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5 Often Overlooked Tax Breaks You Don’t Want to Miss

Deductions, credits can mean the difference between a tax bill and a tax refund


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Are you worried because the deadline for filing federal income taxes is April 18 and your refund wouldn’t buy a stamp to mail your tax return? Or are you scared that you’re going to have to pay a big tax bill? Stop wailing and rending your garments and read these five tax tips that could help reduce your 2021 taxes. You never know: You might be able to turn that tax bill into a refund.

1. Traditional IRA contributions

You have until April 18 to contribute to a traditional IRA for the 2021 tax year. Your contribution can reduce your taxable income, which, in turn, would reduce the amount of tax you owe. If you’re under age 50, you can contribute up to $6,000 for 2021. People who are 50 and older can contribute up to $7,000. You can only contribute earned income to an IRA; Social Security payments, pension payouts, dividends and other types of income don’t count.

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If neither you nor your spouse is covered by a workplace retirement plan such as a 401(k), you can deduct the full amount of your contribution. The deduction faces limits if you or your spouse is covered by a retirement plan at work, or if your modified adjusted gross income (MAGI) exceeds certain levels.

And here’s another nice thing about this tax year: There is no longer an age limit on making contributions to a traditional IRA. Prior to 2020, the cutoff was age 70½. There also is no age limit for contributing to a Roth IRA, but note that Roth contributions aren’t tax deductible, since withdrawals in retirement are tax-free.

2021 deduction limits for traditional IRAs, if covered by retirement plans

Filing status

2021 MAGI

Deduction

Single or head of household

≤$66,000

Full deduction up to contribution limit

 

>$66,000 and <$76,000

Partial deduction

 

≥$76,000


No deduction

Married filing jointly or qualified widow(er)

≤$105,000


Full deduction up to contribution limit

 

>$105,000 and <$125,000

Partial deduction

 

≥$125,000

No deduction

Married filing separately

<$10,000

Partial deduction

 

≥$10,000

No deduction

2. Health savings accounts (HSAs)

As with IRAs, you have until April 18 to make an HSA contribution for the 2021 tax year. The maximum annual contribution you can make is $3,600 for yourself only, or $7,200 for families. If you’re 55 or older, you can toss in another $1,000.

The catch: You need to be insured by a high-deductible health plan (HDHP) to make a contribution. To qualify as an HDHP for 2021, the plan must have a minimum annual deductible of $1,400 for individuals and $2,800 for families. It also must have an out-of-pocket maximum of $7,000 for individuals and $14,000 for families.

For those who can get them, HSAs offer a host of tax advantages. Your pretax contributions lower your taxable income, which then lowers your taxes owed. As long as you withdraw money from your HSA to pay for approved health care expenses, it’s free from taxes — even the interest you earn. And while you can’t contribute to an HSA once you enroll in Medicare, you can use tax-free HSA withdrawals to pay Medicare Part B, Part D and Medicare Advantage premiums.

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3. Student loan interest

Because of the COVID-19 pandemic, most people didn’t have to make student loan payments in 2021. And those who did make voluntary student loan payments didn’t have to pay interest. Nevertheless, if you had a private student loan, you probably had to continue making payments and paying interest. 

Most people know that mortgage interest is deductible, but most student loan interest is deductible, too. You can deduct up to $2,500 in interest each year, or the amount you actually paid, whichever is smaller. If you paid more than $600 in interest, you should get a Form 1098-E, Student Loan Interest Statement

One nice thing about the student loan interest deduction: You don’t need to itemize to get it. It’s an adjustment to income, so you are eligible even if you take the standard deduction, which most taxpayers do. Tax folks call this an above-the-line deduction, because it’s above the line that calculates your adjusted gross income.

Keep in mind that there are income limits for those who deduct student loan interest. The deduction for single filers and heads of households phases out between $70,000 in modified adjusted gross income (MAGI) and $85,000 in MAGI. For married couples filing jointly, the deduction starts to phase out at $140,000 in MAGI and ends at $170,000.

4. Charitable donations

Even if you’re taking the standard deduction, you can deduct up to $600 on your tax return for charitable donations. Like student loan interest, this is an above-the-line deduction.

This deduction has to be for charitable deductions you made in 2021. And the deductions must have been made in cash; clothing, household items and used cars don’t count. Items donated to charity are eligible for a deduction if you itemize.

The maximum with the standard deduction was $300 “per tax unit” for 2020, which meant that single filers and joint filers only got $300 per return. In the 2021 tax year, the charitable deduction for cash donations increases to $300 per filer, so married couples filing jointly could each claim $300, for a total of $600.

5. Long-term care expenses

Sometimes an extra deduction will take you over a high hurdle — such as the current standard deduction. You need to have more in itemized deductions than the standardized deduction to make itemizing worthwhile. In the 2021 tax year, the standard deduction is $12,550 for single filers, $18,800 for heads of household and $25,100 for married people filing jointly. It’s even bigger for taxpayers 65 and older.

If you’re close to overcoming the standard deduction, however, don’t forget to deduct the premiums you pay for long-term care insurance. This counts as a medical expense deduction, which means you can only deduct the amount of your qualifying medical expenses that exceed 7.5 percent of your adjusted gross income. If you had adjusted gross income of $50,000, for example, you could only deduct the medical expenses that exceed $3,750.

Be that as it may, long-term care premiums aren’t cheap, and the IRS allows you to deduct an increasing amount of those premiums as you get older. In the 2021 tax year, for example, someone who is 51 to 60 in the taxable year can deduct $1,690 in long-term care premiums. The amount rises to $4,520 for those 61 to 70 and $5,640 for those 71 and older. Be aware that the deduction is mainly for traditional long-term care policies. Some newer hybrid life insurance policies may not qualify. Be sure to ask your agent about how much, if any, of your premium is deductible.

What you pay for certain long-term care services can also qualify as medical expenses for tax purposes, helping to get above the 7.5 percent threshold. The expenses must be unreimbursed and medically necessary for a critically ill individual, and can include diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, according to the IRS, as well as maintenance and personal care services. See IRS Publication 502 for the full list of qualifying medical expenses.

John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger's Personal Finance and USA Today and has written books on investing and the 2008 financial crisis. Waggoner's USA Today investing column ran in dozens of newspapers for 25 years.

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