2020 was a challenging year for many Americans from a financial standpoint. Maybe you were lucky enough to keep your job, or maybe you were one of many filing unemployment. Regardless, you probably have a vested interest in claiming some tax deductions.
You’re not alone. As much as 54 percent of Americans had severe financial struggles in 2020, but even if you don’t fall into that category, there’s no reason you can’t get the most out of your tax returns.
Read on to find out what the best tax deductions are for 2021 – you may qualify for more than you think!
1. Mortgage Interest Deduction
If you’re a homeowner and pay a mortgage, you might be eligible for a mortgage interest deduction.
How exactly does this work?
Homeowners itemizing their tax return and paying their mortgage may be eligible. They can deduct the interest on their home loans up to the amount of $750,000.
If you took out your mortgage before Dec. 15, 2017, you can deduct the interest on home loans up to $1 million.
It can be a valuable deduction for homeowners, especially new homeowners. That’s because early mortgage payments pay off more interest than principal. That makes it a significant tax deduction.
2. SALT Deduction
The SALT deduction refers to the state and local tax deduction. Everyone needs to pay state tax on their income and property. The SALT deduction lets you deduct some of the taxes you pay to the state and the local government.
This applies to taxpayers who itemize while they file their annual federal taxes.
The Tax Cuts and Jobs Act of 2018 put a cap on the SALT deductions that a taxpayer can claim. The limit is now $10,000. You can either claim property taxes and state income or property taxes and sales tax.
The SALT deduction could be particularly beneficial to residents of states with high property taxes.
3. Child Tax Deduction
Most people know about the Child Tax Deduction. This is a valuable deduction since most people qualify for it, even if they have a solid income.
That differentiates this deduction from other tax credits, which you usually only qualify for in a lower tax bracket.
This year, you can claim up to $2,000 for each child you have younger than 17 years old. To make it even better, up to $1,400 per child is refundable.
That means that you will still be able to claim something even if your tax liability lowers to zero (or even lower).
The people who don’t qualify for a child tax credit? Single filers with an annual income of $200,000 or more. Similarly, married couples who file jointly with a yearly income of $400,000 or more.
But unless you hit that income cap (and most Americans fall short), you can claim at least some money.
4. Student Loan Interest Deduction
The student loan interest deduction is a bit more complicated, but you can claim a return if you qualify.
You are eligible to claim a student loan interest deduction if you meet several criteria. First and most obvious, you must be paying off the interest on your student loans.
The second criterion is that your modified adjusted gross income is less than $70,000 or $140,000 if you are filing jointly with your spouse. This is to qualify for the maximum deduction of $2,500.
You can still claim a smaller deduction if you earn less than $85,000 annually or $170,000 filing jointly with your spouse.
This is not an itemized deduction. Instead, the government takes it out of your taxable income. For most people, this will probably mean that you will get a refund of between $500 and $600. Some people might qualify for both the student loan interest deduction and the standard deduction.
5. Medical Expenses Deduction
It is probably not hard to imagine that many people had higher-than-average medical expenses in 2020.
If the cost of your medical care amounted to more than 7.5 percent of your adjusted gross income, you may be able to claim it as a deduction.
This applies only to unreimbursed medical expenses that qualify for this particular deduction.
Qualifying medical expenses include:
- Costs of appointments
- Hospital care
- Nursing home expenses
- Prescription drugs and medications, including insulin
- Rehabilitation and addiction programs
- Medical saids like dentures, glasses, contacts, hearing aids, wheelchairs, service animals, and walking aids
- Transportation expenses (to access medical care)
- Insurance premiums not covered by your employer
For a more detailed list of covered medical deductions, visit the IRS website.
6. Self-Employment Expenses Deduction
Self-employment is growing in the United States. People are leaving traditional jobs to earn money from home. This has implications for their taxes.
If you are self-employed as a freelancer, business owner, or contractor, you may be able to claim some tax deductions.
Some of the most valuable fall under the broad category of self-employment expenses.
What does this mean?
Essentially, it means that anything that you use for business can be deductible. That might include the cost of your laptop, phone and internet service, and more.
One self-employment deduction is the home office deduction. If you have a workspace that you can qualify as a home office, you may be able to claim deductions on that as well.
This gets a bit complex as you may have to do some calculations. This involves calculating the square footage of your office to understand the costs.
For example: if your office occupies 10 percent of your home, you may be able to claim 10 percent of your electric bill.The same goes for homeowners’ insurance and other features.
2020 was an unprecedented year, not just financially but in many other ways. Luckily, there are plans to help families claim their maximum tax deductions to ease the financial burden. Doing the research beforehand to learn about the year’s best tax deductions is essential before filing your taxes.