Tax season is quickly approaching. As always, it’s important to get a handle on every available credit and deduction to help put you and your family on higher financial ground.
There’s an important distinction here: Tax credits provide a dollar-for-dollar savings on your tax bill. So a $1,000 credit will increase your refund — or decrease your tax owed — by $1,000. Tax deductions, meanwhile, reduce your taxable income. A $1,000 deduction for someone in the 24-percent tax bracket, for instance, creates a $240 reduction in your liability.
Fortunately, some of the more popular breaks offer a bigger benefit than in years past. Here are 20 of the more common tax relief provisions parents will want to look for when they sit down with their 2021 return.
1. Child Tax Credit
The American Rescue Plan Act increased this income-based credit to as much as $3,600 for each child under age 6 and to $3,000 for each kid aged 6 to 17. But most parents already received half of that in the form of monthly payments from July through December of last year. “That was an advance, so you may get a smaller credit when you file your taxes and therefore a smaller refund,” says Lisa Greene-Lewis, a tax expert with TurboTax.
If calculating what your remaining credit seems confusing, don’t fret. 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 isn’t the only parent-focused tax break that got more generous in 2021. Working parents who pay for the care of children under age 13 — or dependents with mental or physical handicaps — can also claim Child and Dependent Care Credit, which can hack up to $4,000 off your tax bill. That amount goes up to $8,000 for two or more qualifying dependents.
Not everyone qualifies for the full credit, however. There’s a formula that uses a percentage of the expenses you incur for your dependent’s care, and the total credit phases out at higher income levels.
3. Recovery Rebate Credit
The third stimulus payment that was 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 didn’t know that,” she says.
You might have also missed out if you had a drop in income last year and were eligible for a bigger payment. Those who got less than the full amount can claim the Recovery Rebate Credit on their 2021 return to make up the difference.
4. Student Loan Interest Deduction
In a typical year, most student borrowers would be claiming the student loan interest deduction, which lets you subtract up to $2,500 of finance charges from your taxable income. Given the ongoing freeze on federal student loan payments, you might not have anything 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 gone through the process well know, adopting a child can be an expensive endeavor. You may be able to get some help with the federal adoption credit, which is good for up to $14,440 per eligible child. That figure phases out, however, for families making more than $216,660 in 2021.
6. 529 Education Savings Plans
As long as you used the money in your kid’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 aren’t 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 returns.
7. IRA, 401(k) Contribution Deduction
Did you contribute money to a qualified retirement plan in 2021? If so, make sure you’re getting the full write-off on eligible contributions. You can claim a deduction of up to $19,500 for 401(k) contributions in 2021, or up to $26,000 if you’re age 50 or older.
For 2021, you were allowed to put up to $6,000 into an IRA (or $7,000 if you’ve reached age 50). You can deduct that entire amount if you file a joint return and made $105,000 or less — beyond that threshold, the deduction phases out.
8. Health Savings Account Deduction
High-deductible health plans aren’t 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’re essentially getting 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-only coverage, or up to $7,200 for family coverage.
9. Medical Expenses Deduction
If your family was left with ridiculously high medical bills in 2021, Uncle Sam might offer some relief. You can deduct medical expenses that exceed 7.5 percent of your adjusted gross income. But you have to itemize your deductions to get this break, so it means filling out a Schedule A, Itemized Deductions.
10. Earned Income Tax Credit
The Earned Income Tax Credit is a lifeline for low- and middle-income filers, providing up to $5,980 in relief for families with two qualifying children. But as many as one in five Americans who are eligible miss out every year, says Greene-Lewis.
Even if you’re not on the lower end of the income spectrum, you may qualify if you lost a job last year or saw your wages temporarily reduced, 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 refund.
11. State and Local Taxes Deduction
The state and local tax (SALT) deduction lets you deduct up to $10,000 a year (or $5,000 for married taxpayers filing separately) of property taxes plus either income or sales taxes. But here’s the rub: you can only claim that SALT deduction if you itemize, something only a fraction of Americans do. Still, it can be a valuable provision for many upper income-earners, or those who live in states with hefty tax rates.
12. Mortgage Interest Deduction
Another potential tax break if you itemize: the interest you paid last year on a mortgage, home equity line of credit (HELOC) or home equity loan. Starting in 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. Higher Education Credits
Parents who are paid for their child’s college tuition and related materials last year will want to see whether they qualify for either the American Opportunity Tax Credit or the Lifetime Learning Credit. There are a few key differences between them. The AOTC, for example, can only be used for four years, while the LLC has no such cap. The AOTC is also partially refundable—you can get 40 percent of the funds back even if you don’t owe any tax in 2021.
14. Self-Employment Tax Deduction
The self-employment tax, which consists of Social Security and Medicare taxes, can be a soul-crusher for folks who hang up their own shingle. That’s because 15.3 percent of your income is going to the IRS—both the employer and employee portion of those taxes.
But there are a number of tax rules that help offset your bill at year’s end. For example, you can deduct the employer portion of your self-employment tax from your adjusted gross income. Additionally, you may be able to write off 20 percent of your qualified business income, or QBI, further lowering your tax bill.
15. Self-Employment Health Insurance Deduction
An even bigger write-off for many self-employed individuals: your health care costs. If you run your own business, you may be able to deduct all of the premiums for yourself, your spouse and your dependents, even if you don’t itemize. However, you can’t deduct them in months when either you or your spouse were eligible for an employer-subsidized plan.
16. Home Office Deduction
If heading to work means walking down the stairs in your pajamas, you may be able to write off the cost of your home office. But that workspace needs to meet the “regular and exclusive use” standard — that is, it can’t double as your man cave — and it has to be your principal place of doing business.
17. Charitable Donations Deduction
Normally, you have to itemize your deductions in order to write off donations to charitable organizations. But Congress extended a CARES Act provision that allows each filer to deduct $300 of contributions, even if you take the standard deduction for 2021. If you’re married and filing a joint return, you can claim a deduction of up to $600.
18. Educator Expenses Deduction
If you’re a teacher and paid for things like books, supplies or computer equipment out of pocket, you may be eligible for a break on your Form 1040. Eligible educators can claim a deduction up to $250, as long as those expenses weren’t reimbursed. Items you used to combat the coronavirus, like personal protective equipment and disinfectants, also qualify.
19. Residential Energy Credit
Making your home greener can not only cuts down on your energy bills, but result in a nice discount on your federal taxes. Filers who put in place devices such as solar energy systems and geothermal heat pumps in 2021 can obtain 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 fossil fuel-burning cars to ones that get their power from an electrical outlet. Those eco-friendly variants typically don’t come cheap, but the IRS is at least helping with the bill. The lengthily-named Qualified Plug-in Electric Drive Motor Vehicles Credit provides a tax break of up to $7,500 on new purchases.
The actual amount of the credit depends on the year and model you buy — there’s a formula based on how much energy it pulls from the battery — but you can easily look up your allowable credit on the IRS website.
Here’s hoping that many of these tax credits and deductions prove useful to you and your family.