What personal expenses can you deduct on your 2021 tax return?
Taxpayers have the option to take either the Standard Deduction or Itemized Deductions on their 2021 tax return to reduce their tax liability or to qualify for a refund.
Standard Deduction
Usually, taxpayers take the standard deduction when they don’t have any/enough personal expenses to claim. The standard deduction is based on the taxpayer’s filing status for the year. For 2021 tax year, the standard deduction is as follows:
Filing status:
Single………………………………………………………$12,550
Married filing jointly……………………………………………………...$25,100
Married filing separately………………………………………...$12,550
Head of Household…………………….$18,800
Note: The standard deduction is $1,350 higher for those who are over 65 or blind. It is also $1,700 higher for unmarried taxpayers. For dependents claimed by another taxpayer, the standard deduction cannot exceed $1,100 or their earned income plus $350, not to exceed the standard deduction for their filing status.
Itemized Deductions
On the other hand, taxpayers may be able to itemize their qualified personal expenses instead of taking the standard deduction. They can do so if their qualified personal expenses exceed the standard deduction amount for their filing status. For 2021, taxpayers can include the following deductions on Schedule A (from the IRS- Itemized Deduction Instructions- Schedule A-Form 1040);
Medical and Dental Expenses- You can only deduct 10% of the unreimbursed expenses paid out of pockets that exceed your adjusted gross income on Form 1040. These expenses can be paid by you for yourself, your spouse, and any dependent you are claiming on your taxes. The qualified expenses you can claim include:
Insurance premiums for medical and dental care (there are limitations to this).
Prescription medicines or insulin.
Acupuncturists, chiropractors, dentists, eye doctors, medical doctors, occupational therapists, osteopathic doctors, physical therapists, podiatrists, psychiatrists, psychoanalysts (medical care only), and psychologists.
Medical examinations, X-ray and laboratory services, and insulin treatments your doctor ordered.
Diagnostic tests, such as a full body scan, pregnancy test, or blood sugar test kit.
Nursing help (including your share of the employment taxes paid).
Hospital care (including meals and lodging), clinic costs, and lab fees.
Qualified long-term care services
The supplemental part of Medicare insurance (Medicare B).
The premiums you pay for Medicare Part D insurance.
A program to stop smoking and for prescription medicines to alleviate nicotine withdrawal.
A weight-loss program as treatment for a specific disease (including obesity) diagnosed by a doctor.
Medical treatment at a center for drug or alcohol addiction.
Medical aids such as eyeglasses, contact lenses, hearing aids, braces, crutches, wheelchairs, and guide dogs, including the cost of maintaining them.
Surgery to improve defective vision, such as laser eye surgery or radial keratotomy.
Lodging expenses (but not meals) while away from home to receive medical care provided by a physician in a hospital or a medical care facility related to a hospital, provided there was no significant element of personal pleasure, recreation, or vacation in the travel. Don't deduct more than $50 a night for each person who meets the requirements
Ambulance service and other travel costs to get medical care. If you used your own car, you can claim what you spent for gas and oil to go to and from the place you received the care; or you can claim 17 cents a mile. Add parking and tolls to the amount you claim under either method.
Cost of breast pumps and supplies that assist lactation.
You can elect to deduct state and local general sales taxes instead of state and local income taxes. You can't deduct both:
-State and Local Taxes: you can take a deduction for state and local taxes limited to $10,000 or $5,000 for married taxpayers filing separately. These are the taxes you can claim:
State and local income taxes withheld from your salary during 2020: These amounts come from your W2, W-2G, 1099-G, 1099-R, 1099-MISC, and 1099-NEC forms.
State and local income taxes paid in 2021 for a prior year: such as taxes paid with your 2020 state or local income tax return. Don't include penalties or interest.
Property Taxes/ Real estate taxes: These are taxes you paid on your personal property and your home. They are calculated based on your home location, and used mainly for services rendered by your town such as funding school districts and garbage pick-up.
State and local estimated tax payments made during 2021, including prior year refunds credited to your 2021 state or local income taxes.
“Mandatory contributions you made to the California, New Jersey, or New York Nonoccupational Disability Benefit Fund, Rhode Island Temporary Disability Benefit Fund, or Washington State Supplemental Workmen's Compensation Fund.”
“Mandatory contributions to the Alaska, California, New Jersey, or Pennsylvania state unemployment fund.”
“Mandatory contributions to state family leave programs, such as the New Jersey Family Leave Insurance (FLI) program and the California Paid Family Leave program.”
-State and Local General Sales Taxes: If you elect to deduct state and local general sales taxes instead of income taxes, you can use either your actual expenses or the optional sales tax tables. These are the qualifying Actual Expenses:
Food, clothing, and medical supplies
Motor vehicles
Instead of using your actual expenses, you can use the 2021 Optional State Sales Tax Table and the 2021 Optional Local Sales Tax Tables at IRS.gov/SalesTax to figure your state and local general sales tax deduction.
Home Mortgage Interest: You may only deduct interest on a mortgage used to buy, build or improve your home up to $750,000, or $375,000 for married taxpayers filing separately (exceptions apply). Below are a few payments that may count as mortgage interest and other expenses that may lower your taxable income (Source- Rocket Mortgage):
Interest on the mortgage for your main home: This property can be a house, co-op, apartment, condo, mobile home, boat or similar property.
Interest on the mortgage for a second home: You can deduct the interest paid on a second home if you use the second home as collateral for that mortgage. However, if the property is also partially rented, you must live in the home for more than 14 days or more than 10% of the days you rent it out (whichever is longer). Note that this deduction can only be taken for one second home.
Mortgage points: Points are a percentage paid upfront at closing when you take out a mortgage to lower your interest rate. To qualify for the deduction, taxpayers must pay the mortgage points directly to the lender. They can be deducted in the year they were paid or over the life of the loan.
Late payment charges on a mortgage payment: You can deduct late payment charges as home mortgage interest. However, you should avoid making late payments as doing so will lower your credit score.
Prepayment penalties: These are payments made towards the principal to lower the loan amount. Lenders may charge you for making these payments. If you pay a prepayment penalty during the year and it is not for a specific service or cost from your mortgage, you can deduct that as mortgage interest.
Interest on a home equity loan: A home equity loan is money you borrow against your home (either in a lump sum or a line of credit). To take the interest deduction, the loan has to be used to “buy, build or substantially improve your home”.
Mortgage insurance premiums: If your adjusted gross income (AGI) is less than $100,000 ($50,000 for married filing separately), mortgage insurance premiums are fully deductible. These are fees paid to the lender for putting less than 20% down on a home mortgage.
Charitable Donations: You can deduct contributions or gifts made to organizations that are religious, charitable, and educational. You can also deduct donations to organizations that work to prevent cruelty to children or animals.
Carryover From Prior Year: You may have contributions that you couldn't deduct in an earlier year because they exceeded the limits on the amount you could deduct. In most cases, you have 5 years to use contributions that were limited in an earlier year.
Record-keeping: You should keep a receipt or written statement from the organization you gave the property to, or a reliable written record, that shows the organization's name and address, the date and location of the gift, and a description of the property.
Casualty and Theft Losses. The deduction for personal casualty and theft losses has been repealed except for federal disaster losses.
Job Expenses and Miscellaneous Deductions subject to 2% of your AGI: Miscellaneous deductions, including unreimbursed employee expenses and tax preparation expenses, which exceed 2% of your AGI have been eliminated. That includes the home office deduction.
Taxpayers can also take “above-the-line” deductions which are separate from the standard deduction and itemized deductions. These will be covered in a different blog post.
Source:
-IRS.GOV (Instructions For Schedule A (Form 1040)).
-Lauren Nowacki. “The Mortgage Interest Deduction 2021: A guide To Limits and What Qualifies”. RocketMortgage.com.
