The closest things to magic words when it comes to taxes are deductions and credits. Both help you keep more money in your pocket instead of Uncle Sam’s, but in slightly different ways.
Tax deductions help lower the amount of your income that can actually be taxed. Some deductions are only available if you itemize your deductions, while others are still available even if you decide to take the standard deduction.
Tax credits, on the other hand, are dollar amounts actually subtracted from your tax bill, and there are two types: refundable and nonrefundable. If a credit is greater than the amount you owe and it’s a refundable credit, the difference is paid to you as a refund. Score! If it’s a nonrefundable credit, your tax bill will be reduced to zero, but you won’t get a refund. Still a win!
Here are some deductions and credits you might be able to claim on your 2021 tax return:
1. Charitable Deductions
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 extended two charitable giving changes enacted by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The law allows you to deduct up to 100% of your adjusted gross income (AGI), which is your total income minus other deductions you have already taken, in qualified charitable donations if you plan to itemize your deductions.
What if you’re taking the standard deduction? Well, non-itemizers may claim an above-the-line deduction (meaning it is not on Schedule A) of up to $300 ($600 for married filing jointly) for charitable contributions made in cash.
2. Medical Deductions
If you found yourself with hefty medical bills last year, you might be able to find at least some tax relief.
You can deduct any medical expenses above 7.5% of your adjusted gross income (AGI), which is your total income minus other deductions you have already taken. For example, if your AGI was $100,000, you can deduct out-of-pocket medical expenses beyond $7,500 in 2021. But you have to itemize your deductions in order to write off those expenses on your tax return.
3. Business Deductions
If you’re self-employed, there are a bunch of deductions you can claim on your tax return — including travel expenses and the home office deduction if you use a part of your home to conduct business.
But if you’re one of the millions of workers who were sent home to work remotely, you won’t be able to claim the home office deduction since it’s reserved for self-employed people only. Sorry!
4. Earned Income Tax Credit
The EITC is a refundable credit designed to help out low- and middle income households. The maximum adjusted gross income for a single filer with no children is $21,430, while the cap for a married couple with three or more children is $57,414.9 Depending on your income, your filing status and number of children, the credit could save you anywhere from a few hundred to a few thousand dollars on your taxes. But here’s a crazy stat: About 1 out of 5 eligible taxpayers either don’t claim the benefit on their taxes or don’t file a tax return at all. Don’t let that be you!
5. Child Tax Credit
Got kids? You probably noticed a nice little surprise from the IRS in July: free money! The American Rescue Plan, which was passed in March 2021, bumped the Child Tax Credit from $2,000 to $3,600 for each child under age 6 and to $3,000 for each child age 6 -17. Rather than waiting until tax time for families to claim this credit, the IRS began sending out a portion of the credit through advance monthly payments ($300 per month for each child under 6 and $250 for each child 6 to 17). The Child Tax Credit is gradually phased out for people with incomes over $150,000 if married filing jointly or $112,500 if filing as head of household.
Checks in the mail are nice, but remember that taking advance Child Tax Credit payments now will reduce the amount you get at tax time. Payments are based on your 2020 taxes, so if your income went up enough in 2021 to start closing in on the phase-out limit for the credit, you might consider opting out of advance payments.
There are plenty of other deductions and credits that might be up for grabs depending on your situation! If you don’t want to miss out on any tax savings, you’ll want to work with a tax advisor who can make sure you’re not leaving anything on the table.
6. Education Credits
Bettering yourself or your children through education is a good thing, and it’s even better when you get a tax break.
The American Opportunity Tax Credit (AOTC) is a partially refundable credit for educational expenses for a student for the first four years of college. You can claim up to $2,500 per student, and if the credit brings your tax liability to zero, 40% (up to $1,000) will be refunded to you.
The Lifetime Learning Credit (LLC) is not refundable and covers up to $2,000 in qualified educational expenses per return. While you can only take advantage of the AOTC for undergrad expenses, you can reap the benefits of the LLC for expenses related to all kinds of educational opportunities — from degree programs to tech classes to improving job skills.
But beware: You can claim both the AOTC and the LLC on your tax return but not for the same student or the same expenses.