Part of being an American is looking toward Tax Day with either dread or anticipation. Will you have to cut a check to Uncle Sam, or will you get a plump refund? Tax deductions can tip the scales — a lot — meaning you’ll end up sending less money to the IRS.
What Is a Tax Deduction?
Tax deductions, also known as tax write-offs, lower your taxable income so you’ll pay less overall. You can either go with the standard deduction, which is a predetermined amount that is subtracted from your income, or itemized deductions, which take into account your particular expenses such as charitable donations and some health care costs.
However, your itemized deductions have to exceed your standard deduction or it is not smart to itemize. Since the federal government changed the tax rules in 2017 to increase the standard deduction, only about 10% of mostly wealthy Americans itemize deductions, according to the Urban-Brookings Tax Policy Center.
The standard deduction amounts for tax year 2021 are:
- Single filers: $12,550
- Married filing jointly and surviving spouses: $25,100
- Married filing separately: $12,550
- Head of household: $18,800
Tax deductions are different from tax credits. A tax deduction decreases your taxable income, whereas a tax credit lowers the amount of taxes you owe the IRS.
Calculating Your Adjusted Gross Income
Deductions are typically calculated from something called your adjusted gross income, or AGI.
Do you know how much you make each year? What about the amount you contribute to retirement? The IRS uses this information and more to calculate your adjusted gross income (AGI), which is the starting point for figuring out your tax bill.
Your AGI includes your wages, alimony income from divorces finalized before 2019, dividend income, retirement distributions and business income. Student loan interest payments, health savings account contributions and many contributions to a traditional IRA can be deducted above the line, meaning you can deduct them even if you’re taking the standard deduction. What’s left over is your AGI.
Changes From 2017 Tax Reform
In late 2017, Congress passed the Tax Cuts and Jobs Act, a sweeping overhaul of the federal tax code. The main change affecting everyday Americans was to the standard deduction. In 2017, it was $6,350 for single filers and $12,700 for married couples filing jointly. Under the new law, it nearly doubled.
While the 2017 changes were good news for some people, they came at the expense of several popular deductions that were eliminated. These include:
- Job-related moving expenses for people who aren’t in the military
- Home equity loan interest deduction, unless the loan is used to improve the home
- Alimony for the person paying spousal support
- Job search expenses
- Unreimbursed work expenses
The higher standard deduction made itemizing less worthwhile for many taxpayers. Itemizing was often the default choice for homeowners with a mortgage in the past because of the mortgage interest deduction. But now choosing the standard deduction often yields the bigger tax savings.
Standard vs. Itemized Deductions
Still, a number of itemized deductions remain in play.
If your potential deductions equal more than the standard deduction, itemizing will lower your taxable income and save you money.
Here’s another way to think about it: If you’re a young, single person with a full-time job, you’re healthy and you rent rather than own a home, you will almost certainly take the standard deduction because your deductible expenses probably didn’t total more than $12,550 in 2021.
But if your financial profile is more complex — think mortgage, property taxes, large medical expenses — then you might benefit from itemizing.
Popular Tax Deductions for Itemizers
If you think you should itemize, you need to know what is and isn’t tax deductible. Here are some common deductions.
1. Charitable Contributions
If you gave money or goods to a charity during the year, you could be eligible for a tax deduction. The organization must be designated as a nonprofit by the IRS. Usually these are religious, educational or charitable groups.
There are some limitations on what you can include in this deduction. For example, if you donated to your local PBS station and they sent you a “thank you” T-shirt, you can’t deduct the value of the shirt. So if your contribution was $100 and the T-shirt was worth $10, you can only deduct $90 on your tax return.
Additionally, you can only deduct charitable contributions up to 50% of your AGI. (Most people can’t afford to donate half their income to charity anyway.) But there are additional limits depending on the organization. Donations to churches, hospitals and colleges qualify up to 50% of AGI, but contributions to veterans’ organizations and fraternal societies have a lower cap — only 30% of AGI.
Under the CARES Act rules, you can deduct up to $300 of charitable contributions for 2021, even if you don’t itemize (that amount is $600 if you’re married filing jointly).
2. Mortgage Interest
The interest you pay on your home mortgage can total many thousands of dollars, particularly at the beginning of the loan. Luckily, you can deduct that interest from your taxable income. This is applicable for debt up to $750,000 or $375,000 if you’re married filing separately through 2025 . If you bought your home on or before Dec. 15, 2017, you can deduct mortgage interest on debt up to $1 million or $500,000 if you’re married filing separately.
3. Property Taxes
The 2017 tax reform put new limits on property tax deductions. Beginning in 2018, you can deduct state and local taxes up to $10,000 or $5,000 if you’re married filing separately. Those caps are for state and local income, property and sales taxes combined.
Let’s say you paid $8,000 of state income tax, $7,000 of property taxes and $6,000 of sales tax. Your deduction is limited to $10,000. Prior to tax reform, you could have deducted each of these expenses in full.
4. Medical Expenses
If you had significant medical expenses last tax year that weren’t reimbursed by insurance, you could get a deduction. The bills must equal 7.5% or higher of your AGI to qualify for the deduction in 2021. Even then, you can only deduct the amount above 7.5% of AGI. For someone with an AGI of $50,000, that means you can’t deduct medical expenses until they exceed $3,750, or 7.5%.
Qualified medical expenses include:
- Bills paid to doctors, dentists, chiropractors and more
- Hospital visits or stays
- Nursing home care
- Some weight loss programs
- Addiction programs
- Prescription medications
- Transportation to and from medical appointments
- Acupuncture
- Dentures, crutches, hearing aids, wheelchairs and service animals
- Reading or prescription glasses or contact lenses
Deductions You Can Claim With the Standard Deduction
Even if you don’t itemize, there are some valuable deductions you can still claim. They’re known as “above-the-line” deductions.
1. Educator Expenses
In an ideal world, teachers wouldn’t have to pay out of pocket for school supplies. In reality, most teachers routinely dip into their own funds to buy pencils, paper, glue and other items for their classrooms. The IRS allows K-12 teachers to deduct up to $250 ($500 for married filing jointly) for educator expenses such as classroom materials.
2. Student Loan Interest
If you paid interest on your student loans, you can deduct up to $2,500 in interest payments if you earned less than $70,000 for single filers or $140,000 if you’re married filing jointly. Above that, the deduction phases out, but those earning up to $85,000 as single filers or $170,000 for those who are married filing jointly can get a reduced deduction.
This only applies for people filing their own tax returns. If you’re still listed as a dependent on your parents’ tax return, you can’t claim the student loan interest deduction. You also can’t claim this deduction if your loan isn’t in your name. So, if your parents took out the loan on your behalf, they will get the deduction instead.
3. Moving Expenses for Military
Members of the military are eligible to deduct moving expenses from their taxable income. In previous years, civilians could also deduct moving expenses, but the deduction is now limited to military personnel.
4. Health Savings Account Contributions
Health savings accounts, or HSAs, are accounts you can use to save for medical expenses if you have a high-deductible health insurance plan. A high-deductible plan is defined as one that has a minimum deductible of $1,400 for a single person or $2,800 for a family in both 2020 and 2021.
You can deduct contributions of up to $3,600 if you’re single or $7,200 for a family in 2021.
5. Self-Employment Expenses
If you’re self-employed, you can deduct quite a few expenses. These include:
- Home office: You can deduct the space devoted to your home office if you’re self-employed. However, you must use this space exclusively for business. You can’t take this deduction if you’re traditionally employed, even if you’re working remotely due to COVID-19.
- Education: As a self-employed individual, you can deduct things like tuition, books and lab fees for education that “maintains or improves skills needed in your present work,” according to the IRS.
- Car: If you use your car for business, such as driving to meetings with clients or vendors, you can deduct 56 cents per mile as of 2021.
6. Health Insurance Premiums
If you are self-employed, you can deduct your health premiums. You can also take the deduction, minus any subsidies you received, if you get your health insurance through a state or federal marketplace.
7. IRA Contributions
You could get a tax deduction if you contribute to a traditional IRA as part of your retirement savings portfolio. The maximum contribution for 2021 is $6,000, and $7,000 for those over age 50. You may be able to deduct your contribution depending on how much money you make and whether you or your spouse has an employer-sponsored retirement plan. Consult the IRS guidelines for those income limits.
Frequently Asked Questions (FAQs) about Tax Deductions
We’ve rounded up and answered some of the most common questions about tax deductions.
