Tax Credits & Deductions

You can save money by taking advantage of every tax credit and deduction available to you. Credits provide a dollar-for-dollar reduction of your income tax liability; that is, a $1,000 tax credit actually saves you $1,000 in taxes.

Deductions, on the other hand, lower your taxable income. For example, if you are in the 22% tax bracket, a $1,000 deduction saves you $220 in tax, which is $780 less than the savings with a $1,000 tax credit. Let’s take a look at some valuable credits and deductions.

Adoption Tax Credit

Those who adopt a child can receive a tax credit of up to $14,440 for qualified adoption expenses in 2021, subject to income limitations (see page 11). Those adopting a child with special needs may claim a $14,440 tax credit in the year the adoption is completed, even if they do not have qualified adoption expenses.

Child Tax Credit - ARP Act Update

The American Rescue Plan (ARP) Act of 2021 temporarily expands the Child Tax Credit by allowing families to claim the credit regardless of their income level. It also increases the maximum amount of the credit to $3,600 for each child under age 6 and $3,000 for each child between ages 6 and 17. Additionally, the tax credit has been made fully refundable for low-income families. Eligible households will begin to receive advance monthly payments of the Child Tax Credit starting in July 2021.

Itemized Deductions

Because tax rates, deductions, and phase-outs are constantly changing, timing of income and expenses is critical. For most taxpayers, the general rule is defer income and accelerate deductions. You are allowed to take the standard deduction or to itemize your deductions on your tax return—whichever offers you the most benefit. However, the Tax Cuts and Jobs Act of 2017 eliminated or restricted many itemized deductions starting in 2018, and raised the standard deduction. This means that fewer taxpayers are likely to itemize.

The standard deductions for 2021 are as follows: $25,100 for married taxpayers filing jointly; $12,550 for single filers; $18,800 for head of household filers; and $12,550 for married taxpayers filing separately. There is an additional deduction for visually impaired or elderly taxpayers of $1,700 (if unmarried and not a surviving spouse) or $1,350 (if married).

If you still itemize your deductions, maintain detailed records. Consult with us throughout the year to monitor your income and plan your deductions.

Some itemized deductions—such as medical expenses—are based on “floor” amounts. Only amounts that exceed the given floor can be deducted.

To see if you qualify for the 2021 Income Tax Phaseout Ranges click here.

Pease Limitation

The Tax Cuts and Jobs Act of 2017 suspended the Pease limit on itemized deductions for tax years beginning after December 31, 2017 and before January 1, 2026.

Mileage Rates

You may deduct expenses for an automobile you own in one of two ways: either record and deduct your actual expenses, including depreciation, or record your mileage and deduct a standard amount per mile of travel, plus parking and toll fees. For 2021, the standard mileage rates are 56¢ per business mile driven, 16¢ per mile for medical or moving (moving is applicable for members of the U.S. Armed Forces or their spouse or dependents only) and 14¢ per mile for charity.