Income taxes are one of our largest expenses. They can also become one of our biggest financial planning stressors. While you can’t avoid paying taxes, you can try to minimize the total amount of income taxes that you owe. By paying less in taxes, you’ll have more money available to save for your goals. The good news is that you can use popular tax deductions to help reduce your tax bill.
How income tax deductions work for you
Standard deduction amounts were given a significant boost when the tax law changed in 2018, which means your limited itemized deductions have a higher threshold to even be used – many more people, especially married filing joint filers, are finding themselves using the standard deduction even if they have things like mortgage interest and property taxes. You choose which method to use, typically based on which one will lower your taxable income more.
|Filing Status||2020 Standard Deduction||2021 Standard Deduction|
|Married Filing Jointly||$24,800||$25,100|
|Married Filing Separately||$12,400||$12,550|
|Head of Household||$18,650||$18,800|
- The standard deduction is higher for those who are over 65 or blind; it is also higher if you meet those conditions and your filing status is Single or Head of Household.
- For the 2020 and 2021 tax years, the standard deduction amount for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of $ 1,100 or the sum of $ 350 and the individual’s earned income, up to the regular standard deduction amount.
- If your tax filing status is Married Filing Separately and your spouse itemizes deductions, you may not claim the standard deduction. If one spouse itemizes income tax deductions, then the other spouse must itemize in order to claim any deductions.
- Non-resident aliens must itemize deductions on their tax return as they are not eligible to claim the standard deduction.
Most commonly used tax deductions
Here are some of the most commonly used tax deductions that you may be eligible to use when attempting to minimize your 2020 and 2021 taxes:
Mortgage interest deduction – Homeowners can deduct their mortgage interest (subject to mortgage limits) on Schedule A of their 1040 form. The limit for mortgage debt incurred after 2017 for deductible interest is reduced to $750K, while existing acquisition debt of up to $1 million is “grandfathered”. No matter when the mortgage debt was incurred, you can no longer deduct the interest from a loan secured by your home to the extent the loan proceeds weren’t used to buy, build, or improve your home.
State and local taxes (SALT) – You can also deduct up to $10,000 of state, local and property taxes (or sales and property taxes if you don’t live in a state that has income taxes). This is an aggregate limit and is $5,000 for married couples filing separately. The so-called “SALT limitations” underscore the importance of limiting state and local taxes as much as possible.
Examples of state and local taxes that can be itemized on a tax return include the following:
- Withholding for state and local income taxes as shown on Form W-2 or Form 1099.
- Personal property taxes
- Real estate taxes
- Estimated tax payments you made during the year
- Payments made during the year for taxes that arose in a previous year
- Extension tax payments you made during the year
Charitable donations – The IRS agrees that it is better to give than to receive and they offer some helpful tax savings for giving (if you itemized deductions). There are deductions available for cash and household items donated to charities.
For charitable contributions to be deductible, they must have been made to qualified organizations. Contributions to individuals are never deductible. You may determine if the organization that you contributed to qualifies as a charitable organization for income tax deduction purposes by referring to the IRS Tax Exempt Organization Search tool. For more information, see Publication 526 , Charitable Contributions and Can I Deduct My Charitable Contributions?
Also note that due to the CARES Act there is an extra standard deduction of $300 available for charitable cash donations for the 2020 tax year. This new deduction is available for those who take the standard deduction (which means you don’t itemize) and they can claim up to an additional $300 standard deduction for charitable cash contributions made in 2020. For 2021, this is also available and couples can deduct up to $600 in charitable cash donations.
Less frequent itemized deductions
Some other less frequently used tax deductions may apply to your financial situation. Medical expenses can be deducted if they exceed 7.5% of your Adjusted Gross Income. Other miscellaneous deductions from previous years have been eliminated under the new tax laws.
Action Item: Not sure if you will be able to itemize deductions this year or next? Consider completing an estimate of your itemized deductions potential using a copy of Schedule A . If your itemized deductions exceed the standard deduction amount for your filing status you will want to itemize. If you are using the standard deduction amount, you can focus your tax planning efforts on reducing or deferring your taxable income.
Tax deductions that are no longer in place since 2018
Here are some of the tax deductions that were eliminated with the tax law change in 2018:
Moving expenses – It is no longer possible to deduct moving expenses when you relocate for a job or self-employment unless you are an active duty member of the military moving due to a military order.
Home equity loan interest for non-home related use – The interest on home equity loans cannot be deducted unless you used the loan to buy, build, or make significant improvements on your home (and the loan is actually secured by your home). This applies to home equity loans already outstanding that you may have used to consolidate debt or pay for other things. If you have outstanding home equity debt that was partially used to update or remodel your home, then only the interest attributed to the portion used to do the work can be deducted.
Miscellaneous itemized deductions – The IRS no longer allows you to claim miscellaneous deductions on Schedule A that were previously subject to a 2 percent floor. Examples of these miscellaneous deductions include:
- Investment fees
- Unreimbursed employee business expenses
- Tax preparation expenses
- Safe deposit box rental
- Certain legal fees
Alimony payments – Alimony (aka maintenance payments between divorced couples) is now non-deductible to the payor and considered non-taxable income to the recipient. Under the previous tax laws, alimony and separate maintenance payments were deductible by the payor and considered taxable income for the recipient.
Casualty and theft losses – Beginning with the 2018 tax year and through tax year 2025, you can only deduct casualty and theft losses if they occurred due to an event that is officially declared a federal disaster.