Illustration by Sam Island
If you paid for daycare, health insurance, or your kid’s college tuition in 2021, you may be eligible for a fat credit on your 2021 taxes—even if you haven’t qualified in past years.
A number of credits have been enhanced for the 2021 tax year under pandemic-relief legislation, and will become more restrictive again on 2022 or 2023 taxes. Not only are many more generous this year than usual, they’re available to more taxpayers whose income, age, or other circumstances made them ineligible in past years.
Credits are far more valuable than deductions because they reduce a tax bill dollar-for-dollar. Deductions reduce taxable income and are usually only a benefit if their total exceeds the standard deduction, which for 2021 is $12,550 for single filers and $25,100 for couples.
Many folks are already aware of the expanded child tax and recovery rebate credits for 2021 under the American Rescue Plan. The child tax credit was increased to $3,000 from $2,000 per child under age 17, plus an additional $600 for kids under age 6. The 2021 stimulus credit is $1,400 per person. These credits were paid out in part throughout last year and the Internal Revenue Service has followed up with notices in the mail. There is plenty of confusion over how to fully claim them on 2021 returns.
But don’t let these highly publicized tax credits eclipse a laundry list of less-known ones, says Mark Luscombe, principal federal tax analyst at Wolters Kluwer: “Historically, when there are new or changed provisions in the tax code many people don’t claim what they are entitled to.”
Here are five credits—and a lone deduction that can be claimed alongside the standard deduction—that can help reduce your 2021 tax burden:
Child and independent care credit
The maximum child and independent care credit was increased to a maximum $4,000 from $1,050 for a single child and to $8,000 from $2,100 for two or more children—only for the 2021 tax year.
What’s more, more taxpayers can claim the full credit because the income threshold is more than eight times higher on 2021 taxes: The credit begins to gradually phase out when adjusted gross income hits $125,000. For the prior tax year, the credit began phasing out on incomes of $15,000.
But there is bad news for top earners. In prior years the credit never phased out to zero; folks earning more than $400,000 could claim 20% of eligible expenses as a credit. Now, the credit fully phases out for incomes of more than $438,000.
The credit is designed for taxpayers who must pay for dependent care to enable them to work, look for a job or go to school. Dependents are defined as a child under the age of 13, or any age if they are incapable of taking care of themselves.
To claim the credit, taxpayers must have the taxpayer identification numbers for their daycare providers, Luscombe says. “If you used a variety of babysitters, that could be a record-keeping problem.”
Health insurance premium credit
While the health insurance premium credit was created years ago for lower-income taxpayers, the American Rescue Plan, passed in March last year, removed income caps for eligibility for the 2021 and 2022 tax years.
The credit can be claimed by individuals or couples who buy health insurance through one of the exchanges created under the Affordable Care Act.
The credit will vary, depending upon a taxpayer’s income and premium costs. For 2021, the credit can be enough to ensure that your premium costs will be no more than 8.5% of household income.
For example, the annual premium for a healthcare plan for a couple earning $150,000 with three kids might run $14,443, or 9.6% of income, according to the Kaiser Family Foundation credit calculator. This family would qualify for a $1,683 tax credit to bring their costs down to $12,750 a year, which is 8.5% of income.
Tax credits for higher education:
If you’re paying for college tuition and costs, consider your eligibility for two education credits. The bad news is you must choose; you can’t use both for a student’s expenses.
The most accessible is the American opportunity tax credit for couples with incomes up to $180,000 and singles earning up to $90,000. It offsets costs of degree-seeking students enrolled in classes at least half time and is capped at $2,500 per student. The credit is equal to 100% of expenses up to $2,000 and 25% of the next $2,000.
Another option is the lifetime learning credit, equal to 20% of annual education expenses up to $10,000, up to $2,000 per tax return. The income eligibility cap for couples is $138,000 and for singles, $69,000. Those caps are up from $118,000 and $59,000, respectively, in 2020. This credit can offset expenses for undergraduate and graduate school, or courses to improve job skills.
Earned-income tax credit
The earned-income tax credit, designed to benefit working taxpayers, almost tripled for the 2021 tax year for taxpayers with no dependents, and eligibility requirements also were relaxed.
Before 2021, taxpayers without dependent children could only claim this credit if they were between ages 24 and 65. That meant a grandparent over age 65 who takes care of a grandchild couldn’t claim the earned-income tax credit, Luscombe says.
That changed just for the 2021 tax year: As part of pandemic-relief efforts, anyone aged 19 or older, whether they have dependent children or not, can claim the credit if they have earnings that fall under certain thresholds.
Both the credit limit and the income thresholds vary depending on the number of dependent children in a family.
For example, the credit for taxpayers with no children was increased to $1,502 from $538 for the 2021 tax year. For eligibility, income for couples can be no more than $27,380 and for singles, no more than $21,430.
The credit when taxpayers have three or more children increased to $6,720 from $6,660 and is available when income is no more than $57,414 for couples and $51,464 for singles.
Another change for 2021 only: Taxpayers can opt to base this credit on their 2019 income as long as it was higher than in 2021. This may result in a higher credit amount.
Enhanced cash contribution deductions
Normally deductions for charitable contributions can only be claimed if you itemize deductions and don’t claim the standard deduction. But the Taxpayers Certainty and Disaster Relief Act, passed in December 2020, enables taxpayers to deduct up to $300 in cash gifts—or $600 per couple—on 2021 returns if they don’t itemize and instead claim the standard deduction.
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