Tax Deductions and Credits to Consider for Tax Season 2021
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 they do so in slightly different ways!
Tax deductions help lower how much of your income is subject to federal income taxes. Some deductions are only available if you choose to itemize your deductions, while others are still available even if you decide to take the standard deduction.
Meanwhile, tax credits lower your actual tax bill dollar for dollar, and there are two types of credits: 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! But if it’s a nonrefundable credit, your tax bill will be reduced to zero, but you won’t get a refund. That’s still great!
Here are some deductions and credits you might be able to claim on your 2020 tax return:
If you like to give like no one else, we have some great news! In an effort to encourage more charitable giving, the CARES Act allows you to deduct up to 100% of their 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 their deductions.
What if you’re taking the standard deduction? Well, the CARES Act added a new “above-the-line” deduction that will help you write off up to $300 of charitable contributions you made in cash.
If you spent a lot of time in the hospital or found yourself with some 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 above $7,500 in 2020. But you have to itemize your deductions in order to write off those expenses on your tax return.
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 individuals only. Sorry!
Earned Income Tax Credit
The EITC is a refundable credit designed to help out low- and middle-income workers (workers earning up to $56,844 during the 2020 tax year might be eligible). Depending on your income, your filing status and how many children you have, 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 one out of five taxpayers who are eligible either don’t claim the benefit on their taxes or don’t file a tax return at all. Don’t let that be you!
Child Tax Credit
Got kids? Families can claim up to $2,000 per qualified child with this tax credit (the income limits for this credit are $200,000 for single parents and $400,000 for married couples). And since this is a refundable credit, your family can receive up to $1,400 per child as a refund.
And 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 any deductions or credits on the table.