The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Information on this website may not be current. This website may contain links to other third-party websites. Such links are only for the convenience of the reader, user or browser; we do not recommend or endorse the contents of any third-party sites. Readers of this website should contact their attorney, accountant or credit counselor to obtain advice with respect to their particular situation. No reader, user, or browser of this site should act or not act on the basis of information on this site. Always seek personal legal, financial or credit advice for your relevant jurisdiction. Only your individual attorney or advisor can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, contributors, contributing firms, or their respective employers.
Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them. Compensation is not a factor in the substantive evaluation of any product.
You just can’t avoid it—we all have to do our taxes for the 2021 tax year. But if you play your cards right, you can substantially reduce your taxable income. Tax exemptions, tax deductions and tax credits change your adjusted gross income (AGI), lowering your tax bill in the process.
In 2017, the Tax Cuts and Jobs Act (TCJA) changed or eliminated many of the exemptions, deductions and tax credits traditionally available to American taxpayers. Feeling daunted? We’ve got you covered. To get you ready to file your 2021 taxes, we’re here to break down those tax exemptions and deductions. This is general information, you should always consult a tax professional about your individual situation.
Tax deductions, tax credits, tax exemptions—tax break terminology can be confusing. Let’s demystify the lingo with a brief explanation of each type.
In a nutshell, tax deductions reduce your AGI. You subtract deductions from your gross income, and sometimes you’ll end up in a lower tax bracket as a result. Popular tax deductions include the student loan interest deduction, the medical expenses deduction, the IRA contributions deduction and the self-employment expenses deduction.
Tax credits reduce the amount of tax you owe. Simply put, they act like money-off vouchers for your final bill. Common tax credits include the child tax credit, the lifetime learning credit, the earned income tax credit and the residential energy credit.
Before tax year 2018, everyone got a $4,050 personal tax exemption. Taxpayers then got a $4,050 exemption for each dependent in their household. When the TCJA passed in 2017, it eliminated this exemption, almost doubled the standard tax deduction and increased child and dependent credits. So, no more personal or dependent tax exemptions until at least 2025, when the TCJA expires.
When you file your taxes, you can use the standard deduction or itemized deductions to offset your taxable income. In 2020, the standard deductions were:
However, for 2021, the deduction amounts were adjusted for inflation to:
If you take the standard deduction, you can’t itemize your deductions. Many people go for the standard deduction because it amounts to more than the total value of their itemized deductions. Hefty medical bills, disaster losses and large charitable contributions can make itemization worthwhile, however.
We’ve briefly covered medical bills, disaster losses and charitable contributions, but let’s go into more detail. Here are a few more common tax deductions.
Tax credits reduce the amount of tax you have to pay. There are lots of different individual tax credits. Let’s talk about a few of the most popular credits in more detail.
Have you ever considered the tax status of your business? Some organizations are tax-exempt, so they don’t pay any taxes whatsoever at the federal level. It might sound good, but there’s a catch. To achieve tax-exempt status, you can’t be a for-profit business, and you can’t receive a profit-based payout from your business.
Tax-exempt business types include:
Tax-exempt businesses are often—but not always—also exempt from state and local taxes once they receive federal tax-exempt status. This rule varies from state to state, however.
Do you find tax season nerve-wracking? You’re not alone. Every year, millions of Americans wait until the last minute to file their taxes. Some of them owe taxes, while others feel intimidated by the filing process.
Tax breaks traditionally fall into three categories: tax exemptions, tax deductions and tax credits. In 2017, the TCJA put tax exemptions on the back burner until at least 2025, leaving deductions and credits alone on the table for tax year 2021. You can itemize your deductions, or you can choose the standard deduction when you complete your taxes.