5 Tax Deductions You Need to Know - Adviser Investments

5 Tax Deductions You Need to Know

Tax season has kicked off. Now is the time to take advantage of every deduction and credit you’re entitled to. Here are five that could make a difference to your bottom line.

Cash contributions. Prior to 2020, claiming a charitable deduction on your tax return required you to itemize. In other words, you had to claim more than the standard deduction to benefit from your charitable contributions. More recently, legislation has made it possible to deduct cash donations (including checks, credit card payments or electronic fund transfers) to qualified charities—even if you do not itemize. The upshot: Cash contributions of up to $300 made in 2021 are deductible on your tax return as an above-the-line deduction in addition to the standard deduction.

Student loan interest. In the past, student loan interest could only be deducted if the filer was liable for the debt and paid it back themselves. Not anymore. As long as you are not claimed as a dependent on someone else’s tax return, you can deduct up to $2,500 of interest on your student loans—even if someone else is making the payments. If you took advantage of the pause in federal student loan repayment in 2021, you may not have any interest to deduct, but those with private loans should still be able to benefit.

Child and dependent care tax credit. Tax credits are more valuable than tax deductions because they reduce your tax bill dollar for dollar—so take every credit you can. If you paid someone to care for your child or dependent so you could work or go to school in 2021, for instance, then you may be eligible for this credit. The size of the credit (up to $3,600 for individuals or $7,200 if you file as a couple) depends on your income—and it can be tricky to figure out, with certain pandemic relief legislation set to expire this year. Our podcast on the subject can help.

Home office deduction. COVID-19 reshaped our economy in a lot of ways, including by accelerating entrepreneurship and home-based businesses. Although this tax deduction is not new in 2021, it may newly apply to you. If you are a small-business owner or entrepreneur using a room in your home as your principal workspace, you may be able to write off items like utilities, rent, mortgage and real estate taxes—but remember, it’s critical to keep accurate and verifiable records. (Note: This deduction does not apply to individuals working for an organization in a remote capacity; if you are not self-employed, you are ineligible.)

Prior-year state tax deduction. If you paid state taxes in 2020, be sure to incorporate that amount into your itemized deductions. And if you paid more in state and local sales tax than state and local income tax, you can opt to deduct the former. (You can’t deduct both.) Remember, as of 2018, the deduction for state and local taxes was capped at $10,000 per year.

Tax obligations vary from person to person, so we recommend checking in with your accountant or tax preparer or taking advantage of Adviser Investments Tax Solutions, our in-house tax advisory service. If you have any questions, please contact your wealth management team and we will be happy to help you.

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