Today, relatively few Americans itemize deductions on their tax returns. You can claim either the standard deduction or the itemized deductions, but not both. And, of course, you always want to choose the one with the highest value. However, as the Tax Reform Act of 2017 nearly doubled the standard deduction, it is now worth more than any itemized deduction available to most taxpayers.
This means that most people cannot claim any known tax benefits. No deductions for medical expenses. No tax savings for mortgage payments. Not even for state and local taxes. You will not claim any of these popular deductions if you claim the standard deduction.
But there are a handful of other tax deductions that people who take the standard deduction can still claim on their tax return. Most of these so-called "above-the-line" deductions have no income limit, so anyone can claim them. In addition to direct tax savings, Adjusted Gross Income (AGI) will be lower, which may allow you to claim other tax exemptions that have income limits based on AGI. So if you're claiming the standard deduction and want to lower your tax bill, read on to see if you qualify for one of these money-saving waivers.
Charitable Contributions Deductions
In response to the coronavirus crisis, the CARES Act (enacted in March 2020) added a new above-the-line deduction to encourage more charitable giving. If you take the standard deduction on your 2020 tax return, you can deduct up to $300 for cash donations to charities made during the year. (For joint filings in 2020, the allowable amount is still only $300.) Donations to donor-recommended funds and certain charities are not tax-deductible. Also excluded are contributions carried forward from previous years and most cash contributions to charities.
The deduction was extended to the fiscal year 2021 in December 2020 by the Taxpayer Certainty and Disaster Relief Act, but with some modifications. For example, ordinary tax filers can claim up to $600 for cash donations in the 2021 return. Even the 2021 deduction will not reduce your AGI.
IRA Deduction
Contributing to a Traditional Individual Retirement Account (IRA) is a win-win decision that allows you to increase your retirement savings while lowering your tax bill (assuming you've earned income). The contribution limit is $6,000 ($7,000 if you're 50 or older) or your taxable earnings for the year, whichever is lower. Plus, if you (and your spouse, if married) don't have a workplace retirement plan, every dollar can be deducted from your taxable income. If you are covered by a work pension plan (or your spouse is), this deduction may be limited if your income exceeds certain levels.
The contribution limits remain the same for 2021 as in 2020. However, the income limits for the deduction are slightly higher. Most people have until April 18, 2022 (April 19 for residents of Maine and Massachusetts) to make tax-deductible IRA contributions for 2021.
Finally, starting in 2020, workers over age 70.5 can contribute to a traditional IRA. So now you can continue to save money on a traditional IRA if you work until you're 70 or older.
Deductions for Business Expenses
The Tax Reform Act of 2017 eliminated almost all of the business deductions that itemizers used to make on Schedule A. But in some lines of work, it is still possible to eliminate some of the costs under certain conditions. Here are those income adjustments, now in Schedule 1:
You are a "fee-bias" government employee and wish to write off labor expenses: This is for notaries who perform a public function and are paid directly by the people they serve. You can deduct work-related expenses if you meet this definition.
You are a teacher and buy useful items for your class: Educators can set aside up to $250 a year of classroom expenses if they teach kindergarten through 12th grade and spend at least 900 hours a year at work. These include expenses paid or incurred after March 12, 2020, for personal protective equipment, disinfectants, and other materials used to prevent coronavirus spread. You don't have to be a teacher to claim this break. Principals, counselors, and aides may claim if they have supporting receipts.
You are an artist earning less than $16,000: The IRS expects you to prove that at least two employers paid $200 each for your services and that the expenses you intend to deduct are more than 10% of what you earned for your services. Please note that the IRS specifies that you must be an employee who receives wage income.
You are disabled, have a job, and incur expenses that allow you to work: Here is an example from the IRS: you are deaf and use a sign language interpreter at business meetings. This is deductible.
You are in the National Guard or the military reserve, traveling for drills: You have to travel over 100 miles from home and spend the night away from home. If you are eligible, you can deduct the cost of accommodation and meals (according to the federal per diem program) as well as an allowance to drive your car. For travel in 2021, the fare is 56 cents per mile, plus what you paid for parking, taxes, and fees.
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Jim McClaflin, EA, NTPI Fellow, CTRC