A group of tax deductions and credits have been extended into 2021 and beyond, and qualifying taxpayers may want to start planning now. These tax credits and deductions can really add up on your personal income tax return by reducing your tax liability. Below are some 2021 tax deductions and credits for individual taxpayers. We always recommend consulting with a qualified CPA before claiming a deduction or credit with detailed qualifying rules.
Mortgage Insurance Premiums Deduction
The portion of your monthly mortgage payment that covers Private Mortgage Insurance (PMI), or Mortgage Insurance Premiums (MIP), is deductible thanks to the Consolidated Appropriations Act of 2020. Generally, home buyers with less than 20% equity pay PMI, and the monthly premium can range from about $30-$70 per $100,000 of loan. Taxpayers have been able to deduct PMI in the past, and the Consolidated Appropriations Act extended the deduction into 2020 and 2021.
The deduction is subject to qualified taxpayers’ AGI limits and begins phasing out at $100,000 and ends at those with an AGI of $109,000 (regardless of filing status). The deduction applies to premiums on mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, the Rural Housing Service, and private insurers. In order to take the mortgage insurance deduction, you must itemize deductions on your tax return.
Health Coverage Tax Credit
The Health Coverage Tax Credit was set to expire at the end of 2020, but has been extended through December 31, 2021. If you hold a health insurance policy that’s not from Medicare, Medicaid, TRICARE, or the Affordable Care Act Exchange, you may be eligible to claim a tax credit to help offset the cost of your monthly premiums.
For those not on a qualified health plan, some providers may be able to put you back on a plan that qualifies for the HCTC for the remainder of 2021. The taxpayer can then re-enroll in the HCTC Advance Monthly Program, or claim the credit on the annual return.
Residential Energy Credit
The Residential Energy Credit allows homeowners to take a tax credit for certain energy-saving improvements to their primary homes. Eligible energy-efficient improvements may include:
- Windows and skylights
- Exterior doors
- Heating and air conditioning systems (HVAC)
- Water heaters
In addition, the 26% rate for the Nonbusiness Energy Property Credit was extended until the end of 2022, which was previously set to be reduced to 22% in 2021. The IRS provides a detailed list of items eligible for a residential energy credit.
Alternative Motor Vehicle Credits
Individuals and businesses can take advantage of a tax credit of up to $8,000 for the purchase of a qualified light-duty fuel cell vehicle. The credit amount is based on the vehicle’s fuel economy and allows taxpayers to take the credit for any qualifying alternative motor vehicle purchased in 2021. Note that you must purchase, not lease, the vehicle to take advantage of this credit (if you lease, the lessor would claim the credit).
You can use IRS form 8910 to claim the Alternative Motor Vehicle credit.
If you purchased an electric car and installed a charging station (i.e. an alternative fuel vehicle refueling property) at your home, you may be eligible for a credit of up to $1,000 or 30 percent of the installation cost (whichever is lower). In order to qualify, the installation must have occurred in your primary home and be placed into personal use in the qualifying tax year.
Forgiven Mortgage and Student Loan Debt
Generally, canceled debt is reported as income on the debtor’s tax return. The American Rescue Plan excluded debt canceled from forgiven mortgages and student loans from the regular cancellation of debt rules, renewing the mortgage exclusion through 2025. However, the renewal reduces the maximum amount of mortgage debt that can be excluded to $750,000, down from $2 million. Canceled student loan debt is uncapped.
Tax Deductions for 2021: Are you eligible?
If you think you can benefit from one or more of these extended credits and deductions, schedule a consultation with one of our CPAs for personalized advice on how to ensure you qualify.