EarnTaxes

Here’s How to Qualify for Special 2021 Tax Breaks

Pam Krueger  |  March 16, 2022

Tax breaks, anyone? We've got everything you need to know about 2020 tax breaks (and what to do, if you qualify) right here.

Tax breaks, anyone? We’ve got everything you need to know about 2021 tax breaks (and what to do, if you qualify) right here.

Your life over the past two years was probably very different than it had been in the past, and you may be eligible for some different tax breaks, too. If you lost your job (or part of your income), had unexpected child-care expenses, worked from home, qualified for additional stimulus funds, or did some freelance work, you may need to take some extra steps when you file your income-tax return this year. Here’s what you need to know:

TAX BREAK FOR CHILD-CARE COSTS

The American Rescue Plan Act of 2021 enhanced the child and dependent care benefits and made them refundable for those living in the U.S. for at least 6 months. Eligible families are able to claim the cost of daycare, a nanny, preschool, before- or after-school care, and summer day camp if your child was under the age of 13. 

The amount of the credit in 2021 to a percentage of qualifying expenses from $3,000 for one child and $6,000 for two or more children up to $8,000 for one child and $16,000 for two or more qualifying children. The credit percentage has also increased from 35% to 50%. If your income is less than $125,000 then you are eligible for the maximum credit. This gradually phases down to 20% for income between $125,001 and $183,000. The 20% stays in place for families earning between $183,001 and $400,000, but is gradually reduced again to 0% for taxpayers earning more than $400,000. Once your adjusted gross income (AGI) reaches $438,000, you will be ineligible for a credit.

NEW RULES FOR THE HOME-OFFICE DEDUCTION

So many people started working from home during the global pandemic and are wondering whether they can take the home-office deduction. If you worked from home as an employee, rather than an employer, you aren’t eligible for the break. The law changed starting in 2018 and now you can only take the home-office deduction if you have some self-employed income, but not if you’re an employee. Self-employed people can take the deduction if they use part of their home “regularly and exclusively” for business. Your home office doesn’t need to be a separate room, but it has to be an area where you don’t do anything else – so it can’t be your kitchen table, for example. If you qualify, you can either deduct a portion of your rent or mortgage interest, utilities, and homeowners or renters’ insurance, based on the percentage of your home that you use as your home office. Or you can take the “simplified option” which is worth $5 per square foot of your home office, up to 300 square feet, for a maximum deduction of $1,500.

TAX BREAKS FOR FREELANCERS

If you did have any self-employed income in 2021 – if you did consulting work between jobs, or picked up a side gig to earn extra money, or decided to start your own business – you have to report your business income on Schedule C. But you can also deduct many expenses, including the cost of equipment you use in your business, such as a computer (based on the portion of time you use it for business), printer, the cost of a desk and chair, filing cabinets, office supplies, advertising, mailing, and other business expenses – in addition to the home office deduction if you qualify. Make sure you keep all receipts for business-related purchases!

UNEMPLOYMENT BENEFITS ARE TAXABLE

If you received unemployment benefits in 2021, keep in mind that those payments are taxable. If you didn’t have enough money withheld from your payments last year, you may owe more money at tax time. You should have received Form 1099-G in January reporting the amount of unemployment benefits you received in 2021 and how much money was withheld for taxes.

STIMULUS MONEY IS NOT TAXABLE

Like in 2020, the stimulus payments received in 2021 are not taxable income. As of now, there are no planned stimulus payments for 2022. If your income has dropped or you had a baby in 2021, you may qualify for additional stimulus funds. Be sure to file an income-tax return and report the difference on the line for the Recovery Rebate Credit.

SPECIAL BREAK FOR CHARITABLE CONTRIBUTIONS

The Tax Cuts and Jobs Act also had an impact on charitable contributions. Generally, you can only deduct your charitable contributions if you itemize your deductions, but fewer people itemize now that the TCJA doubled the standard deduction (in 2021, the standard deduction is $12,550 for single taxpayers and $25,100 for married taxpayers filing jointly, or more for people who are 65 or older). However, The Coronavirus Aid, Relief and Economic Security (CARES) Act allowed people to deduct up to $300 in cash contributions to charities in 2021, even if they don’t itemize.

You still have until April 18, 2022, to take advantage of several tax benefits for 2021. If you had self-employed income (even if you just did some freelance work or consulting) you can still make tax-deductible contributions to a Simplified Employee Pension. If you had an HSA-eligible high-deductible health insurance policy in 2021, you can make tax-deductible contributions to a health savings account, which you can then use tax-free for eligible medical expenses anytime in the future. If your modified adjusted gross income was less than $140,000 if you’re single or $208,000 if you’re married filing jointly, you can contribute to a Roth IRA for 2021. (Those income figures will grow in 2022 to $144,000 if you’re single and $214,000 if you’re married and filing jointly.) You won’t get a current tax break for Roth contributions, but you can withdraw the earnings tax-free after age 59 ½, as long as you’ve had a Roth IRA for at least five years, and you can take out the contributions without taxes or penalties at any time.

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