charge competitive rates. Check out which tax relief company is the best fit for you.
Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, and a Certified Personal Finance Counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.