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- Herausgeber: John Wiley & Sons
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- Serie: J.K. Lasser
- Sprache: Englisch
The definitive guide to all income-tax deductions and credits for the everyday taxpayer Millions of Americans overpay their taxes by billions of dollars every year. J.K. Lasser's 1001 Deductions and Tax Breaks 2022: Your Complete Guide to Everything Deductible provides an invaluable tool by thoroughly explaining and keeping track of the constantly advancing tax law code for the ordinary taxpaying Americans. The fifth edition of this popular book has been fully updated to reflect the latest rulings and laws, allowing the reader to easily refer to the appropriate deductions for their particular needs. This guidebook answers the most common tax questions regarding deductions and credit in a clear, and easy-to-follow guide. It provides readers with: * Answers to the most common tax questions regarding deductions and credit * Comprehensive information on each deductible expense, including dollar limits and record-keeping requirements * An e-supplement with the latest tax developments from the IRS and Congress * Information regarding the American Rescue Plan Act (ARPA) and the Consolidated Appropriations Act, 2021 (CAA) Ideal for taxpayers and tax professionals, 1001 Deductions and Tax Breaks, 2022 helps the American taxpayer claim what is rightfully yours and keep more of your hard-earned money.
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Table of Contents
Cover
Title Page
Copyright
Introduction
Tax‐Favored Items
Limits on Qualifying for Tax‐Favored Items
Standard Deduction versus Itemized Deductions
Impact of Deductions on Your Chances of Being Audited
How to Use This Book
CHAPTER 1: You and Your Family
Marital Status
Dependents
Qualifying Child
Qualifying Relative
Child Tax Credit
Earned Income Credit
Dependent Care Expenses
Adoption Costs
Foster Care
Child Support
Alimony
ABLE Accounts
CHAPTER 2: Medical Expenses
Individual Mandate
Employer‐Provided Health Insurance
Premium Tax Credit
Health Coverage Tax Credit
Itemized Medical Expenses
Self‐Employed Health Insurance Deduction
Long‐Term Care Coverage
Flexible Spending Accounts for Health Care
Health Reimbursement Arrangements
Individual Coverage HRAs
Excepted Benefit HRAs
QSEHRAs
Health Savings Accounts
Archer Medical Savings Accounts
ABLE Accounts
COBRA Coverage
Medicare
Continuing Care Facilities and Nursing Homes
Accelerated Death Benefits
Decedent's Final Illness
Medical Insurance Rebates
CHAPTER 3: Education Costs
FAFSA Submissions
Employer‐Paid Education Assistance
Scholarships, Fellowships, and Grants
American Opportunity Credit
Lifetime Learning Credit
Work‐Related Education
Student Loan Interest
Interest on U.S. Savings Bonds
Coverdell Education Savings Accounts
Qualified Tuition Programs (529 Plans)
ABLE Accounts
Seminars
Educational Travel
Cancellation of a Student Loan
Penalty‐Free Withdrawals from IRAs
Government Reimbursements
Internships and Apprenticeships
COVID‐19‐Related Grants
CHAPTER 4: Your Home
Mortgages
Mortgage Interest Tax Credit
Home Equity Loans
Points
Prepayment Penalties
Late Payment Penalties
Mortgage Insurance
Reverse Mortgages
Cancellation of Mortgage Debt
Penalty‐Free IRA Withdrawals for Home‐Buying Expenses
Real Estate Taxes
Cooperative Housing
Minister's Housing Allowance
Home Sale Exclusion
Moving Expenses for Active Duty Military Personnel
Energy Improvements
ABLE Accounts
Disaster Rules for Casualties to Your Home
COVID‐19 Emergency Assistance
Home Office Deduction
CHAPTER 5: Retirement Savings
Traditional IRAs
Roth IRAs
IRA Rollovers
401(k) and Similar Plans
Self‐Employed Retirement Plans
SEPs
SIMPLEs
Retirement Saver's Credit
Custodial/Trustee Fees
Employer‐Paid Retirement Planning Advice
Charitable Transfers of IRA Distributions
Qualified Longevity Annuity Contracts
Hardship Distributions from Retirement Plans
Special Rules for COVID‐19 and Disasters
CHAPTER 6: Charitable Giving
Cash Donations
Appreciated Property Donations
Used Clothing and Car Donations
Intellectual Property Donations
Real Estate Donated for Conservation Purposes
Bargain Sales
Volunteer Expenses
Tickets to Fund‐Raisers, Raffles, and Sporting Events
Membership Fees to Nonprofit Organizations
Student Exchange Program
Donor‐Advised Funds
Sophisticated Charitable Giving Arrangements
IRA Transfers to Charity
Leave‐Based Donation Programs
Record Keeper for Your Charitable Giving
CHAPTER 7: Your Car
Business Use of Your Personal Car
Employer‐Provided Car
Vehicle Registration Fees
Car Accidents and Other Car‐Related Problems
Donating Your Car
Credit for Plug‐In Electric Drive Vehicles
Car Insurance Rebates
CHAPTER 8: Investing
Penalty on Early Withdrawal of Savings
Loss on Bank Deposits
Capital Losses
Capital Gains and Qualified Dividends
Worthless Securities
Loss on Section 1244 Stock
Margin Interest and Other Investment‐Related Borrowing
Amortization of Bond Premium
Municipal Bonds
Savings Bonds
Gain on the Sale of Small Business Stock
Gain on DC Zone Assets
Gain on Reinvestments in Opportunity Zones
Foreign Taxes on Investments
Exercise of Incentive Stock Options
Losses from Investment Ponzi Schemes
Deferral of Income in Commercial Annuities
CHAPTER 9: Travel
Business Travel
Temporary Work Assignments
Conventions
Medical Travel
Charitable Travel
Education‐Related Travel
National Guard and Military Reservist Travel
Frequent Flier Miles
Recordkeeping for Travel Expenses
CHAPTER 10: Real Estate
Vacation Home
Home Office
Timeshares
Rentals
Low‐Income Housing Credit
Rehabilitation Credit
Like‐Kind Exchanges
Deduction for Energy‐Efficient Commercial Buildings
Qualified Improvement Property
Conservation Easements
CHAPTER 11: Borrowing and Interest
Home Mortgage Interest
Student Loan Interest
Borrowing from Retirement Plans
Investment‐Related Interest
Business Interest
Accrued Interest on Bond Purchases
Below‐Market Loans
Bad Debts
Debt Forgiveness
CHAPTER 12: Insurance and Catastrophes
Casualty, Theft, and Disaster Losses
Economic Impact Payments
Disaster Relief Payments
Damages
Disability Coverage
Accelerated Death Benefits
Legal Fees
Identity Theft Losses
Tax Identity Theft and Relief
CHAPTER 13: Your Job
Educator Expenses
Prizes and Awards
Performing Artists
State or Local Government Officials Paid on a Fee Basis
Repayment of Supplemental Unemployment Benefits
Jury Duty Pay Turned Over to Your Employer
Impairment‐Related Expenses
Military Benefits
Contributions to State Benefit Programs
Dependent Care Assistance
Fringe Benefits
Income Earned Abroad
CHAPTER 14: Your Business
Start‐Up Costs
Qualified Business Income Deduction
Equipment Purchases
Payment for Services
Supplies
Gifts
Self‐Employment Tax Deduction
Home Office Deduction
Farming‐Related Breaks
Other Business Deductions
Business Credits
Net Operating Losses
COVID‐19 Government Assistance
CHAPTER 15: Miscellaneous Items
State and Local Income Taxes
State and Local Sales Taxes
Certain Federal Taxes
Tax Refunds
Legal Fees
Gifts You Receive
Inheritances
Life Insurance Proceeds
Gambling Losses
Estate Tax Deduction on Income in Respect of a Decedent
Rebates and Discounts
Government Benefits
Olympic Medals
Alternative Minimum Tax
APPENDIX A: Items Adjusted Annually for Inflation
APPENDIX B: Checklist of Tax‐Free Items
APPENDIX C: Checklist of Nondeductible Items
Nondeductible Items
Index
End User License Agreement
List of Tables
Introduction
TABLE I.1 Standard Deduction Amounts for 2021
Chapter 1
TABLE 1.1 Stage 1 Phaseout of the Child Tax Credit over MAGI Limits in 2021
TABLE 1.2 Stage 2 Phaseout of Child Tax Credit over MAGI Limits in 2021
TABLE 1.3 Maximum Earned Income Credit for 2021
TABLE 1.4 Earned Income Needed for Top Credit in 2021
TABLE 1.5 AGI Phaseout Range for the Earned Income Credit in 2021
TABLE 1.6 MAGI Phaseout Range for the Adoption Credit in 2021
TABLE 1.7 Year to Claim the Credit for Adoption of a U.S. Citizen or Resident Ch...
TABLE 1.8 Year to Claim the Credit for Adoption of a Foreign Child
Chapter 2
TABLE 2.1 Poverty Amounts in the Contiguous States and D.C.*
TABLE 2.2
TABLE 2.3 Deductible Long‐Term Care Premiums for 2021
TABLE 2.4 Health Savings Account Contribution Limits for 2021
TABLE 2.5 2021 High‐Deductible Policy Limits
TABLE 2.6 2021 Limits on Deductlbles and Out‐of‐Pocket Expenses
TABLE 2.7 Part B Premiums for 2021
TABLE 2.8 Part D Premiums for 2021
Chapter 3
TABLE 3.1 2021 MAGI Phaseout Range for Education Credits
TABLE 3.2 2021 Phaseout Ranges for Student Interest Deduction
TABLE 3.3 2021 Phaseout Ranges for Savings Bond Interest Exclusion
TABLE 3.4 MAGI Phaseout Ranges for Coverdell ESA Contributors
Chapter 5
TABLE 5.1 2021 MAGI Phaseout Range for Active Participants Deducting IRA Contrib...
TABLE 5.2 MAGI Limits in 2021 for Retirement Saver's Credit
Chapter 6
TABLE 6.1 Deduction for Income from Intellectual Property Donations
TABLE 6.2 Record Keeper for Your Cash Donations
Chapter 7
TABLE 7.1 Dollar Limit on Depreciation of Passenger Cars
TABLE 7.2 Sample Inclusion Amounts for Cars First Leased in 2021
TABLE 7.3 States with Ad Valorem Taxes
Chapter 8
TABLE 8.1 2021 Ceiling on Taxable Income for Zero Tax Rate
TABLE 8.2 2021 Taxable Income Triggering 20% Tax Rate
TABLE 8.3 State Income Tax Treatment of Municipal Bond Interest
Chapter 9
TABLE 9.1 North American Area for Convention Deduction
TABLE 9.2 Sample Weekly Travel Expense Record Keeper
Chapter 10
TABLE 10.1 Depreciation Rates for Residential Rental Property
TABLE 10.2 Depreciation Rates for Nonresidential Rental Property (Placed in Serv...
Chapter 12
TABLE 12.1 Phaseout Range for the Economic Impact Payment
Chapter 13
TABLE 13.1 Fringe Benefits in 2021
TABLE 13.2 Benefits Exempt from Social Security and Medicare (FICA) Taxes
Chapter 14
TABLE 14.1 2021 Taxable Income Phaseout for the QBI Deduction
TABLE 14.2 Tax Credits
Chapter 15
TABLE 15.1 Income Threshold for the Excludable Portion of Social Security Benefi...
TABLE 15.2 2021 Phaseout Thresholds for the AMT Exemption
Guide
Cover Page
Table of Contents
Title Page
Copyright
Introduction
Begin Reading
Appendix A Items Adjusted Annually for Inflation
Appendix B Checklist of Tax‐Free Items
Appendix C Checklist of Nondeductible Items
Index
End User License Agreement
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J.K. LASSER'S™
1001 DEDUCTIONS AND TAX BREAKS 2022
Your Complete Guide to Everything Deductible
Barbara Weltman
Copyright © 2022 by Barbara Weltman. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.
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Introduction
The COVID‐19 pandemic triggered a number of changes in tax rules designed to help individuals cope financially with the economic fallout in the economy. Some changes are temporary, while others are permanent. The word “taxes” makes most people groan. There are good reasons for this response: First of all, the cost of paying your taxes annually can be a financial burden. You may feel taken to the cleaners every time you view your paycheck after withholding for federal income taxes (not to mention state income taxes as well as Social Security and Medicare taxes). And taxes are time consuming—to gather information, meet with a tax professional if you use one, or prepare and submit your own returns.
Second, it can cost you money to get your taxes done. The IRS says that nearly 60% of taxpayers use paid preparers for their returns. Of course, because more than 90% of individual income tax returns are completed by computer (through a paid preparer, with software, or FreeFile), the places where deductions and credits are entered on the return is not critical to you; it's effectively done automatically.
Third, the tax law is very complicated and changing all the time. There have been several major tax acts impacting 2021 returns. These include the Consolidated Appropriations Act, 2021, and the American Rescue Plan Act.
Fourth, you have to know what the tax rules are and can't claim ignorance to avoid taxes and penalties. Even if you use a tax professional or tax preparation software to prepare your return, you remain responsible for your taxes. The Tax Court has noted that using software is not an automatic excuse to avoid underpayment penalties.
How can you combat the feeling of dread when it comes to taxes? It helps to know that the tax law is peppered with many, many tax breaks to which you may be entitled. These breaks allow you to not report certain economic benefits you enjoy or to subtract certain expenses from your income or even directly from your tax bill. As the famous jurist Judge Learned Hand once stated (in the 1934 case of Helvering v. Gregory in the Court of Appeals for the Second Circuit):
Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike, and all do right, for nobody owes any public duty to pay more than the law demands.
So get your tax affairs in order and legally reduce what you pay each year to Uncle Sam!
In getting a handle on how to do this by taking advantage of every tax break you may be entitled to without running afoul of the Internal Revenue Service (IRS), there are some simple rules to keep in mind. They include:
You must report all of your income unless a specific law allows you to exclude or exempt it (so that it is never taxed) or defer it (so that it is taxed at a later time).
You can claim deductions only when and to the extent the law allows. Deductions are referred to as a “matter of legislative grace”; Congress doesn't have to create them and does so only for some purpose (for example, to encourage economic activity or to balance some perceived inequity in the tax law).
Tax credits are worth more than tax deductions. A credit reduces your tax payment on a dollar‐for‐dollar basis; a $1,000 credit saves you $1,000 in taxes. A deduction is worth only as much as the top tax bracket you are in. Suppose you are in the 24% tax bracket, which means this is the highest rate you pay on at least some of your income. If you have a $1,000 deduction, it is worth $240 (24% of $1,000) because it saves you $240 in taxes you would otherwise have to pay.
In a number of cases, different deduction rules apply to the alternative minimum tax (AMT), a shadow tax system that ensures you pay at least some tax if your regular income tax is lower than it would have been without certain deductions.
Whether you prepare your return by hand, use computer software or an online solution, or rely on a professional, this book is designed to tell you how to get every tax edge you're entitled to. Knowing what to look out for will help you plan ahead and organize your activities in such a way that you'll share less of your hard‐earned money with the government.
Tax‐Favored Items
There are 5 types of tax‐advantaged items receiving preferential or favorable treatment under the tax law:
Tax‐free income
—income you can receive without any current or future tax concerns. Tax‐free income may be in the form of exclusions or exemptions from tax. In many cases, tax‐free items do not even have to be reported in any way on your return.
Capital gains
—profits on the sale or exchange of property held for more than one year (long‐term). Long‐term capital gains are subject to lower tax rates than the rates on other income, such as salary and interest income, and may even be tax free in some cases. Ordinary dividends on stocks and capital gain distributions from stock mutual funds are taxed at the same low rates as long‐term capital gains.
Tax‐deferred income
—income that isn't currently taxed. Since the income builds up without any reduction for current tax, you may accumulate more over time. However, at some point the income becomes taxable.
Deductions
—items you can subtract from your income to reduce the amount of income subject to tax. There are 2 classes of deductions: those “above the line,” which are subtracted directly from gross income, and those “below the line,” which can be claimed only if you itemize deductions instead of claiming the standard deduction (explained later).
Credits
—items you can use to offset your tax on a dollar‐for‐dollar basis. There are 2 types of tax credits: one that can be used only to offset tax liability (called a “nonrefundable” credit) and one that can be claimed even if it exceeds tax liability and you receive a refund (called a “refundable” credit). Usually you must complete a special tax form for each credit you claim.
This book focuses on different types of tax‐favored items: exclusions (tax‐free income), above‐the‐line deductions that don't require itemizing, itemized deductions, tax credits, and other benefits, such as subtractions that reduce income. At the end of this Introduction you'll see symbols used to easily identify the type of benefit being explained.
Limits on Qualifying for Tax‐Favored Items
In many cases, eligibility for tax benefits (including Economic Impact Payments), or the extent to which they may be claimed, depends on adjusted gross income (AGI) or modified adjusted gross income (MAGI).
Adjusted gross income is gross income (all the income you are required to report) minus certain deductions (called “adjustments to gross income”). Adjustments or subtractions you can make to your gross income to arrive at your adjusted gross income are limited to the following items:
Alimony payments for pre‐2019 divorces and separation agreements
Archer Medical Savings Accounts (MSAs) (for accounts set up prior to 2008)
Business expenses of self‐employed individuals
Capital loss deductions of up to $3,000
Charitable contributions up to $300 ($600 for joint filers) if you don't itemize personal deductions
Educator expenses up to $250
Employer‐equivalent portion of self‐employment tax
Forfeiture‐of‐interest penalties because of early withdrawals from certificates of deposit (CDs)
Health Savings Account (HSA) contributions
Individual Retirement Account (IRA) deductions
Jury duty pay turned over to your employer
Legal fees for unlawful discrimination claims
Net disaster loss if you don't itemize personal deductions
Net operating losses (NOLs)
Performing artist's qualifying expenses
Qualified retirement plan contributions for self‐employed individuals
Rent and royalty expenses
Repayment of supplemental unemployment benefits required because of the receipt of trade readjustment allowances
Self‐employed health insurance deduction
Simplified employee pension (SEP) or savings incentive match plan for employees (SIMPLE) contributions for self‐employed individuals
Student loan interest deduction up to $2,500
Travel expenses to attend National Guard or military reserve meetings more than 100 miles from home
Figuring AGI may sound complicated, but in reality it's merely a number taken from a line on your tax return. For example, AGI is the figure you enter on line 11 of the 2021 Form 1040 or 1040‐SR.
Modified adjusted gross income is merely AGI increased by certain items that are excludable from income and/or certain adjustments to gross income. Which items are added back varies for different tax breaks. For example, the MAGI limit on eligibility to claim the student loan interest deduction is AGI (disregarding the student loan interest deduction) increased by the exclusion for foreign earned income and certain other foreign income or expenses. All of these items are explained in this book.
Household income is a term in tax law used to determine eligibility for the premium tax credit to help pay for coverage purchased through a government marketplace. Household income is explained further in this book in connection with these tax rules.
Qualified business income. If you are an owner in a pass‐through entity—a sole proprietorship, limited liability company, partners, or S corporation—you may be eligible for a qualified business income (QBI) deduction. QBI for purposes of this personal deduction is explained further in Chapter.
TABLE I.1 Standard Deduction Amounts for 2021
Filing Status
Standard Deduction
Married filing jointly
$ 25,100
Head of household
18,800
Single (unmarried)
12,550
Qualifying widow(er) (surviving spouse)
25,100
Married filing separately
12,550
Taxable income. This is the amount of income remaining after subtracting deductions. Taxable income is the amount on which taxes are figured. Taxable income is also the threshold used for determining the QBI deduction explained in Chapter.
Standard Deduction versus Itemized Deductions
Every taxpayer, other than a dependent of another taxpayer, is entitled to a standard deduction. This is a subtraction from your income, and the amount you claim is based on your filing status. Table I.1 shows the standard deduction amounts for 2021. In 2018 (the most recent year for statistics), about 88% of all filers used the standard deduction.
In addition to the basic standard deduction, certain taxpayers can increase these amounts. An additional standard deduction amount applies to those age 65 and older and for blindness. For 2021, the additional amount is $1,700 for individuals who are not married and are not a surviving spouse and $1,350 for those who are married or a surviving spouse.
Example
In 2021, you are single, age 68, and not blind. Your standard deduction is $14,250 ($12,550 + $1,700).
You cannot claim any additional standard deduction that applies to those 65 or older and/or blind if you choose to itemize deductions in lieu of claiming the basic standard deduction amount.
Individuals who do not itemize but suffer a net qualified disaster loss in a federally declared disaster area can effectively increase their standard deduction amount. Net qualified disaster losses are explained in Chapter 12.
Instead of claiming the standard deduction, you can opt to list certain deductions separately (i.e., itemize them). Itemized deductions include:
Medical expenses
Taxes
Interest payments
Gifts to charity (without regard to the dollar limit allowed for those claiming the standard deduction)
Casualty and theft losses in federally‐declared disaster areas
Gambling losses
Estate tax payments on income in respect of decedents
Generally, claim the standard deduction when it is greater than the total of your itemized deductions. However, it may save overall taxes to itemize, even when total deductions are less than the standard deduction, if you are subject to the alternative minimum tax (AMT). The reason: The standard deduction cannot be used to reduce income subject to the AMT, but certain itemized deductions can.
In the past there was an overall limit on itemized deductions for high‐income taxpayers. This limit does not apply for 2018 through 2025.
If a married couple files separate returns and one spouse itemizes deductions, the other must also itemize and cannot claim a standard deduction.
Impact of Deductions on Your Chances of Being Audited
Did you know that the IRS collects statistics from taxpayers to create profiles of average deductions? If you claim more than the average for your income range, the IRS's computer may select your return for further examination.
Tax experts agree that you should claim every deduction you are entitled to, even if your write‐offs exceed these statistical ranges. Just make sure to have the necessary proof of your eligibility and other records you are required to keep in case your return is examined.
How to Use This Book
This book is tied to Form 1040, U.S. Income Tax Return for Individuals. It can also be used for Form 1040‐SR, Income Tax Return for Seniors; a form specifically for seniors age 65 and older.
The chapters in this book are organized by subject matter so you can browse through them to find the subjects that apply to you or those in which you have an interest.
Each tax benefit is denoted by an icon to help you spot the type of benefit involved:
Exclusion
Above‐the‐line deduction
Itemized deduction (a deduction taken
after
figuring adjusted gross income)
Credit
Other benefit (e.g., a subtraction other than an above‐the‐line or itemized deduction that reduces income)
For each tax benefit you will find an explanation of what it is, starting with the maximum benefit or benefits you can claim if you meet all eligibility requirements. You'll learn the conditions or eligibility requirements for claiming or qualifying for the benefit. You'll find both planning tips to help you make the most of the benefit opportunity as well as pitfalls to help you avoid problems that can prevent your eligibility. You'll see where to claim the benefit (if reporting is required) on your tax return and what records you must retain to support your tax position.
You'll find dozens of examples to show you how other taxpayers have successfully taken advantage of the benefit. Over the years, taxpayers have been able to write off literally thousands of items; not every one is listed here because space does not allow it. And you'll learn what isn't allowed even though you might otherwise think so. There are references to free IRS publications on a variety of tax topics that you can download from the IRS website (www.irs.gov) or obtain free of charge by calling 800‐829‐1040.
You'll also see key dates for various actions, such as filing returns, contributing to retirement plans, and reporting foreign financial accounts to the U.S. Treasury. For example, the deadline for filing 2021 federal income tax returns is April 18, 2022.
In the appendices, you'll find a listing of items that can be adjusted each year to reflect cost‐of‐living changes so you can plan ahead, as well as a checklist of items that are tax free, and a checklist of items that are not deductible.
Throughout the book you will find alerts to possible changes to come. For a free update on tax developments, look for the Supplement to this book in February 2022, by going to www.jklasser.com, as well as to my website, www.BigIdeasForSmallBusiness.com.
CHAPTER 1You and Your Family
Marital Status
Dependents
Qualifying Child
Qualifying Relative
Child Tax Credit
Earned Income Credit
Dependent Care Expenses
Adoption Costs
Foster Care
Child Support
Alimony
ABLE Accounts
The nature of families is changing, and taxes have specific rules for them. Do the old clichés still ring true? Can two still live as cheaply as one? Are things really cheaper by the dozen? For tax purposes, there may be a penalty or bonus for being married versus single. And there are certain tax breaks for having a family.
This chapter explains family‐related tax benefits, such as tax credits related to your children and the consequences of marital dissolutions. Economic impact payments (EIPs) in 2021 to individuals and dependents are explained in Chapter 12. For more information on these topics, see IRS Publication 501, Dependents, Standard Deduction, and Filing Information; IRS Publication 503, Child and Dependent Care Expenses; IRS Publication 504, Divorced or Separated Individuals; IRS Publication 596, Earned Income Credit; and IRS Publication 972, Child Tax Credit.
Marital Status
Whether you are married or single has a significant impact on your taxes. In some cases, being married results in a “marriage bonus,” which means effectively averaging taxes when one spouse works and the other does not. In other cases, being married results in a “marriage penalty,” which means that two working spouses earning about the same likely will pay higher total tax than if they were single. For some tax rules, a married couple has the identical tax break as a single individual, such as the $3,000 capital loss deduction against ordinary income and the $10,000 limit on itemizing state and local taxes, which is a distinct disadvantage for those who are married. For some tax rules, a married couple has double the tax break for singles, such as the ordinary loss deduction for so‐called Section 1244 stock, so marital status makes no difference here.
Technically, there are a number of filing statuses that determine eligibility for various tax breaks:
Married filing jointly
Married filing separately
Head of household
Unmarried (single)
Qualifying widow(er) with a dependent child. This filing status is also referred to as a surviving spouse.
You need to know which term applies to you. The terms are not further defined here and often cause confusion, so check IRS Publication 501 if you are unsure. Note that under federal tax law, the terms “husband,” “wife,” and “spouse” are gender neutral. The term “husband and wife” means two individuals lawfully married to each other. However, those in a civil union or domestic partnership are not married for federal income tax purposes.
Dependents
No personal or dependency exemptions can be claimed in 2018 through 2025. So if you had 4 exemptions in 2017 and deducted $16,200 ($4,050 × 4) in that year, your deduction in 2021 is zero. The suspension of exemptions seriously reduces write‐offs for many taxpayers. Of course, because high‐income taxpayers were subject to a phaseout of exemptions, they are not greatly affected by the suspension in the deduction for exemptions.
However, the concept of dependents has not been eliminated and continues to apply for various purposes. For example, for purposes of a child tax credit that may be claimed for a qualifying child or a dependent who is not a qualifying child, the concept of dependents continues to apply. The definition of dependent varies for certain purposes and is explained in each relevant tax break in this book. For example, the amount of income for a qualifying relative taken into account in determining dependent status in 2021 is $4,300.
Qualifying Child
The following is a brief explanation of a qualifying child and a qualifying relative (someone who is not a qualifying child):
A qualifying child must meet all of the following conditions:
Relationship test:
The child must be your son or daughter (natural, adopted, step, and in some cases foster) or a descendant of your sibling (e.g., niece or nephew).
Age test:
The child must be younger than you and either younger than 19 years old, be a “student” younger than 24 years old as of the end of the calendar year, or any age but permanently and totally disabled.
Residency test:
The child must live with you in the United States for more than half the year (special rules for noncustodial parents are explained later).
Joint return test:
The child cannot file a joint return unless doing so to claim a tax refund.
Support test:
The child does not provide more than half of his or her own support.
Multiple people claiming the child as a dependent. Where one parent has physical custody of the child, he or she can waive treating the child as a dependent to permit the noncustodial parent to do so. The waiver (annually or permanently) is made on Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent. The form applies to some benefits (e.g., child tax credit) but not for other benefits (e.g., earned income tax credit, dependent care credit, head of household status).
Where 2 people are eligible to treat the child as a dependent, a “tie breaker rule” comes into play. Generally, the person with greater physical custody (determined by counting the nights that the child spends with each person) is determinative. However, when there's an even split, other rules are used to decide which person can treat the child as a dependent.
Qualifying Relative
This is a person who is not a qualifying child and who meets all of the following conditions:
Relationship test
.
The person must be either related to you in a stated way (e.g., a child too old to be a qualifying child, grandchild, parent, certain in‐laws, aunt, uncle, niece, or nephew) or a member of your household.
Support test
.
You must provide more than half of the person's support for the year.
Gross income test
.
The person must have a gross income below a set amount ($4,300 in 2021).
Child Tax Credit
The U.S. Department of Agriculture estimates that it costs a middle‐class family over $233,610 to raise a child born in 2015 to age 18 (there are no newer statistics), but if you factor in inflation, the cost becomes $261,473). In recognition of this cost, the tax law allows you to claim a tax credit.
Benefit
You may claim a tax credit of up to $3,600 for a qualifying child from birth to under age 6 and $3,000 for age 6 but under 18. You may claim a $500 credit for a qualifying dependent (a person who is not a qualifying child). If the credit for a qualifying child that you are entitled to claim is more than your tax liability, you may be entitled to a refund under certain conditions.
The credit for a qualifying child is fully refundable if you (or your spouse if married filing jointly) meet certain conditions; the credit for a qualifying dependent is not refundable. From July 1, 2021, through December 31, 2021, the IRS paid one‐half of the credit on an advanced basis (ratably each month) to you if you were eligible for the credit, unless you opted to forego the advance payments. These payments are reported to you on IRS Letter 6419 (sent in January 2022). The balance of the credit is claimed on your 2021 income tax return.
The advance payments were based on information the IRS had about you for 2020 (your income, dependents, filing status, residency). If there have been changes, you may have to repay any excess credit amounts you received (see Pitfalls).
Conditions
To claim the child tax credit, you must meet 2 conditions:
You must have a qualifying child or a qualifying dependent with a valid Social Security number.
Your income must be below a set amount. To have the credit treated as refundable, you must meet a residency test. This means you (or your spouse if married filing jointly) have a principal place of abode in the U.S. for more than half of 2021 or are a bona fide resident of Puerto Rico for 2021.
QUALIFYING CHILD
You can claim the credit only for a “qualifying child.” There are 5 tests for a qualifying child and you must meet all of them. A qualifying child who meets the 5 tests:
Age test
.
The child must be under age 18 by the end of the 2021. This age limit applies even if a child is disabled (but such an older child may be a qualifying dependent explained later).
Residence test
.
The child must have the same principal residence as you for more than half the tax year. There are some exceptions in certain cases for a child of divorced or separated parents, a kidnapped child, temporary absences, and for a child who is born or dies during the year.
Support test
.
The child does not provide more than half of his or her support.
Social Security number
.
No credit is allowed unless the child has a Social Security number. The Social Security number must be issued on or before the due date of your return. A Social Security card that is labeled “not valid for employment” (i.e., it is only good for purposes of receiving federal benefits, such as Medicaid) is not treated as a valid Social Security number for purposes of the child tax credit.
Nationality
.
The child must be a U.S. citizen or national, or a resident of the United States. The person can't be a resident of Canada or Mexico.
QUALIFYING DEPENDENT
You may claim the $500 nonrefundable child tax credit for a qualifying dependent. A “qualifying dependent” is a person who is not a qualifying child and who is viewed as a dependent (even though there is no dependency exemption). More specifically, a dependent is a qualifying relative. There are 5 tests for being a qualifying relative, all of which must be met:
Relationship test
.
The person must be your child (including adopted or step); your grandchild or great‐grandchild; in‐law (son, daughter, father, mother, brother, or sister); parent or stepparent; sibling (including step and half); and aunt, uncle, niece, or nephew if related by blood.
Gross income test
.
For 2021, this means having gross income exceeding $4,300.
Support test
.
You must provide more than half of the person's support for the year.
Qualifying child test
.
The person cannot be a qualifying child for you or any other taxpayer.
Residency test
.
The qualifying dependent must be a U.S. citizen, national, or resident of the United States. The person can't be a resident of Canada or Mexico.
MAGI LIMIT
You must have modified adjusted gross income (MAGI) below a set amount. The credit you are otherwise entitled to claim is reduced or eliminated if your MAGI exceeds a set amount. MAGI for purposes of the child tax credit means AGI increased by the foreign earned income exclusion, the foreign housing exclusion or deduction, or the possession exclusion for American Samoa residents.
The credit phases out in 2 stages: first for the amount above $2,000 and then for the remaining $2,000. The credit amount above $2,000 is reduced by $50 for each $1,000 of MAGI or a fraction thereof over the MAGI limit for your filing status. The phaseout begins if MAGI exceeds the limits found in Table 1.1. The remaining $2,000 credit phaseout limits are in Table 1.2.
Example
In 2021, a single parent with one qualifying child age 4 has MAGI of $100,000. The $3,600 credit is reduced to $2,350 (reduction is $1,250, which is $25,000 excess MAGI over the applicable threshold ÷ $50).
TABLE 1.1 Stage 1 Phaseout of the Child Tax Credit over MAGI Limits in 2021
Filing Status
MAGI Limit
Married filing jointly
$150,000
Head of household
$112,500
Single
$ 75,000
TABLE 1.2 Stage 2 Phaseout of Child Tax Credit over MAGI Limits in 2021
Filing Status
MAGI Limit
Married filing jointly
$400,000
Other filing status
200,000
ADDITIONAL CHILD TAX CREDIT
If you can't meet the residency test discussed earlier, you may still qualify for a child tax credit that exceeds your tax liability and is refundable to you. The basic child tax credit amount for those not meeting the residency test is $2,000; income limits apply. The refundable portion is limited to $1,400, but no more than either:
15% of earned income in excess of $3,000, or
For those with 3 or more qualifying children, the excess if any of Social Security taxes over the earned income credit.
Planning Tips
The child tax credit and the credit for other dependents should be factored into income tax withholding from paychecks to enjoy the tax savings throughout the year. The amount of the child tax credit in 2022 will be lower unless Congress makes a change. But you may still file a new Form W‐4 with your employer to factor in the applicable child tax credit into your withholdings for the year.
If you know you will become entitled to claim the credit (e.g., you expected the birth of a child), you may wish to adjust your withholding so that you don't have too much income tax withheld from your paycheck. Increase your withholding so that less income tax is withheld from your pay by filing a new Form W‐4, Employee's Withholding Certificate, with your employer. There is a Tax Withholding Estimator at https://www.irs.gov/individuals/tax-withholding-estimator to help you complete Form W‐4.
If you can't claim a credit for a qualifying child because the child doesn't have a valid Social Security number, you may be able to claim the credit for a qualifying dependent. For example, if there is another taxpayer identification number (e.g., Adoption Taxpayer Identification Number, or ATIN), you may be eligible for the $500 credit.
Pitfalls
If you had a change in income, dependents, filing status, or residency, you may have received more in advance payments of the child tax credit than what you are actually entitled to, based on 2021 income, dependents, filing status, and residency. You may have to repay some or all of the excess advance payments received.
There's no repayment required if your modified adjusted gross income (MAGI) for 2021 does not exceed $40,000 for singles, $50,000 for heads of households, or $60,000 for joint filers as long as your principal place of abode was in the U.S. for more than half the year.
There
may
be repayment if MAGI for 2021 is between $40,000 and $80,000 for singles, $50,000 and $100,000 for heads of households, or $60,000 and $120,000 for joint filers as long as your principal place of abode was in the U.S. for more than half the year. It depends on the “repayment protection amount,” which is $2,000 multiplied by the number of children used to figure your advance payments minus the number of children used to figure the total credit amount on your 2021 return. If the number of children is the same, then the overpayment must be repaid (i.e., there is no repayment protection amount). If there is a repayment protection amount, then there is a reduction in what must be repaid.
There's full repayment if MAGI is at least $80,000 singles, $100,000 for heads of households, or $120,000 for joint filers.
If you claim the foreign earned income exclusion to exclude income earned abroad up to the annual dollar limit ($108,700 in 2021), you cannot receive the refundable child tax credit.
For 2021 returns filed in 2022, the IRS is not permitted to issue tax refunds for the refundable child tax credit before mid‐February 2022. As a result, refunds usually aren't received until the third or fourth week in February, even for returns submitted in January 2022.
Where to Claim the Credit
On page 1 of Form 1040 or 1040‐SR, enter dependents for whom you are claiming a child tax credit or credit for other dependents, along with their Social Security numbers and relationship to you. The child tax credit—refundable and nonrefundable amounts—as well as the additional child tax credit are figured on Schedule 8812 of Form 1040 or 1040‐SR. The nonrefundable child tax credit or the credit for other dependents is entered on line 19 of the return. The refundable child tax credit or the additional child tax credit is entered on line 28 of the return.
Earned Income Credit
Low‐income taxpayers are encouraged to work and are rewarded for doing so by means of a special tax credit, called the earned income credit. The earned income credit is the second‐largest program, after Medicaid, that provides assistance to low‐income people. The amount of the credit varies with income, filing status, and the number of dependents, if any. The credit may be viewed as a “negative income tax” because it can be paid to taxpayers even if it exceeds their tax liability.
TABLE 1.3 Maximum Earned Income Credit for 2021
Maximum Earned
Number of Qualifying Children
Income Credit
No qualifying child
$ 1,502
1 qualifying child
3,618
2 qualifying children
5,980
3 or more qualifying children
6,728
Benefit
If you are a working taxpayer with low or moderate income, you may qualify for a special tax credit of up to $6,728 in 2021. The amount of the credit depends on several factors, including your adjusted gross income, earned income, and the number of qualifying children. Table 1.3 shows the maximum credit you may claim based on the number of your qualifying children, if any.
The credit is “refundable” because it can be received in excess of the tax owed.
Conditions
To be eligible for the credit, you must have earned income from being an employee or a self‐employed individual. The amount of the credit you are entitled to claim depends on several factors.
QUALIFYING CHILDREN
You may claim the credit even if you have no qualifying child. But you are entitled to a larger credit if you have one qualifying child and a still larger credit for 2 or more qualifying children.
To be a qualifying child, the child must:
Be a qualifying child as defined earlier in the chapter under the child tax credit
Be under age 19 or under age 24 and a full‐time student or permanently and totally disabled
Live in your U.S. household for more than half the year
Qualify as your dependent if the child is married at the end of the year
Be a U.S. citizen or resident (or a nonresident who is married to a U.S. citizen and elects to have all worldwide income subject to U.S. tax)
EARNED INCOME
Earned income includes wages, salary, tips, commissions, jury duty pay, union strike benefits, certain disability pensions, U.S. military basic quarters and subsistence allowances, and net earnings from self‐employment (profit from your self‐employment activities). Military personnel can elect to treat tax‐free combat pay as earned income for purposes of the earned income credit.
TABLE 1.4 Earned Income Needed for Top Credit in 2021
Earned Income Needed
Number of Qualifying Children
for Top Credit
No qualifying child
$ 9,820
1 qualifying child
10,640
2 or more qualifying children
14,950
Nontaxable employee compensation, such as tax‐free fringe benefits or salary deferrals—for example, contributions to company 401(k) plans—is not treated as earned income.
Earned income does not include pensions and retirement plan distributions, long‐term disability and military disability pensions, welfare, and Social Security benefits (for retirement or disability).
To qualify for the maximum credit, you must have earned income at or above a set amount. Table 1.4 shows the earned income you need to obtain the top credit (depending on the number of your qualifying children, if any).
For 2021, you may use your 2019 earned income to figure the credit if it was higher than your earned income in 2021.
ADJUSTED GROSS INCOME
If your adjusted gross income is too high, the credit is reduced or eliminated. Table 1.5 shows the AGI phaseout range for the earned income credit. This depends not only on the number of qualifying children, if any, but also on your filing status, as shown in the table.
JOINT RETURN
If you are married, you usually must file a joint return with your spouse in order to claim an earned income credit. However, this requirement is waived if your spouse did not live in your household for the last 6 months of the year or have a decree, instrument, or written agreement of separation and did not live with a spouse by the end of the year. In this case, assuming you paid the household expenses in which a qualifying child lived for the full year, you qualify as single for purposes of the earned income credit (using “other taxpayers” limits on AGI).
TABLE 1.5 AGI Phaseout Range for the Earned Income Credit in 2021
Number of Qualifying Children
Married Filing Jointly
Other Taxpayers
No qualifying child
$17,560–27,380
$11,610–21,430
1 qualifying child
$25,470–48,108
$19,520–42,158
2 qualifying children
$25,470–53,865
$19,520–47,915
3 or more qualifying children
$25,470–57,414
$19,520–51,464
Example
You are married and file a joint return. You and your spouse have 1 qualifying child. In 2021, if your AGI is less than $25,470, your earned income credit is not subject to any phaseout. If your AGI is $48,108 or higher, you cannot claim any earned income credit; it is completely phased out. If your AGI is between these amounts (within the phaseout range), you may claim a reduced credit.
CHILDLESS INDIVIDUALS
For 2021, the minimum age for claiming the earned income credit, which had been 25, is reduced to 19. The minimum age for a full‐time student is 24; it's 18 for a former foster child or homeless youth. The maximum age, usually 65, does not apply in 2021.
If you have a qualifying child who lacks a Social Security number, you may claim the earned income tax credit as if you were childless.
Planning Tips
The credit is based on a set percentage of earned income. However, you don't have to compute the credit. You merely look at an IRS Earned Income Credit Table, which accompanies the instructions for your return.
You can have the IRS figure your credit for you (you don't even have to look it up in the table). To do this, just complete your return up to the earned income credit line and put “EIC” on the dotted line next to it. If you have a qualifying child, complete and attach Schedule EIC to the return. Also attach Form 8862, Information to Claim Earned Income Credit after Disallowance, if you are required to do so as explained next.
If your child does not qualify as your dependent because of the tie‐breaker rule (discussed earlier in this chapter), you may claim the earned income credit with no qualifying child. For example, a grandmother has a home in which her daughter and the baby (granddaughter) live. Under the tie‐breaker rule, while the baby could be a qualifying child of the grandmother and mother, she is the daughter's qualifying child. The grandmother can claim the earned income tax credit with no qualifying child, assuming all other requirements for the credit are met. Alternatively, if the daughter foregoes the dependency exemption, the grandmother can claim it and the earned income tax credit, assuming that her AGI exceeds the daughter's AGI. In this instance, the daughter could claim the earned income tax credit with no qualifying child, assuming all other requirements for the credit are met.
Pitfalls
You lose eligibility for the credit if you have unearned income over $10,000 in 2021 from dividends, interest (both taxable and tax free), net rent or royalty income, net capital gains, or net passive income that is not self‐employment income.
You lose out on the opportunity to claim the credit in future years if you negligently or fraudulently claim it on your return. (If you use a paid preparer, he or she is required to perform to diligence before allowing you to claim the earned income credit.) You are banned for 2 years from claiming the earned income credit if your claim was reckless or in disregard of the tax rules. You lose out for 10 years if your claim was fraudulent. If you become ineligible because of negligence or fraud, the IRS issues a deficiency notice. You may counter the IRS's charge by filing Form 8862, Information to Claim Earned Income Credit after Disallowance, to show you are eligible.
If the IRS accepts your position and recertifies eligibility, you don't have to file this form again (unless you again become ineligible). For 2021 returns filed in 2022, the IRS is not permitted to issue tax refunds for the refundable earned income tax credit before February 15, 2022. As a result, refunds usually aren't received until the third or fourth week in February, even for returns filed in January 2022.
Where to Claim the Earned Income Credit
You can claim the earned income credit on line 27 of Form 1040 or 1040‐SR.
Dependent Care Expenses
Many taxpayers must pay for the care of a child in order to work. According to the World Population Review, the cost of child care in 2021 for an infant is $15,000 at a center. The tax law provides a limited tax credit for such costs, called the dependent care credit. The amount of the credit you may claim depends on your income. It may be as much as 50% of eligible expenses. Or, if your employer helps with child care costs, you may exclude the payments from your income.
Benefit
If you hire someone to care for your children or other dependents to enable you to work or incur other dependent care expenses, you may be eligible for a fully refundable tax credit of up to $8,000. More specifically, this credit is a percentage of eligible dependent care expenses (explained later). The credit percentage ranges up to 50%. However, no credit may be claimed if income is $440,000 or more (explained later).
If your employer pays for your dependent care expenses, you may be able to exclude this benefit from income up to $10,500 in 2021.
The maximum amount of expenses taken into account for the credit in 2021 is $8,000 for one qualifying dependent and $16,000 for 2 or more qualifying dependents. This limit doesn't need to be divided equally among them.
Example
A single parent has two children. She spends $12,000 for daycare for one and $6,000 for after‐school daycare for the other. Because her total expenses do not exceed the limit of $18,000, she can take them all into account in figuring the dependent care credit for 2021.
In 2021, the credit is fully refundable.
Conditions for the Tax Credit
There are a number of conditions for claiming the dependent care credit; you must satisfy all 8 of them to claim the credit:
Incur the expenses to earn income.
Pay expenses on behalf of a qualifying dependent.
Pay over half the household expenses.
File a joint return if you are married.
Have adjusted gross income below a set amount.
Have qualifying expenses in excess of employer reimbursements.
Meet a residency requirement.
Report information about the child care provider.
INCUR THE EXPENSES TO EARN INCOME
The purpose of the dependent care credit is to enable you to work. This generally means that if you are married, you both must work, either full time or part time.
However, a spouse who is incapacitated or a full‐time student need not work; he or she is treated as having earned income of $250 per month if there is one qualifying dependent or $500 per month if there are 2 or more qualifying dependents.
