Deductions and Credits

STANDARD DEDUCTION

The standard deduction, which reduces the amount of your taxable income, for 2020 is $24,800 ($25,100 in 2021) for married taxpayers filing jointly, $18,650 ($18,800 in 2021) for those who file as heads of household and $12,400 ($12,550 in 2021) for those who file as single or married filing separately.

CHILD TAX CREDIT

Each dependent child under the age of 17 with a Social Security number qualifies for a $2,000 tax credit, subject to income limitations. Up to $1,400 of the credit is refundable. The credit phases out at $400,000 for joint filers and $200,000 for everyone else.

DEPENDENT TAX CREDIT

Take a $500 tax credit for each dependent adult child or elderly parent in your care. The dependent doesn’t need to be related to you if they lived with you for the entire tax year and is a U.S. citizen, national, or resident alien. This credit is subject to the child tax credit’s income limits discussed above.

ITEMIZED DEDUCTION LIMIT GONE

Itemized deductions, which were previously phased out for taxpayers with higher incomes, have no income-based limit through 2025.

MEDICAL EXPENSE DEDUCTIONS

For taxpayers who itemize deductions, medical expenses will now be deductible to the extent they exceed 7.5% of your adjusted gross income income. The 7.5% threshold was made permanent for tax years 2020 and beyond.

EMPLOYEE BUSINESS EXPENSE DEDUCTION

Only certain employees can claim unreimbursed business expenses as an itemized deduction now. Eligible employees include: Armed Forces reservists, qualified performing artists, fee-basis state or local government officials and employees with impairment-related work expenses. These individuals can deduct ordinary and necessary expenses incurred while conducting business as an employee. Expenses must be paid or billed during the tax year.

HOME LOANS

Married taxpayers filing jointly may deduct the interest on a maximum of only $750,000 of mortgage principal, down from $1 million previously. The deduction is limited to half of that for single taxpayers. Interest on home equity loans, home equity lines of credit (HELOCs) and second mortgages may be deducted only when used to buy, build or substantially improve the taxpayer’s primary or secondary qualified residence that secures the loan, subject to limits.

REAL ESTATE SECTION 1031 LIKE-KIND EXCHANGES

The treatment of investment property for Section 1031 exchanges is now limited to real property – including land and permanent structures on that land. However, you can still sell one property and buy one to three other properties within a certain timeframe. If you sell investment property, you may defer taxable gains if within 45 days of the sale you identify other incomeproducing property that you buy within 180 days or by the due date of your tax return, including extensions. Your tax professionals will give you more information.

SALT TAXES

Taxpayers who itemize deductions are limited to $10,000 on state and local tax (SALT) deductions. This provision is especially harsh on homeowners in high-tax states, where state income and property taxes can easily exceed this figure. Making “charitable deductions” to a state-run charitable fund won’t allow you to get around the SALT limitations. Buying SALT credits this way is not allowed, because as with all charitable contributions, you’ll have to reduce the amount of your contribution by the value of anything you receive.

MORTGAGE INSURANCE PREMIUM DEDUCTIONS

Individuals may deduct mortgage insurance premiums on their personal residence and on one other home, such as a vacation home. The deduction is set to expire December 31, 2021, unless Congress acts to extend it. It begins to phase out when your adjusted gross income reaches $100,000 ($50,000 for married filing separate returns).