Deductions and Credits
There are several deductions and credits. Please consult your tax professional to determine which apply to your personal tax situation.
The standard deduction reduces the amount of your taxable income. For 2021, the standard deduction amount is $25,100 ($25,900 in 2022) for married taxpayers filing jointly, $18,880 ($19,400 in 2022) for those who file as heads of household, and $12,550 ($12,950 in 2022) for those who file as single or married filing separately.
CHILD TAX CREDIT
The enhanced child tax credit amounts and advance payments from the American Rescue Plan Act were for 2021 only. In 2022, 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 $1,500 of the credit is refundable. The credit phases out at $400,000 for joint filers and $200,000 for everyone else.
DEPENDENT TAX CREDIT
You're allowed 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
Medical expenses will now be deductible to the extent they exceed 7.5% of your adjusted gross 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. All expenses must be paid or billed during the tax year.
Married taxpayers filing jointly may deduct the interest on a maximum of only $750,000 of mortgage principal. 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 up to three others within a certain timeframe. You may be able to defer taxable gains when you sell investment property. You have 45 days after the sale to identify other income-producing property that you will purchase within 180 days of the sale, or by the due date of your tax return, including extensions. Your tax professional can give you more information.
Taxpayers 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.
If you are a partner in a partnership or owner of an S-corporation, discuss the pass-through entity tax with your tax professional as a workaround of the $10,000 SALT tax deduction limit.