- What Are Tax Deductions?
- What is a Tax Credit?
- Adoption Tax Credit
- American Opportunity Tax Credit
- Charitable Contribution Deductions
- Child and Dependent Care Credit
- Child Tax Credit
- Earned Income Tax Credit (EITC)
- Health Savings Account Contribution
- IRA Contributions Deductions
- Lifetime Learning Credit
- Medical and Dental Expenses
- Mortgage Interest Deduction
- Recovery Rebate Credit
- Saver’s Credit
- Student Loan Interest Deduction
Deductions and credits are a great way to lower your tax bill so that you either pay less or get more money back when you file your tax return. Here’s a quick guide to current tax deductions and credits in 2021 that you may qualify for this year:
What Are Tax Deductions?
A tax deduction is an expense that you can subtract from your gross income to lower your taxable income and therefore, your tax liability. All federal income taxpayers can choose to either accept the standard deduction when filing or choose to itemize a range of tax deductions.
|Filing Status||Standard Deduction 2021|
|Single; Married Filing Separately||$12,550|
|Married Filing Jointly & Surviving Spouses||$25,100|
|Head of Household||$19,400|
Taxpayers who are age 65 or older or blind can claim an additional standard deduction on top of the amount you’d claim in the above table.
|Filing Status||Additional Standard Deduction (Per Person)|
Married Filing Joining or
Single or Head of Household:
What is a Tax Credit?
A tax credit is what you are allowed to subtract, dollar for dollar, from what you owe on your income taxes. Tax credits can be more ideal than tax deductions since they reduce the tax due and not just the amount of taxable income.
Adoption Tax Credit
Adoptions finalized in 2021 qualify for an adoption tax credit of up to $14,440 per child, but taxpayers can only use the credit if they have federal income tax liability.
To be eligible for the credit, parents must:
- Have adopted a child other than a stepchild: The child must be under 18 years of age OR be physically or mentally unable to take care of themselves.
- Meet income limits: Your modified adjusted gross income affects how you can claim.
- Families with an income below $216,660 can claim full credit
- Families with an income of $216,660 to $256,660 can claim partial credit
- Families with an income above $256,660 cannot claim the credit
American Opportunity Tax Credit
The American opportunity tax credit (AOTC) is granted to qualifying students who have paid for college in the past year. You can lower your tax bill by up to $2,500 and claim this credit for a maximum of four years.
This credit allows you to claim the first $2,000 you spent on equipment, books, tuition, and other school fees (other than transportation and living expenses) as well as 25% of the next $2,000.
To be eligible for AOTC, the student must:
- Be enrolled at least half time for at least one academic period* beginning in the tax year
- Not have finished the first four years of higher education at the beginning of the tax year
- Be pursuing a degree or other recognized education credential
- Not have claimed the AOTC or the former Hope credit for more than four tax years
- Not have a felony drug conviction at the end of the tax year
*Academic Period refers to the semesters, trimesters, quarters or any other period of study determined by the school.
Charitable Contribution Deductions
For the 2021 tax year, single filers may be able to deduct $300 on their tax return, or $600 for married filers, without having to itemize deductions. If you do itemize, you can claim deductions for cash contributions up to 100% of your adjusted gross income (AGI).
To qualify, the contribution must be:
- made to a qualifying organization
- a cash contribution
- donated during the 2020 calendar year
Non-cash property contributions do not qualify for this relief, but you may still be able to claim non-cash contributions as a deduction.
Child and Dependent Care Credit
The child and dependent care credit is for those who care for a child or another dependent in their household. For the 2021 tax year, you may be able receive up to 50% back for your childcare-related expenses.
The amount you can claim is up to $8,000 of expenses for one dependent and up to $16,000 for two or more.
To qualify for the child and dependent care credit, you’ll need to provide proof of your expenses and meet the below modified adjusted gross income (MAGI) requirements:
- Under $75,000 (Single)
- $112,500 (Head of household)
- $150,000 (Married filing jointly)
Child Tax Credit
In 2021, the child tax credit was made fully refundable and also increased to up to $3,600 per year per child through age 5, and for children ages 6 to 17, up to $3,000 per year.
To qualify for the child tax credit, your MAGI must be:
- Under $75,000 (Single)
- $112,500 (Head of household)
- $150,000 (Married filing jointly)
Other child-related eligibility requirements include:
- In the last year, you must have provided at least half of the child’s support and they must have lived with you for at least half of the year
- The child cannot file a tax return jointly
Earned Income Tax Credit (EITC)
Depending on a) how many kids you have, b) how much you make, and c) your marital status, you may qualify for anywhere between $543 to $6,728 in 2021 with the earned income tax credit.
You may qualify for the EITC if your income is low to moderate. The amount may also change if you meet other special criteria such as having disabled children.
Health Savings Account Contribution
If you have a health savings account (HSA)—a dedicated healthcare savings account for those enrolled high-deductible health insurance plans—your contributions are tax-deductible.
Withdrawals are also not subject to federal income tax if used for qualified medical expenses.
For 2021, the contribution limits are:
- $3,600 (Individual)
- $7,200 (Family)
Individuals 55 or older, can put an extra $1,000 into your HSA.
IRA Contributions Deductions
If you have an IRA, you may be able to deduct some or all of the contributions you made on your individual federal income tax return. The IRA deduction may be limited if your income exceeds certain levels, or if you or your spouse is covered by a retirement plan at work.
For 2021, the total contributions you can make in the year for both traditional IRAs and Roth IRAs is limited to:
- $6,000 (or $7,000 if you’re age 50 or older); or
- If less, your taxable compensation for the year
Roth IRA contributions are not deductible and rollover contributions do not apply.
Lifetime Learning Credit
The lifetime learning credit (LLC) applies to those paying for qualifying higher education costs for yourself, a spouse or a dependent.
If you qualify, you can claim 20% of the first $10,000 you paid toward tuition and fees, up to $2,000. Living expenses and transportation are not eligible expenses.
The LLC is not refundable, so although you won’t get any money back with your return, it will still lower your tax bill. Unlike, the American Opportunity credit, however, there is no limit to the number of years you can claim this credit, but you can’t claim both in the same year.
To claim the LLC:
- You, your dependent or a third-party must be paying for qualified higher education expenses
- You, your dependent or a third-party must be paying the education expenses for an eligible student enrolled at an eligible educational institution
- You, your spouse, or a dependent is the eligible student listed on your tax return
Medical and Dental Expenses
If you paid out-of-pocket for medical expenses, you can deduct them for you, your spouse, or any of your dependents. However, the total amount must exceed 7.5% of your adjusted gross income.
Some eligible medical and dental expenses include:
- Hospital care, residential nursing home care
- Payments to doctors, specialists, mental health professionals, dentists, specialists, or nontraditional medical practitioners
- Substance abuse treatment
- Fees for eyeglasses, contact lenses, crutches, wheelchairs, or hearing aids
- Fees for guide dogs or service animals
Elective procedures such as cosmetic surgery are not eligible.
Mortgage Interest Deduction
Mortgage interest tax deductions are incentives for Americans to purchase homes and make homeownership more affordable. The deduction reduces the taxable income of qualifying homeowners by the amount of mortgage interest they pay.
For home loans taken out:
- Before Dec. 15, 2017: Taxpayers can deduct home mortgage interest on their first $1 million or $500,000 for those married filing separately.
- After Dec. 15, 2017: Taxpayers can deduct home mortgage interest on their first $750,000 or $375,000 of mortgage debt for those married filing separately.
Recovery Rebate Credit
You may be eligible for the Recovery Rebate Credit if you were eligible for a third stimulus payment and never received it or if you didn’t get the full amount. This only applies to the third payment, if you didn’t receive your first or second (or if it wasn’t the full amount), you cannot claim it on your 2021 tax return.
The saver’s tax credit is for those who have retirement savings plans such as an IRA, 401(k), 403(b) or certain other retirement plans. The credit is 10%-50% of up to $2,000 in contributions or $4,000 if filing jointly, with the percentage being dependent on your filing status and income.
You're eligible for the saver’s tax credit if you're:
- Age 18 or older,
- Not claimed as a dependent on another person’s return, and
- Not a student
You were a “student” if, during any part of 5 calendar months of the tax year, you:
- Were enrolled in school as a full-time student
- Participated in an on-farm training course given by a school or a state, county, or local government agency
- Attended a technical, trade, or mechanical schools
- This does not include correspondence schools, on-the-job training courses, or online-only schools
Student Loan Interest Deduction
Although federal student loans were automatically deferred in 2021, if you paid interest on private loans or continued to pay federal student loans for yourself, your spouse or another dependent, you may qualify for this tax credit.
Rather than an itemized deduction, you can claim the deduction as an adjustment to your income. All of the following must apply to claim the student loan interest tax deduction on a qualifying student loan:
- You paid interest on a qualified student loan in the 2021 tax year
- Your filing status isn’t married filing separately
- You're legally required to pay interest on a qualified student loan
- Your modified adjusted gross income is less than a specified amount set annually
- If filing jointly, neither you nor your spouse can be claimed as dependents on someone else's return
Tax Returns FAQs
Have more questions about your 2021 tax return? We've got the answers to the most frequently asked questions regarding your taxes.