Tax Deduction Basics

What Is a Tax Deduction?

Unlike a tax credit, which reduces the amount of tax owed, a tax deduction reduces the amount of income subject to taxation before taxes owed are calculated.

Tax deductions typically fall into three main categories:

  • The standard deduction
  • Itemized deductions
  • Schedule 1 deductions (also known as above-the-line deductions). 

Standard Vs. Itemized Deductions

Filers must choose between the standard deduction and itemized deductions, typically opting for the larger of the two, but can use other Schedule 1 deductions regardless of whether they itemize

The Standard Deduction

The standard deduction is by far the most common route for taxpayers. This deduction is a set amount, which is adjusted each year and determined based on factors like a taxpayer’s filing status.

The Standard Deduction Typically increases every year. Keep in mind that 2018 and prior was a significantly lower Standard Deduction.

Every year, we look at the standard deduction compared with the itemized

deduction, and we’re always going to take what’s bigger. You don’t have to lock in

to one or the other. Every year can be different.

Here are the standard deduction amounts for 2021 (taxes filed in 2022):

Married Filing Jointly$25,100
Head of Household$18,800
Married Filing Separately$12,550

Taxpayers who are over 65 or blind receive an additional deduction of $1,350 and an additional $1,700 for those individuals who are also unmarried and not a surviving spouse.

Itemized Deductions

Itemized deductions are qualified expenses subtracted from a taxpayer’s adjusted gross income. individuals who itemize are often homeowners and high-income earners.

The most common reason someone itemizes is they own a home and have a mortgage. If you don’t own a home, it would be very difficult to itemize unless you had substantial charitable contributions. And the thing you have the most control over the outside of the mortgage and mortgage rate is how much money you donate to charity.

In order to itemize the taxpayer’s expenses, need to be in excess of the Standard deduction.

Itemized Deductions Include the following

  • Charitable contribution deduction

Filers interested in donating to charity can use these contributions to boost their deduction amount. To qualify, contributions must be made in cash to a qualifying organization during the 2021 calendar year.

  • Mortgage interest tax deduction

For debt accrued after Dec. 15, 2017, taxpayers can deduct home mortgage interest on their first $750,000 or $375,000 of mortgage debt for married filing separately. For home loans taken out before Dec. 15, 2017, the previous maximum of $1 million or $500,000 if married filing separately still applies.

  • Medical expenses tax deduction 

Qualified health care expenses may be subtracted from a taxpayer’s adjusted gross income as itemized deductions. These might include costs for diagnosis, treatment or prevention of a disease but do not include unnecessary procedures like cosmetic surgery.

  • State and local tax deduction

Filers can deduct taxes paid in 2021 up to $10,000 or $5,000 if married filing separately for state and local taxes.

  • Property tax deduction

One popular state and local tax deduction is for a filer’s property tax. This deduction applies to taxes on real estate property, like a home, and personal property, like a car or boat.

Other Tax Deductions

Even if a taxpayer doesn’t itemize deductions, there are some other deductions they may utilize. Previously called “above-the-line” tax deductions, taxpayers can take certain deductions on the 1040 Schedule 1 form.

Common Schedule 1 deductions for 2021 are:

  • Alimony
  • Educator expenses
  • Health savings account contributions
  • IRA contributions
  • Self-employment deductions
  • Student loan interest
  • Higher education tuition and fees
  • Charitable contributions
  • Alimony

Taxpayers can deduct alimony payments for divorce agreements dated before Dec. 31, 2018.

  • Educator expenses

Taxpayers who work as educators in schools can deduct up to $250 of unreimbursed expenses.

  • Health savings account contributions

A health savings account, or HSA, is a dedicated health care savings account for individuals enrolled in a qualified high-deductible health insurance plan. This account receives special tax treatments, including the option to deduct contributions, which are limited to $3,600 for single filers and $7,200 for families in 2021.

Consider taking advantage of this deduction if you contributed to your HSA directly. If you fund an HSA through your employer, your contributions may be deducted directly from your paychecks instead.

  • IRA contributions

Individuals who make traditional IRA contributions, which are subject to income and participation requirements, can deduct some or all of the amount of their contribution limit. Roth IRA contributions, however, are not deductible.

  • Self-employment deductions

Taxpayers who are self-employed can take advantage of a number of deductions, such as a deduction for health insurance premiums and the deductible part of self-employment taxes. Those who opt for itemized deductions or additional deductions must be prepared for an audit.

  • Student loan interest

Borrowers who paid interest on a qualified student loan in 2021 can deduct the lesser of $2,500 or the amount of interest actually paid during the year. However, this deduction is gradually reduced and eventually eliminated as a taxpayer’s modified adjusted gross income reaches the annual limit. This is reported on the tax Form 1098E

  • Charitable contributions

Taxpayers can deduct charitable contributions to qualified organizations of up to $300 for single filers and $600 for married filers. This is a new occurrence during the pandemic. The amounts for contribution varied in the 2020 and 2021 tax years. This may or may not exist in the 2022 tax year.

Stimulus Check Breakdown

So far, three sets of Economic Impact Payments (also known as “stimulus checks”) have been issued to eligible recipients as part of the pandemic relief from the federal government. . Each set of payments has been slightly different and is outlined below for your Federal return.  

Round of PaymentLegislationProjected DateProjected PaymentTax Year  Max. Income to Receive Payment
1ST RoundCARES ActMarch 27, 2020$1,200 per adult
$500 per child
2020Single: $99,000
HOH: $136,500
Married: $198,000
2ND RoundConsolidated Appropriations Act December 27, 2020$600 per adult
$600 per child
2020Single: $87,000
HOH: $124,500
Married: $174,000
3RD RoundAmerican Rescue PlanMarch 11, 2021$1,400 per adult
$1,400 per child
2021Single: $80,000
HOH: $120,000
Married: $160,000


Q. Why didn’t I receive my stimulus check?

A. If they didn’t receive their stimulus check, they can apply for it within the refund of the corresponding Tax Year (see above).

Q. What if I received more than I was supposed to receive?

A. There is no way for the client to “return” their check to the government. There is no need to do so.

Q. How much tax do I pay on the stimulus payments?

A. There is no tax due on the stimulus payments.

Q. Why didn’t my child/dependent didn’t receive their stimulus check?

A. If someone was claimed under another person they won’t receive a stimulus check. You can correct this by filing the dependent separately, even with zero income.

Q. Can I call the IRS to get my payment?

A. Calling the IRS will most likely not help or move the payment along faster due to the pandemic.

Q. Will there be another payment?

A. Our office doesn’t expect another payment unless there is a severe dip in the economy again.

Q. How were the payments sent?

A. Most payments were sent by direct deposit; however, some clients may have received checks due to varying reasons.

Q. Why did my friend get their check, but I didn’t?

A. There are so many varying reasons – however, it isn’t something to fret over as it varies case by case.

Q. What if my spouse/dependent has an ITIN?

A. Based on the legislation mentioned above, if your spouse or dependent had an ITIN, the taxpayer doesn’t qualify for the stimulus payment. The only way to resolve this is to file on your own, but this may not be beneficial based on your tax liability.

Solar Tax Credit (Residential Energy Credit) – Form 5695

Installing solar panels earns you a federal tax credit. That means you’ll get a credit for your income taxes that has the potential actually to lower your tax liability or increase your refund.

You can qualify for the ITC as long as your solar system is new or being used for the first time between January 1, 2006 and December 31, 2023. Unless Congress renews the ITC, it expires in 2024.

Other requirements include:

  • You must own the system outright (not lease it)
  • The system must be located in the United States
  • The system must be located at your primary or secondary U.S. residence or for an off-site community solar project

How much is the credit?

The credit is a percentage of the total cost paid for the purchased solar panels.

26% – For property placed in service between January 1, 2021, and December 31, 2022

22% – For property placed in service between January 1, 2023, and December 31, 2023

If my tax bill is too small, do I lose the credit?

No, you don’t lose the credit.

You can carry forward the Solar Tax Credit if your tax bill is smaller than your tax credit! A carry forward is a provision in the tax law that allows taxpayers to apply some of their unused credits, deductions, or losses to a future tax year.

What do I need to give my tax preparer to claim the credit?

Your tax preparer needs copies of the receipts and a clear indication of the amount spent to claim the credit on the appropriate form.

Tax Savings & Retirement Plans

“Tax Now” means you pay taxes on this item now, but you don’t have to pay the taxes on the accumulated amount when you retire.

“Tax Later” means you save taxes now, but you have to pay the taxes on the accumulated amount when you retire. 

IRA stands for Individual Retirement Account.                                                 

Traditional IRAA traditional IRA is a retirement account in which individuals can make pre-tax contributions and the investments in the account grow tax-deferred. In retirement, the owner pays income tax on withdrawals from a traditional IRA.Tax LaterSome taxpayer’s may be able to reduce their tax liability now if they contribute to the Traditional IRA by 04/15 of that tax year. Use the Traditional IRA Calculation Worksheet to solidly figures and provide information to the client.
ROTH IRAA Roth IRA it allows qualified withdrawals on a tax-free basis if certain conditions are satisfied. It was established in 1997 and named after William Roth, a former U.S. senator from Delaware.Tax NowThis does not impact the individual tax return. If a client provides you information on this, you can disregard this.
SEP IRASimplified Employee Pension (SEP) plan provides business owners with a simplified method to contribute toward their employees’ retirement as well as their own retirement savings. Contributions are made to an Individual Retirement Account or Annuity (IRA) set up for each plan participant (a SEP-IRA).Tax LaterThis can be used to decrease taxes in the current tax year for business owners. Use the SEP IRA Calculation Worksheet to solidly figures and provide information to the client. For those with Corporations (opposed to Sole Proprietorships) owners can only contribute up to 25% of their wages (W2) through the corporation. If they don’t issue payroll to themselves, they can’t make a SEP IRA contribution.
Defined Benefit PlanAn employer-based program that pays benefits based on factors such as length of employment and salary history. Benefits can be distributed as fixed-monthly payments like an annuity or in one lump-sum payment.    Tax LaterThe business owner can take a substantial expense and put the money into their Defined Benefit Plan. This helps high net worth clients reduce taxes overall. The client does have to commit to making the contribution for 5 years – so it is vital that they make consistent income. The amount they contribute varies based on their W2 for the owner, age, gender, and other factors that need to be assessed and calculated.
401(k) PlanA 401(k) is a retirement savings and investing plan that employers offer. A 401(k) plan gives employees a tax break on money they contribute. Contributions are automatically withdrawn from employee paychecks and invested in funds of the employee’s choosing (from a list of available offerings). 401(k)s have an annual contribution limit of $19,500 in 2021 and $20,500 for 2022 ($26,000 in 2021 and $27,000 in 2022 for those age 50 or older).Tax LaterThis decreases wages on Box 1, thereby decreasing the taxable income for that specific tax year. When an employee leaves the employer they should move the funds to a different retirement account as the fees associated with maintenance of the account will eat into the retirement fund. In addition once the employee leaves they cannot continue contributing to this Plan.  
Solo 401(k) PlanA solo 401(k) is an individual 401(k) designed for a business owner with no employees. In fact, IRS rules say you can’t contribute to a solo 401(k) if you have full-time employees, though you can use the plan to cover both you and your spouse.Tax LaterOwners can contribute to both the Solo 401(k) plan as well as the SEP IRA. The contribution limits are the same as a 401(k) plan. However by contributing to both the SEP IRA and the Solo 401(k) you can decrease the Business’s Income as well as the Individual’s W2 on their personal return.