Even though you probably just filed your taxes for 2020, it’s not too early to start thinking of how you can minimize your tax burden or maximize your refund for 2021. In order to take advantage of most tax credits and deductions, you generally need to plan ahead and take action during the year so you can claim them when it’s time to file, so to help you with your tax planning, our CPA firm is sharing the best tax breaks for 2021.
Tax Credits vs Tax Deductions
Before we look at the best credits and deductions, it’s important to understand the difference between the two. A tax deduction reduces your taxable income, thus reducing the amount you are expected to pay. A tax credit reduces the actual amount you owe.
Let’s say your pre-tax income is $75,000, which falls in the 22 percent tax bracket (though due to marginal tax rates, only the amount you make above $39,476 is taxed at 22 percent.)
- The student loan interest deduction allows you to deduct up to $2,500, giving you an adjusted income of $72,500 that is subject to tax.
- The Lifetime Learning credit offsets post-secondary education by giving you a tax credit up to $2,000. If you are expected to pay $3,100 in taxes on your adjusted gross income, this credit would drop your payment down to $1,100.
Best Tax Breaks for Personal Tax Preparation
With the Tax Cuts and Jobs Act of 2017, the standard deduction was raised and many itemized deductions were eliminated, or tax payers had to choose between taking the standard deduction or itemizing deductions. Unless your itemized deductions were significantly more than the standard, and you had comprehensive documentation recording them, the standard deduction is generally the best option. For 2021, individuals will receive a standard deduction of $12,550 while married couples filing jointly will receive $25,100.
However, there are a few deductions and credits you can still take advantage of for your personal taxes that can lead to a significant break on your tax bill.
- Charitable Contribution (Deduction): While charitable deductions are generally an itemized deduction, legislation was passed in December 2020 that allowed a $300 charitable deduction per household filer (so married couples could deduct up to $600 of charitable contributions) while still using the standard deduction.
- Student Loan Interest (Deduction): You can deduct up to $2,500 of paid student loan interest in a tax year.
- American Opportunity Tax Credit (Credit): Receive a credit of up to $2,500 per student in your household to cover education expenses for the first four years of post-high school education (including tuition, books, and fees). This is available for single filers who earn below $90,000 and married couples who earn $180,000.
- Child Tax Credit (Credit): If you have children under 17 and you pay for the majority of their care, you can receive a tax credit of up to $2,000 per child.
- Credit for Other Dependents: If you care for aging parents or other dependent who is not applicable for the child tax credit, you can deduct up to $500 for those dependents, if your income is below $200,000 for single filers or $400,000 for married couples.
Best Tax Breaks for Self-Employed People and Business Owners
If you are self-employed or a small business owner who has a pass-through tax entity like a sole proprietorship, LLC, or S corporation, you are eligible for several tax breaks on your 1040.
- Qualified Business Income Deduction: The QBI allows you to deduct up to 20 percent of your income from your business or self-employment income and can be claimed along with the standard deduction.
- Home Office Deduction: You can claim utilities, rent, repairs, and other expenses as they relate specifically to your home office, such as a portion of your internet or upgrades to a space to convert it into a home office.
- Health Insurance Premiums: If you are self-employed, you can deduct your health insurance premiums as well as those you paid for your spouse and dependents.
- Retirement Savings: Like health insurance, you can deduct your contributions to a SEP IRA or Simple IRA and other similar retirement accounts.
Schedule a Consultation to Discuss Tax Planning with a CPA
If you want an advantageous tax strategy, but you’re not sure where to start, we can help. With a CPA office in Durham and Raleigh, we serve a wide client base across NC. Schedule a consultation with an experienced accountant today by calling (919) 872-0866 or filling out the form below to get started.