Missing These Tax Credits and Deductions Could Cost You Thousands

While some of the best credits and deductions required taxpayers to take action before Dec. 31, there are others that can be used right up to the filing deadline. Whenever possible, though, seek out credits rather than deductions: Each dollar in tax credits is one less dollar in taxes paid, while deductions that reduce taxable income offsets taxes by only 10 to 39.6 cents for every dollar deducted, depending on the tax bracket. With help from Andrew G. Poulos, an enrolled agent and accredited tax preparer with Poulos Accounting & Consulting in Tucker, Georgia, we found a host of 2021 deductions and credits to choose from.

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The passage of the Tax Cuts and Jobs Act in 2017 almost doubled the standard deduction in 2018, pushing it from $9,350 for those filing as head of household to $18,000. There was another boost in 2019 to $18,350 for the head of household, and the amount is raised again for 2021 to $18,800 (married people filing jointly also got bumped up, to $25,100 from $24,400). But it also eliminated a bunch of helpful credits and deductions, including the personal exemption, which was $4,050 in 2017.

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That higher standard deduction makes it difficult to put together enough charitable deductions to make it worth itemizing. But this year, thanks to the temporary COVID-19 tax relief measure called the CARES Act, individuals can take an above-the-line deduction up to $300 (and married couples filing jointly up to $600) for cash contributions to IRS-approved charities. If you have enough deductions to itemize, it is possible. While it's too late to make charitable donations for 2021, it’s the perfect time to begin tracking donations made throughout the year for 2022.

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While tuition and fees deductions have dried up, the American Opportunity Tax Credit remains an option for eligible students — not grad students or long-term undergrads; it's available only during the first four years of college — with at least half-time status at an accredited school. It covers all of the first $2,000 in expenses and 25% of the next $2,000 (for a total $2,500). Schools will send students a 1098-T showing the amount paid last year in tuition and fees, but even expenses including books, supplies, and equipment such as computers can be offset. If the 1098-T does not max out the allowed credit, hold onto those receipts for supplies.

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This is the tax credit for the older student. Anyone taking classes at an eligible educational institution to acquire or improve job skills is eligible, even if taking just one class well after four years of undergraduate education. There are limits: Students are credited for only 20% of $10,000 in expenses ($2,000 is the maximum), though it can be applied to tuition, fees, books, supplies, and equipment. Individuals with an adjustable gross income between $80,000 and $90,000 (or between $160,000 but less than $180,000 for married filing jointly), will get a reduced amount. If it's over those thresholds, you can't claim the credit.

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Students can still deduct up to $2,500 for interest paid on student loans — but get less if median adjusted gross income exceeds $70,000 ($140,000 for joint returns) and nothing if it's $85,000 or more (or $170,000 or more for joint returns).

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Those who took advantage of the child tax credit in 2017 could claim a $1,000 credit on their income tax return for each child under 17 who qualified. In 2018, that doubled. In 2021, the American Rescue Plan Act expanded the credit even further to $3,600 for children under 5 at the end of 2021, and $3,000 for children aged 6 to 17 at the end of 2021. To qualify, children have to be 18 years or younger on the last day of 2021, be related to you, claimed as a dependent, be a documented U.S. citizen or resident, have lived with you for half of the tax year (though absences related to school, vacation, military service, and medical care are exempt) and must not provide more than half of his or her own support. The expanded credit is available for heads of household earning $112,500 or less (or $150,000 or less for married couples filing jointly).

Many taxpayers got Advance Child Tax Credit payments, which amounted to about half the credits they were eligible for based on 2020 income and dependents. These monthly disbursements began in July and continued through December. Taxpayers who got them must indicate it on returns and can’t claim the full credit. Those who didn’t get advance payments — for example, parents who had new infants in 2021 who weren’t reported on 2020 taxes — are eligible for the full credit.

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The American Rescue Plan Act of 2021 also substantially expanded the Child and Dependent Care Credit. If you paid for care expenses for a dependent so you or your spouse could work or look for work, you may be eligible. You can claim up to $4,000 for one qualifying person; the cap is $8,000 for two or more qualifying people. Any caretaking fees paid for children under 13, a spouse, or an elderly dependent who can’t care for themselves without supervision and who lives with you for more than half the year are eligible.

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The Earned Income Tax Credit is for low- and moderate-income taxpayers with "earned income" such as wages, salaries, or self-employment pay (but not Social Security, unemployment, or investment income). The limits are strict, ranging from $21,430 for a single person with no children to $57,414 for a married couple with three children or more. The credit's value is worth $1,502 to $6,728 depending on filing status and number of dependents, but it requires recipients to have less than $10,000 in investment income for the year. To qualify with dependents, the child must be related to you, be under 19 or under 24 if a full-time student, and live with you for more than half the year (non-consecutively). The American Rescue Plan Act created two temporary changes to the EITC: For 2021 only, you may qualify if you are 19 years old or older and not a student. You are also able to select your 2021 or 2019 income and claim the amount that provides you the largest refund.

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If you or your family have health insurance from a government-run marketplace built through the Affordable Care Act, you may be eligible for this credit. In previous years, if you earned more than 400% of the federal poverty line by the size of your family, you would have been ineligible for this credit. The American Rescue Plan Act eliminated this rule for tax years 2021 and 2022, though. Additionally, the ARPA extended eligibility to unemployment recipients. If you or your spouse got this benefit in any week in 2021, you may claim this credit — usually equal to the cost of the second-lowest silver plan. Taxpayers can get this credit in advance to offset monthly premium bills, but claim too much and it must be paid back when filing. Those who get too little can claim the remainder when submitting returns.

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You should have received three Economic Impact Payments. If, for some reason, you didn’t get all three or fell short of the amount you were eligible for, you can claim a Recovery Rebate Credit. This credit is available only for tax years 2020 and 2021. If you didn’t get the third stimulus payment between March and December, you can claim it on your return for this year. If you missed a previous stimulus payment or payments, you’d need to address that on your 2020 return. If you’re earning less now than in previous tax years, you may also have been eligible for a larger stimulus check than the one you got, because payments were based on the last income information filed with the IRS. It's important to check your records carefully, Poulos says. Claiming this credit when you’ve already received the stimulus will cause an immediate red flag when the IRS processes a return and could cause processing delays as the IRS corrects it.

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It isn't much, but the Savers Credit gives back to low- and moderate-income people who contribute to a qualified retirement account. Taxpayers can get a credit for 10%, 20%, or 50% of the first $2,000 contributed, depending on income and family size. To get the minimum 10%, the maximum allowed income is $34,000 for single filers, $51,000 for the head of a household, and $68,000 for joint filers. Also, beginning in 2019, if you're the designated beneficiary you may be eligible for a credit for contributions to your Achieving a Better Life Experience account for persons with disabilities.

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If you bought a home and had the mortgage in place before Dec. 16, 2017, you are still eligible to deduct interest on up to $1 million in mortgage debt. If you happened to sign on that date or later, though, your threshold drops to $750,000.

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Taxpayers who get a Qualified Mortgage Credit Certificate worth up to $7,500 from a local or state government may be able to claim the Mortgage Interest Credit. The home must be the taxpayer's primary residence, the claimants must be first-time homebuyers, and interest payments can't go to a taxpayer's relative. The credit is worth up to $2,000, and unused portions may be carried forward to the following year.

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Taxpayers 65 or older — or younger but retired or on permanent and total disability — may be eligible for a credit. Taxable income must be below $17,500 (or $20,000 if married and filing jointly) and nontaxable Social Security, pension, or disability benefits must be below $5,000. If both partners qualify and file jointly, the income limits are $25,000 for taxable income and $7,500 for nontaxable benefits. The credit itself ranges between $3,750 and $7,500.

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Whether it's through an employer or private plan, a traditional Individual Retirement Arrangement funded with pretax money — unlike a post-tax Roth IRA — is deductible up to a certain limit. For 2021, the maximum contribution is $6,000 (or $7,000 for those 50 or older). There are also deduction limitations depending on the taxpayer's income and access to an employer-sponsored retirement account.

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Until recently, taxpayers 65 years or older could deduct total medical expenses that exceeded 7.5% of their adjusted gross income. Even married couples that included one person 65 or older were eligible, but younger, single taxpayers could deduct only medical expenses that exceeded 10% of their AGI. The current threshold for everyone is 7.5% of gross income and retroactive to 2017. It stays in place for 2021.

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A longtime friend to small-business owners and freelancers, the Simplified Employee Pension IRA offers higher contribution limits than a traditional IRA. In 2021, as their own employer, business owners and freelancers can contribute up to 25% of their annual income or $58,000, whichever is lower. As with a traditional IRA, contributions made before the tax-filing deadline (without an extension) can be applied to the previous year.

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Unfortunately, taxpayers can't just set one of these up before the tax deadline and save some cash. The one-participant 401(k), or solo or self-employed 401(k), requires you to file for a federal Employer Identification Number and set up the account by Dec. 31. But once a solo 401(k) is established, taxpayers can make contributions right up to the tax-filing date in April (or mid-October, with an extension). Total contributions can't exceed $58,000, but that's still nearly four times the maximum employee contribution to a standard 401(k) of $19,500.

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If you bought new office furniture, computer servers, cranes, end loaders, cattle, trucks, or taxis for a business last year, you may be able to write off more from them than you thought. Even if you built oil derricks, warehouses, office space, or utility plants after Sept. 26, 2017, the bonus depreciation you could claim on the first year of owning those assets increased from 50% just a day before to 100% "expensing" from Sept. 27 onward. Tax changes also extended bonus depreciation from items bought or built new to new and used assets. That "expensing" applies to productions (qualified film, television, and/or staged performances) and even certain fruit or nuts. The law also increased the maximum deduction to $1 million from $500,000, with the phase-out threshold increasing to $2.5 million from $2 million.

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Self-employed people can deduct 56 cents a mile driven for business purposes for 2021. That said, detailed mileage logs are required. Writing down the miles driven (odometer readings at the beginning and end of the trip help), the date, the business purpose of the trip, and the destination should be adequate. Taxpayers can also take a 16-cent-per-mile deduction for eligible miles driven for medical and certain moving purposes in 2021. The standard mileage rate for charitable activities is unchanged at 14 cents. Look for the IRS to increase these rates for 2022 as it responds to high fuel costs and inflation.

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Unfortunately for the millions of Americans who suddenly found themselves working from home during the pandemic, this deduction isn’t available to W2 employees. Only self-employed workers qualify. The deduction disappeared for employees in 2018 and hasn’t returned. Additionally, you can’t simply work on the couch or at a kitchen table. A home office has to be a dedicated space for working and meeting clients and customers. Furthermore, office-related utilities including telephone, internet, and even heat and electricity have to be parsed out separately. You can try to determine which portion of a home's expenses, taxes, insurance, and depreciation is dedicated to a home office; a simplified version multiplies the square feet of the room by $5 (if the total size is 300 square feet or smaller).

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Under tax changes, deductions for state and local taxes (property tax and sales or income tax) are capped at $10,000 from 2018 through 2025. If your total state and local taxes and property taxes are typically more than $10,000, there's no way to increase the deduction. 

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You may be able to take a tax credit of up to $14,400 for qualified expenses paid to adopt a child in 2021. Those expenses include adoption fees, court costs, attorney fees, travel expenses (including amounts spent for meals and lodging), and readoption expenses for a foreign child. Those credits apply to adoptions of anyone under 18 years old or physically or mentally incapable of taking care of themselves. If your modified adjusted gross income is more than $216,660, the credit is reduced; those with MAGI of $256,660 or more can't take the credit.

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Despite fears it would be eliminated, this credit still offers buyers of qualified electric or plug-in hybrid vehicles up to $7,500 for the purchase. While this credit isn't going to be around forever, it's still a formidable tool for boosting sales of these fuel-efficient vehicles in spite of low gas prices and the market's hunger for less-efficient SUVs.

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Most people who sell a home know that, if they've sold at a gain, they may exclude up to $250,000 of it if single or $500,000 if married filing jointly. Granted, you had to live in that home as your main residence for two of the past five years (military, foreign service, and intelligence personnel are exempt). What most homeowners don't realize is that the gain isn't only on the sale price of the home, but on improvements made, real estate agent sales commissions, closing costs, recording fees, and survey fees. Keep clear records of all of it in case of an audit and to keep a big chunk of the gain tax-free.

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If you paid or accrued income tax in a foreign country or U.S. possession in 2021, you can use it as a credit against U.S. income tax. If you already exclude foreign earned income, foreign housing costs, foreign possessions, or income from Puerto Rico exempt from U.S. tax, you aren't eligible. Also, your foreign tax credit can't be more than your U.S. tax liability multiplied against a fraction made up of taxable income from outside the United States and total taxable sources.

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If you live in a foreign country for at least 330 full days out of the year, you can have up to $108,700 of your salaries, wages, professional fees, and other amounts you get as an employee excluded from federally taxable income. You may also exclude amounts your employer pays for rent, furniture rental, parking, or other items.

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The IRS will allow taxpayers to make tax-free contributions and withdrawals from Health Savings Accounts as long as they go toward qualifying medical expenses. High-deductible health plans — with premiums ranging between $1,400 and $7,200 for singles and $2,800 and $14,000 for families — allow taxpayers to contribute up to $3,600 for single filers or $7,200 for families to HSAs without any tax implications.

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The Non-Business Energy Property Credit covers materials that meet the efficiency standards of the Department of Energy. This includes home insulation, exterior doors, exterior windows and skylights, some roofing materials, electric heat pumps, various water heaters, central air conditioning, biomass stoves, furnaces, boilers, and advanced circulation fans. You can claim 10% of the minor improvements or 100% of the big ones, but you'll get only a maximum $500 credit for all years of improvements combined. It also sets credit limits for windows ($200), furnaces or boilers ($150), fans ($50), and bigger jobs ($300).

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If you're thinking about going solar, installing a small windmill, looking into geothermal heat, or experimenting with fuel cells, there's a tax incentive to do so. You can get a 26% rebate on any of the above if the system was put into service after Dec. 31, 2019, and before Jan. 1, 2023.

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In previous years, a taxpayer could get a deduction for any mishap that occurred in their home. But starting in 2018, the casualty losses must have occurred during a federally declared disaster for a taxpayer to get that same deduction. This deduction may return in full in 2025, but for now it's limited to disaster areas. Theft losses are applicable any place where you’ve experienced the unlawful and criminal removal of money or property.

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The self-employed, including those with freelance income, can write off educational expenses for workshops, webinars, books, or other material that maintain or improve skills. While educational expenses to meet the minimum requirements of a trade or business — or related to getting into a new line of work — don't qualify, refresher courses, courses on current developments, and academic or vocational courses would.

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