If you're like most taxpayers, when you finally decide to do your taxes, you want to get it over with as soon as possible.
But don't pay a price for you haste.
If you rush through filling out your Form 1040, you could cheat yourself out of some tax savings.
It happens every year. Folks overlook deductions, whether they itemize on Schedule A or claim above-the-line breaks — officially known as adjustments to income — that now are, for the most part on Form 1040 Schedule 1. These reduce all your earnings to your adjusted gross income, or AGI.
There also are tax credits that slip through the filing cracks. Credits are even better that deductions (or adjustments) because they directly reduce dollar-for-dollar what you owe Uncle Sam. In a few cases, credits even could get you a tax refund.
So that you don't leave any money on the table, or more accurately in the U.S. Treasury, check out these 13 that tend to fall into that category.
1. Earned income tax credit (EITC): This credit is intended to reduce the amount of tax owed for low- and moderate-income wage earners. However, only 4 out of 5 eligible taxpayers every year claim the EITC, according to the Internal Revenue Service.
That's too bad, especially for the 2021 tax year. Provisions in the COVID-prompted American Rescue Plan Act (ARPA) enacted last March enhanced the EITC. More people are eligible for it, with age and earning limits expanded. Single taxpayers without any dependent children also could get a dramatically larger credit.
The EITC maximum for qualifying single, no-kiddos taxpayers is $1,502. That's almost triple the pre-ARPA amount. As for EITC eligible taxpayers in the other your filing statuses, the maximum EITC amounts with the ARPA changes are:
- $3,618 for those with one qualifying child,
- $5,980 for two qualifying children, and
- $6,728 for taxpayers with three or more qualifying children.
These expanded EITC options weren't renewed for the 2022 tax year. That makes claiming this refundable tax credit, which means you could get any excess amount back as a tax refund, your 2021 return even more important.
You can read more about the tax credit changes and how to claim it in my EITC Day post from earlier this year.
2. Dependent care costs: Ask any parent about the cost of raising a family and they'll tell your that one of the biggest expenses is paying for someone to watch after their youngsters while mom and dad (or mom and mom or dad and dad) are at work. Last year, many parents gave up their dual working from home/watching over the kids jobs and went back to their offices. To do so, they had to again find child care.
This tax break (note that it's one of those valuable directly tax-reducing tax credits) usually covers up to $3,000 spent on care for one child or up to $6,000 for the care costs two or more kids. Then you figure the actual tax credit you can get — again noting that it's one of those valuable directly tax-reducing credits — as a percent of those care costs based on your AGI. When all the calculating is done, that comes to a maximum of $1,050 for one child and $2,100 for two or more.
But for 2021 returns, ARPA increased the amount of eligible expenses you can use to figure the credit. They're bumped up this filings season to $8,000 for the care of one child and $16,000 for two or more youngsters.
And while the percentage of AGI is still used to figure the actual credit amounts, ARPA increased the maximum credit to 50 percent of qualified expenses instead of 35 percent. That math means the child care credit goes up in 2021 to a maximum of $4,000 for the care of one child, and potentially $8,000 for two or more children.
3. Credit for other dependents: You probably noticed in the child care credit discussion just above that it actually has a longer official name. It can be claimed for care of other, older dependents, too. And that brings us to another tax credit that you don't want to overlook if you are responsible for more than just minor youngsters who get you the Child Tax Credit.
The Credit for Other Dependents is a $500 tax credit was created as part of 2017's Tax Cuts and Jobs Act (TJCA). It's a credit that can help out taxpayers who are providing for older kids and/or aging parents for older relatives who are part of your household.
4. Deductible IRA contributions: Some taxpayers who contribute to a traditional IRA may be eligible to claim all or a portion of their contributions as a deduction. This is an easy way to make a sizeable reduction to taxable income while also planning for your post-work years. Even better, you have until Tax Day, which is April 18 this year, to establish and put money into one of these retirement accounts for the prior tax year.
The amount you can contribute to an IRA is adjusted annually for inflation. For the 2021 tax year, it can be as much as $6,000 if you're younger than 50, or $7,000 if you've hit or are beyond the half-century mark.
5. Retirement savings credit: If you can put some money into an IRA, traditional or Roth version, or a workplace or self-employment retirement plan, you also might be able to get a bonus tax break. The Saver's Credit is available to lower- and middle-income earners who contribute to retirement savings. It's worth up to $1,000. And because it's such a great tax advantage, I've got to keep repeating myself. That amount, since it's a tax credit, means a dollar-for-dollar reduction of any tax you owe.
6. Lifetime learning lessons: Many parents of college students, or the youngsters themselves if they file their owe returns, used to use the tuition and fees above-the-line deduction. That tax break, however, was is no longer in the Internal Revenue Code.
But don't despair, for 2021 you can use the Lifetime Learning Credit to account for many of these same educational expenses. This is a good option because the federal funding and COVID relief law enacted on Dec. 27, 2020, increased the income phaseout thresholds for the Lifetime Learning Credit, meaning it's now available to more taxpayers.
Better still, the direct reduction of tax thanks to the Lifetime Learning Credit could be as much as $2,500 per student on 2021 tax returns.
Best of all, this tax break lives up to its lifetime appellation. The Lifetime Learning Credit covers lessons for students of all ages, including those of us in the working work who are taking some continuing ed classes to improve our on-the-job skills. If you took such classes in 2021, be sure to check out whether you can claim this credit.
7. Teacher classroom expenses: If you're on the other side of the educational spectrum and dispense knowledge to eager students, you're probably well aware of this above-the-line deduction that helps you get some tax payback for your out-of-pocket classroom expenditures. Full-time K-12 teachers can deduct up to $250 in out-of-pocket classroom expenses as an above-the-line deduction. If spouses are both teachers and filing a joint return, the deduction can be as much as $500.
When toting up your classroom costs, be sure to count the new items that now qualify. The IRS added coronavirus pandemic personal protective equipment (PPE) to the allowable classroom expenses list.
8. Larger standard deductions for older filers: Most people claim the standard deduction, especially since the Tax Cuts and Jobs Act (TCJA) greatly increased those amounts. Your exact standard deduction amount is based on your filing status. But a couple of other factors can come into play here.
Older, as well as visually impaired taxpayers of any age, generally can claim additional standard deduction amounts (starting at $1,700 more) just by checking boxes on Form 1040 or by filing the new Form 1040-SR created especially for senior citizen taxpayers.
9. Donations directly on Form 1040: You regularly donate to good causes, but don't itemize at tax time. This year, the IRS has just the tax break for you. The government spending/coronavirus relief law enacted at the end of 2020 allows taxpayers who don't itemize to claim a charitable deduction directly on Form 1040. Single filers can claim up to $300 in donations, with married couples filing jointly getting a deduction of up to $600.
10. Charity-related miles: If it's more tax worthwhile to claim your charitable gifts as itemized expenses, make sure you don't miss out on any charity-related miles. You can count that travel distance at 14 cents per mile among your charitable gifts on Schedule A. Also be sure to include the amounts for receipts for parking and tolls. These miles could add up, for example, if you used your car to help the local food bank or prepared meals for the homebound groups deliver to those in need.
11. Donated retirement money: Sticking with the philanthropic theme, here's one for generous older individuals who did a great job saving for retirement. In fact, you're discovering you don't really need all that cash you socked away for your golden years. But the IRS still wants you to take out this money as a required minimum distribution (RMD), which now kicks in when you turn 72 instead of 70½.
You can avoid those RMD taxes by donating up to $100,000 a year of your required withdrawal to an IRS-approved charity. You can even start doing so at your 70½ birthday. That giving age wasn't changed when the RMD trigger was extended. Just make sure you do so as a direct transfer, known as a Qualified Charitable Distribution or QCD, to the charity. You can't deduct these QCDs, but the donations meet RMD rules, meaning the gift isn't included in your adjusted gross income and therefore isn't taxable income to you.
12. Self-employment tax breaks: Job shake-ups due to the COVID-19 pandemic pushed more of us into alternative work areas. We took side gigs or became full-time, being-the-boss entrepreneurs. Not only do these enterprises, part-time or permanent, offer more freedom, the tax code provides some breaks we should claim at filing time.
If you pay for your medical insurance as a self-employed worker, be sure to deduct that as an above-the-line deduction found on Schedule 1. Ditto for half the self-employment (SE) tax you pay. And don't forget about retirement. You can several self-employed retirement plan options. As noted in overlooked tax break #4, these contributions also count toward the Saver's Credit.
There also are a slew of expenses you, as a sole proprietor of one full-time or many side hustles, can claim on your Schedule C for each.
13. Many medical deductions: OK, maybe this is a bit of cheating, but not the kind that will get you in trouble with the IRS. I'm lumping a lot of medical costs into this final overlooked tax break item, which applies to folks who itemize because they have a lot and often large medical expenses.
To do so, their medical expenses must exceed at 7.5 percent of adjusted gross income. These can help them (and maybe you) clear that hurdle.
Allowable deductible medical costs you can count range from medical miles that can be claimed on 2021 returns at 16 cents each to certain health insurance premiums to many more discussed in my look at IRS-approved deductible medical expenses, as well other in my post on often overlooked (yes, doubling down here) deducible medical expenses. Again, note the addition of coronavirus-related personal protective equipment to the list.
It might take a bit more time and work to claim some of these overlooked tax breaks. If you use tax software or hire a tax preparer to help you file, they should catch these listed here if you qualify. But it never hurts to know what to look for and discuss with your tax pro.
If any of these baker's dozen deductions and credits work for you, then they're definitely make it worth the extra filing trouble to save some, and sometimes, a lot of tax dollars.