9″Above-the-Line” Deductions for Your 2021 Return
By: Stacey Nickens
Taxpayers often ask me about deducting mortgage interest payments or medical expenses. However, many taxpayers do not claim these popular deductions because it is more beneficial for them to take the standard deduction. On 2021 returns, the standard deduction is $12,550 for single filers and $25,100 for joint filers. With such a large standard deduction, few taxpayers qualify for enough individual deductions to warrant itemizing their return.
However, taxpayers taking the standard deduction can still claim certain “above-the-line” deductions. These deductions reduce your adjusted gross income (AGI), allowing some taxpayers to qualify for additional, income-based deductions. With that said, review some of these above-the-line deductions to learn ways to reduce your tax bill.
1. IRA Deduction
Contributing to an IRA allows you to both save for retirement and reduce your taxable income. For the 2021 tax year, each taxpayer can contribute up to $6,000 to an IRA, and if you are 50 or older, you can make an additional $1,000 catch-up contribution. Those whose taxable income is less than these limits can only contribute the amount of their taxable income or less. For example, if you earned $4,000 in 2021, you would have to contribute $4,000 or less to an IRA.
Taxpayers not covered by a workplace retirement plan can deduct the full amount of their contribution. Individuals who themselves are covered by a workplace retirement plan, or whose spouses are covered by a workplace retirement plan, may find their allowable deduction reduced if their income exceeds certain thresholds.
Most taxpayers have until April 18, 2022 to make an IRA contribution that they can deduct on their 2021 return. Maine and Massachusetts residents have until April 19, and the victims of a few recent natural disasters have until May 16.
2. HSA Deductions
Contributing to an HSA is a wonderful way to invest in your health and save on healthcare costs. For 2021, members covered by an individual plan can contribute up to $3,600 to an HSA, and members covered by a family plan can contribute up to $7,200 to an HSA. Taxpayers who are 55 or older can make a catch-up contribution of $1,000.
These contributions are deductible as long as they were made with after-tax funds. For example, someone whose HSA contributions are directly deducted from their paycheck before taxes are withheld would not be able to deduct their HSA contributions.
To claim this deduction, make your contribution before the tax filing deadline, and use Form 8889 to claim your deduction.
3. Self-Employed Deductions
If you are self-employed, you face double Social Security and Medicare taxation. You must pay both the employee and employer portion of these taxes. However, you can then deduct half of these tax payments on your return. You simply use Schedule SE to calculate this deduction.
Additionally, you can deduct contributions to a self-directed retirement plan. Self-directed plans include SEP, SIMPLE, or qualified plans. If you contribute to a SEP as a self-employed person, you will need to calculate the size of your allowable deduction on your return. Contributions above the allowable deduction can be carried over and deducted in future years.
Finally, you can deduct health insurance costs as long as you and your spouse are not eligible for any workplace healthcare plan. You can deduct Medicare premiums, Medigap expenses, and other heath insurance costs, up to your business’s net income.
4. Student Loan Deduction
You may be able to deduct up to $2,500 in student loan interest as long as your income falls below certain thresholds. To deduct a spouse’s, a child’s, or your own loan interest payments, a single taxpayer’s AGI must fall below $70,000 and a joint taxpayer’s AGI must fall below $140,000. The deduction is then reduced before disappearing for single taxpayers who earn more than $85,000 and joint tax payers who earn more than $170,000.
You are not allowed to claim this deduction if you are married but filing separately or if you are a dependent on someone else’s return. Additionally, you can only deduct loan interest for loans used on qualifying educational expenses at qualifying institutions.
5. Alimony Deduction
Alimony payments can be deducted as long as they are made pursuant to a pre-2019 divorce agreement. You can only claim this deduction if you report your ex-spouse’s Social Security number.
6. Deducting Business Expenses
Certain professionals can deduct expenses related to their work. These professionals include…
- Teachers, aides, counselors, principals, and other educators who buy equipment for their students or classroom. Educators can deduct up to $250 in related expenses, including expenses incurred to prevent the spread of COVID-19.
- Members of the National Guard or military reserves can deduct certain travel expenses. National Guard or military reserve members may be required to travel more than 100 miles from their home for drills and may be away overnight. If this is the case, they can deduct lodging, meal, and driving expenses.
- Performing artists can deduct work-related expenses if they earn less than $16,000 per year. To qualify for this deduction, the artist must receive $200 in wage income from at least two employers during the year. Additionally, the incurred expenses must represent more than 10% of the artist’s income.
- Those who are disabled and incur fees in order to be able to work can deduct those expenses. For example, someone who is deaf may need to pay for a sign language interpreter while at work. The cost of the interpreter could be deducted.
- Fee-based public officials can write off work expenses. This deduction is only available to those who perform a public duty and who are also paid by the people they serve. This deduction is not available to regular government employees.
7. Deducting Bank Penalties
You may have incurred fees for the early removal of funds from a certificate of deposit (CD). These fees are deductible on Form-1099 INT or Form 1099-OID.
8. Military Moving Expenses Deduction
Active military members required to move due to a military order can deduct the cost of moving. This deduction applies when moving from a civilian home to a post, from one post to another, or from a post to a civilian home. The deduction also includes the cost of travel if you used your own car to move.
9. Charitable Contribution Deduction
The charitable contribution deduction cannot be used to reduce your AGI. Accordingly, the deduction may not help you qualify for other AGI-limited deductions, but deducting cash donations to charity can still reduce your tax bill. Single filers can deduct up to $300 in cash donations to charity, and joint filers can deduct up to $600. This is the final tax year to claim this deduction, so make the most of it while it is available.
10. Other Deductions
There are several other above-the-line deductions, including deductions for contributions made to certain pension plans or deductions for foreign housing expenses. You can reach out to our qualified tax team for assistance in claiming deductions and filing your return.
