Dozens of tax credits, deductions, and adjustments can reduce your bill or increase your refund, whether you’re paying student loans or saving for retirement.

Every year it’s hard to believe tax season rolled around again so quickly. 

Before you sit down with some handy tax software (here’s a quick look at our favorites) to figure out how much you’ll owe or get refunded this time, take a minute to review your potential income tax breaks. 

Almost everyone will qualify for at least a few credits or deductions. And younger taxpayers can really maximize their savings, with minimal added paperwork (I mean, you’re doing taxes anyway). 

What is a tax break?

Source: Giphy.com

Tax breaks are ways you can reduce your tax bill, or increase your tax refund. 

The IRS revisits and adjusts tax breaks every year—most stay the same, but there are some changes year to year, primarily in the amounts you can claim. 

There are three categories of tax breaks, and they all work differently. 

  • Credits are the most useful type of tax break. They directly lower the amount you owe, with a dollar-for-dollar reduction. If you don’t end up owing anything, some credits add to your refund. 
  • Deductions reduce the amount of your income that’s taxable. They usually kick in when you report contributions to certain expenses, like a mortgage or retirement fund. The IRS gives you a few deduction options. Some taxpayers save more money when they “itemize” deductions, or pick the individual deductions they can take. Others will save more by taking the “standard deduction,” a fixed amount set by the IRS. 
  • Adjustments work like deductions—they lower your taxable income. The difference is that you can take adjustments even if you decide not to itemize your deductions. This is where your Adjusted Gross Income, or AGI, comes from. Your AGI is your gross income, minus any deductions or adjustments you take. 

Read more: Understanding The Differences Among Tax Credits, Deductions, And Adjustments 

Tax credits 

Premium tax credit 

The premium tax credit offsets the cost of insurance you buy through the Health Insurance Marketplace (healthcare.gov). If you’re purchasing Marketplace coverage for another year, your credit can go directly to the insurance company and cover the cost of some monthly premiums. 

Who’s eligible? 

  • You purchased Healthcare.gov insurance and paid all your premiums. 
  • You don’t have other healthcare options, like an employer-sponsored plan or Medicaid. 
  • Your income falls between 100% and 400% of the federal poverty line (for 2021, the “poverty guideline” figure is $12,880 for a one-person household). 

Usually, the Healthcare.gov site will let you know if you qualify when you’re applying for coverage.  

Earned income tax credit (EITC) 

This credit goes to anyone the IRS defines as a “low-to-moderate” income earner, so it’s a nice boost for young taxpayers starting their careers. 

The EITC has fixed maximums: 

  • No dependents: $1,502.
  • One dependent: $3,618.
  • Two dependents: $5,980.
  • Three or more dependents: $6,728.

Who’s eligible? 

  • You’re 25 or older (24 if you’re a full-time student). 
  • Your annual income for single filers is no more than:
    • $21,430 (no dependents).
    • $42,158 (one dependent).
    • $47,915 (two dependents).
    • $51,464 (three dependents).
  • Your annual income for married filers, filing jointly, is no more than: 
    • $27,380 (no dependents).
    • $48,108 (one dependent).
    • $52,865 (two dependents). 
    • $57,414 (three dependents).
  • Your investment income is less than $10,000 for the tax year. 

Child tax credit

Source: Giphy.com

The IRS gave parents extra help in the 2021 tax year, increasing the tax credit to 

  • $3,600 per child for kids age five and under. 
  • $3,000 per child for kids aged six through 17. 

Who qualifies? Any taxpayers with dependent children will get the full amount, as long as their AGI is under $75,000 as a single filer or under $150,000 as married joint filers.

If you’re above the income threshold, you’ll still get child tax credits, but a reduced amount. 

No official announcement has been made about these credits in 2022, so stay tuned!

Advance child tax credit payments 

So parents don’t have to wait for their money, the IRS has been sending half the child tax credit payments early, in six installments.

Qualified taxpayers received half the payments before the end of 2021. They can claim the other half as credits on their tax returns. 

Who’s affected? If you received advance child tax credit payments, you don’t need to report these payments as income. 

If you’re eligible for advance payments but didn’t get any, or didn’t get all six installments, you can claim the missing amount as a child tax credit on your 2021 return. 

Credit for other dependents 

If you’re supporting someone who doesn’t qualify you for the child tax credit, you can still get a $500 “other dependent” boost. 

Who qualifies? Anyone whose AGI is under $200,000 and has a dependent who’s 17 or older, or who isn’t related to you. 

Child and dependent care credit

This credit is specifically designed to offset the cost of childcare for dependents under 13, like daycare and babysitter expenses. 

For the 2021 tax year, you can claim up to $8,000 in expenses for one child or $16,000 for two or more children. The IRS also has a sliding scale that lets you claim 20% to 50% of childcare costs depending on your income (if you earn less, you can claim more). 

Who qualifies? If your kid(s) are under 13, and you paid for childcare so you or your partner could work, look for work, or go to school, you’re eligible. Stay-at-home parents who didn’t outsource childcare, unfortunately, can’t take this credit. 

The amount you can claim gets reduced if your AGI is more than $125,000 ($183,000 for married joint filers). 

Adoption credit 

If you pursued adoption in 2021—whether you just started the process,  you’re further along, or you’ve already finalized—you can claim up to $14,400 in qualified adoption expenses, like court costs, adoption fees, and travel. 

And if your employer offered adoption assistance, you can exclude this assistance from your income. 

Who’s eligible? The year(s) for which you can claim adoption expenses depend on how far along you are in the process. Even if you started but didn’t finish an adoption, you can claim some expenses. 

American Opportunity Tax Credit 

With the American Opportunity Tax Credit, students in their first four years of higher education can claim up to $2,500 for education expenses. 

It’s a partially refundable credit, meaning if this credit erases the amount of tax you owe, you’ll still get part of the money (up to 40%, or $1,000, whichever is less). 

Who qualifies?

Anyone in their first four years of higher education who: 

  • Hasn’t graduated by the beginning of the tax year. 
  • Was enrolled at least part-time for a full academic period. 
  • Hasn’t claimed the AOTC for more than four tax years. 
  • Earns less than $80,000 (single filers) or $160,000 (married filers). 
  • Doesn’t claim the Lifetime Learning Credit. 

Lifetime Learning Credit (LLC) 

This credit helps students with the expenses of undergraduate, graduate, or professional education. You can claim up to $2,000 each year you’re eligible, with no limit on the number of years. 

Who qualifies? 

Anyone (or their spouse or dependent) who: 

  • Is enrolled for at least one academic period. 
  • Is pursuing job skills or a recognized education credential, like a degree or certification.
  • Earns less than $69,000 (single filers) or $138,000 (married filers). 
  • Doesn’t claim the American Opportunity Tax Credit. 

Recovery rebate credit (2021 tax year)

Remember those Economic Impact Payments most of us got in 2020 and 2021? If you didn’t get the full third payment—the one disbursed in 2021—you can claim the missing amount on your taxes. The payment was $1,400 for each individual and dependent. 

Who’s eligible?

You can claim the rebate if: 

  • You didn’t get the third payment, or you only got a partial payment.
  • Your AGI was too high for Economic Impact Payments in 2020, but you have less income in 2021 and you’re now eligible. 
  • You got a new dependent in 2021. 
  • You turned 18 or stopped being someone else’s dependent in 2021. 

Residential energy efficient property credit

If you made certain energy-saving upgrades to your property, you can qualify for a maximum $500 credit. For energy-efficient windows, the maximum is $200. 

The dollar maximums are lifetime limits (you can’t claim $500 each year). 

Who (and what) qualifies? 

  • Solar water heaters. 
  • Wind turbines.
  • Natural gas or oil furnaces. 
  • Energy-efficient windows, doors, or skylights. 
  • Insulation. 
  • Roof improvements. 
  • Energy-efficient heating and AC systems. 

Saver’s credit

This credit is one way the IRS rewards taxpayers for saving for retirement. The exact credit amounts are staggered based on your AGI, but you can score 10%, 20%, or 50% of your retirement contribution as a tax break. The max is $1,000 for individuals and $2,000 for couples. 

Who qualifies? The saver’s credit has income limits: your AGI should be $33,000 or less as a single filer, and $66,000 or less as married joint filers. Full-time students are also ineligible. 

Otherwise, you can take the saver’s credit if you’ve contributed to: 

  • A traditional or Roth IRA. 
  • A 401(k) (a salary-deferred contribution). 
  • An employer-sponsored retirement plan. 
  • Another plan on the IRS’s eligible list.

You can also take the credit if you’re a beneficiary on someone else’s ABLE (Achieving a Better Life Experience) account. 

Unemployment benefit tax refund for 2020 

In most years, unemployment benefits are taxable. But taxpayers who collected unemployment in 2020 got a temporary reprieve, with up to $10,200 of their unemployment benefits protected from federal tax. 

If affected taxpayers had already filed their returns by the time the reprieve was announced, they got a refund. 

As of early 2022, the IRS is still rolling out these refunds, so you may have one coming. If you have past-due taxes or unpaid debts to the IRS, the refund money goes directly to those debts. 

Who’s eligible? Taxpayers who collected unemployment during 2020, reported their unemployment as income, and had an AGI of less than $150,000 (for an individual or a couple) may be refunded. 

Since the IRS excludes unemployment compensation from your 2020 income, you may have extra benefits coming your way. If the lower-income qualifies you for the Earned Income Tax Credit or Additional Child Tax Credit, and you didn’t claim these in 2020, you can add them in 2021.  

In most cases, you won’t need to file an amended return. 

This is a one-time perk, unfortunately, since the unemployment exclusion tax break won’t continue in 2022

Read more: Tax Return Error? Here’s How To Amend Your Return 

Tax deductions

Source: Tenor.com

If you take the standard deduction—which reduces your taxable income by a fixed amount—you don’t have to itemize deductions. 

Here are the standard deductions for 2021 taxes: 

  • $12,550 for single filers. 
  • $18,100 for heads of household. 
  • $25,100 for married joint filers. 

If you take itemized deductions instead, you’ll do more work, but you may drop your taxable income much further. Here are some situations when itemizing can save you money: 

  • You’re married but filing separately, and your spouse itemizes (in this case you can’t take the standard deduction). 
  • You paid mortgage interest or property taxes. 
  • You had large medical or dental bills. 
  • You had significant losses from a federally declared disaster.

A tax preparer, or a good online tax filing system, can help you maximize deductions if your financial situation is complicated. 

Read more: Itemized Deductions: A Beginner’s Guide 

Medical and dental expenses deduction

You can deduct medical and dental expenses (for yourself, a spouse, or a dependent) once they exceed 7.5% of your AGI. 

The IRS’s full list of eligible medical expenses is pretty long, but here are some common ones: 

  • Doctor and dentist co-pays. 
  • Prescription medication co-pays.
  • Glasses and contact lenses. 
  • Psychiatric care, including medicine.
  • Hospital inpatient fees.
  • Supplies you need to manage a disability or medical condition.

State and local tax deductions

You can deduct state income tax or sales tax—use the IRS calculator to figure out how much state tax you can deduct depending on where you live. 

Individual state and local tax deductions are capped at $10,000. 

Personal property tax deduction 

Homeowners and people paying property taxes on vehicles (or other taxable personal property) can deduct the total amount they paid for the year. 

Mortgage interest deduction

This is the biggest deduction for a lot of taxpayers, and the main reason you can save money by itemizing. 

If you have a mortgage, you should get a Mortgage Interest Statement (Form 1098) that shows you all the interest plus mortgage-related charges you paid that year, like loan fees and real estate taxes. The IRS calls these extra charges “points” and they’re often deductible

Who’s eligible? Anyone who pays mortgage (not rent) on their living space.

Federal tax deductions for charitable donations

If you donated to charity, keep your written acknowledgment thank-yous; you’ll need them to back up any charitable donations over $250. For smaller donations, a credit card statement or receipt will work. 

Even if you don’t itemize, you can deduct up to $300 for individuals or $600 for married joint filers if you made qualified charity gifts. 

Which charitable contributions are tax-deductible?

  • Nonprofit organizations. 
  • Religious organizations. 
  • Governments, if you contribute to public funds. 
  • Disaster relief organizations. 
  • Major charities like the Red Cross and Goodwill. 
  • War veteran groups. 

Other expenses you can deduct include: 

  • Out-of-pocket costs from volunteering at a qualifying organization. 
  • The approximate value of any furniture, clothes, or household items you donated to charity. 

Contributions to individuals, like GoFundMe gifts, aren’t deductible. 

Gambling loss deduction 

If you report gambling income, you can also deduct losses—but only if the losses are less than the winnings you reported as income.  

IRA contributions deduction

For traditional IRAs—not Roth IRAs—you can deduct up to $6,000 in contributions. The deduction amount gets reduced at higher income levels (once you hit $66,000 AGI as an individual or $105,000 as a couple). 

Self-employment continuing education expenses deduction 

Costs of continuing education that relate to your current career, like tuition, school supplies, and lab fees, are deductible. (The expenses must be connected to your current field, not a new field). 

Who qualifies? This deduction is available to self-employed workers, performing artists, people with disabilities, and certain government employees. 

Vehicle/mileage deduction 

If you’re self-employed and you drive a lot for work, you can take a mileage deduction at the flat rate ($0.56/mile in 2021) or deduct the work-related percentage of your total automobile expenses. 

Home office deduction 

The standard home office deduction amount is $5 per square foot. You can also deduct mortgage and utility bills you pay for the space, and the cost of any repairs. 

Who qualifies? This one is tricky; you can’t necessarily take the home office deduction just because you’re working from home. 

If an area of your home (a room or an outbuilding) is exclusively an office space, not used for any other purposes, and you work there regularly, you may qualify. 

Educator expenses deduction 

Teachers can deduct up to $250 of classroom supplies they paid for out of pocket. 

Who qualifies? Kindergarten through grade 12 teachers who worked at least 900 hours in the last school year. 

Casualty loss deduction 

The IRS provides some tax relief in disaster situations. 

If your property is damaged because of a federally declared disaster—a weather event like a flood, hurricane, fire, or tornado—you can claim a deduction based on either the adjusted basis of the property (its cost plus the cost of any improvements) or the decrease in its fair market value, as long as it’s not completely destroyed. 

Losses from major thefts can be deducted too. In each case, casualty or theft, the loss should be greater than $100. 

Subtract any insurance reimbursement payouts you received, or expect to receive, from the amount you plan to deduct. 

Moving expenses for members of the Armed Forces

Active duty members in the Armed Forces can deduct any unreimbursed moving expenses, if they’re moving based on a change of station or military order. 

Repayments under claim of right

If you reported taxable income in a previous tax year that you ended up having to repay (like unemployment compensation or a signing bonus), you can deduct the amount from your current taxes. This is called a Claim of Right Repayment.

Who qualifies? This is reserved for major repayment sums over $3,000. 

Tax adjustments 

Source: Tenor.com

Adjustments reduce your taxable income, just like deductions, but you can itemize them even if you take the standard deduction. 

Student loan interest adjustment 

Everyone’s favorite adjustment is the student loan tax break. You can deduct the amount you paid in student loan interest, up to $2,500, during the tax year. 

Who qualifies? Anyone required to pay interest on a federal or private student loan can take the deduction, as long as your AGI is less than $80,000 for individuals or $160,000 for married joint filers. It isn’t available to married people filing separately. 

Self-employment taxes adjustment

When people earn wages for employers, the employer pays about half of their employees’ individual Social Security and Medicare taxes. Self-employed people pay the whole tax themselves at a 15.3% rate. 

This adjustment allows self-employed people to deduct between 50% and 57% of their self-employment tax payments (the portion an employer would normally pay). 

Who qualifies? If you earn at least $400 a year through self-employment, you can take this deduction. 

Self-employed retirement plans adjustment 

Self-employed taxpayers funding their own retirement plans, like SEPs, SIMPLE plans, or solo 401(k)s, can deduct their contributions up to a maximum that varies based on the plan

Read more: The Beginner’s Guide To Saving For Retirement

Health Savings Account [HSA] contributions adjustment 

If you or someone other than your employer contributes to your HSA, you can deduct the annual contributions. For 2021, the maximum deduction is $3,600 for individual coverage and $7,200 for family coverage. 

Self-employment health insurance adjustment

Self-employed taxpayers can deduct 100% of the premiums they paid for a medical or dental care policy, as long as the deductions don’t exceed their annual earned income. 

Who qualifies? If you made a net profit from self-employment, and you couldn’t opt into any other coverage—including coverage from a spouse’s insurance—you can take this adjustment. 

Alimony payments adjustment 

In many cases, divorced or separated people can deduct alimony payments they made during the year. 

Tax relief in disaster situations

Besides claiming a casualty loss deduction, you can get other breaks from the IRS if you’re affected by a federally declared disaster. 

Specifically, you can postpone filing and paying your taxes. The postponement includes any estimated tax payments you need to make before filing, and gives you extra time to make IRA contributions and get the deduction. You won’t be penalized for failure to pay. 

The IRS gives specific extension dates after major disasters for people who live or own businesses in the affected areas, as well as any relief workers helping with rebuilding efforts. 

Most of the time you’ll get the extension automatically without having to do anything. But if the disaster affected you and you’re outside the area of coverage, you can contact the IRS disaster hotline at 866-562-5227 to see if you qualify. 

Who qualifies for disaster tax relief?

As of this writing, for the 2021 tax filing season, the IRS has offered extensions to victims of the January Colorado wildfires and the November flooding in Washington State

Residents in Boulder County, Colorado have a tax extension until May 16, 2022. Residents of Clallam, Skagit, and Whatcom counties in Washington, along with members of the Lummi, Nooksack, and Quileute Native American nations, have an extension until March 15, 2022, for any estimated payments with earlier due dates. 

Summary 

Hopefully, you’ve found multiple ways to lower your tax bill, whether they’re deductions, adjustments, or credits. Finding ways to save has become my favorite part of filing taxes every year. 

And tax breaks tend to favor taxpayers with lower incomes, so you can budget more cash towards your savings goals.

Featured image: New Africa/Shutterstock.com

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About the author

Amy Bergen Writer
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Amy Bergen is a writer and editor based in Portland, Maine. She's interested in technology, literature, and how the world will change in the future. You can reach Amy on LinkedIn, Twitter, or Facebook.