DEDUCTIONS

Part: 1 STANDARD DEDUCTIONS

Standard deduction is a Fixed amount of Deduction that is allowed based on the filing status of
the Individual Tax payer as on December 31st.

The following are the standard deduction amounts for 2021:

FILING STATUS Standard Deduction

Single/MFS $12,550

MFJ/QWDC $25,100

HOH $18,800

Married +Age 65+Blind $1350 For 65 yrs and for Blind

Unmarried +Age65+ Blind $1650 for 65 yrs and for blind

The Following are Not Allowed to claim standard deduction:-

 Persons Claiming itemized deductions

 Non Residents aliens
 Individuals who files short period Tax returns ( Fiscal Year)
 A married Taxpayer who files a separate Tax Return and his Spouse itemized.
 Partnerships, Estates and Trusts (PETS)
 No Prorata Deduction is allowed for Standard deduction-It is either Full or Nill
 Greater of Standard/Itemised deduction is claimed on the Tax return.
 Additional standard deduction is allowed for:
 The taxpayer who cannot see better than 20/200 in the better eye with glasses
or contact lenses, or the taxpayer's field of vision is 20 degrees or less
 Tax payer age 65 and /or above.
 The Standard deduction for a qualifying child is limited to $12,550 but it is greater of
 $1100
or
 Earned Income + $350

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# EXAMPLE:

Hari is 16 years old and single. His parents can claim him as a dependent on their 2021 tax
return. He has interest income of $780 and wages of $150. He has no itemized deductions.

Hari standard deduction is $1,100 because it is greater than $500 ($150 earned income +
$350).

# INCREASED STANDARD DEDUCTION FOR QUALIFIED CASH CHARITABLE

CONTRIBUTIONS IF NOT ITEMIZING:-

 Non-itemizing taxpayers can claim an increased standard deduction for qualified cash
charitable contributions as an adjustment to income on Form 1040 or 1040-SR.
 For 2021, taxpayers taking the standard deduction can claim up to $300 ($600 MFJ) as
an adjustment to income.

Part 2:- Itemized Deductions (Schedule A).

1) Medical and Dental Expenses (PUB 502)

 Medical and Dental expenses must be Incurred for TP/SP/QC/QR.

 Only Expenses in excess of 7.5% of AGI is claimable.
 Include only the expenses paid for this year regardless of whenever the services were
provided.
 Exclude expenses reimbursed/paid by others (eg; - Insurance claim).
 PUB 502, Page 5 talks about what medical expenses are includable.
 Even medical miles are claimable @$0.16 per medical mile.
 PUB 502, Page 15 talks about NOT INCLUDABLE expenses.
 The lodging expenses for the patient as well as the attendant will be $50 per person per
night.
 Sec: PUB 17, talks about Includable and Not includable expenses in table format.
 Medical expenses include expenses paid for a dependent or for an individual that would
have been a dependent except that, for 2021:
1. They had gross income of $4,300 or more,
2. They filed a joint return, or
3. Taxpayer, or taxpayer's spouse if filing jointly, could be claimed as a dependent on
someone else's return.

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INCLUDES DOES NOT INCLUDE

Any Medication prescribed by physicians or Cosmetic in nature

surgeons or Dentists or other medical
practitioner or co-pays (doctor consultation
charges)

Insurance Premium Regular Health Care such as Gym fees,

Vitamin, Health club, Vacation, etc

Prescribed drugs/Insulin or contact lenses. Over the counter drugs

Transportation expenses. Car expenses: - Meals not included.

Medical miles 16 cents per mile.

Lodging $50 each person- each night, Also

includes for the Person travelling for the
person receiving medical care.

2) Taxes you paid :

A Taxpayer can claim upto $10,000 in Taxes as Itemized Deductions ($5000 if MFS)

TAXES INCLUDE TAXES DOES NOT INCLUDE

SALT (State and Local Taxes) or State and Federal Income Tax
Local Sales Tax whichever is higher

Real Estate Taxes Personal Fees or Charges (Eg: Driving License,

Parking, Car Inspection, etc)

Foreign Income Taxes Taxes on one’s trade or business. (Eg: Business

license, Business registration)

Personal Property Taxes (Eg: cars, boats etc)

3) Interest you Paid :

 A Tax payer may deduct Interest paid on “Home Acquisition debt” to buy, build
or Improve a qualified home (Main/Second Home).

 For a Home purchased in 2018 or later a taxpayer cannot consider >= $750,000
($375,000 if MFS) as Home acquisition debt or acquisition indebtness. That is

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acquisition indebtness is $1 million ($500,000 if MFS), if loan was taken on or

before December 15th 2017th.

 Interest on Home equity Debt meaning Mortgages on qualified homefor

purposes other than to Buy, build/Improve a home is No longer deductible.
 Mortgage interest paid on home acquisition debt to buy, build, or improve a
qualified home is deductible if all the following conditions exist:
• File Form 1040 or 1040-SR and itemize deductions on Schedule A
• The taxpayer is legally liable for the loan
• There is a true debtor-creditor relationship between the taxpayer and the
lender
• The taxpayer has an ownership interest in the qualified home that secures the
mortgage
 Interest paid on Main Home and second Home is Deductable (Primary &
Secondary residence)
 Personal Interest expense like credit card, loan from a friend etc. are Not–
deductable.
 TP must have the ownership interest in the qualified home and there must be
true debtor and creditor relationship between the Taxpayer and lendor.
 TP must be legally liable for the loan mortgage
 Any interest payments and principal outstanding are reported on FORM 1098.
 Points such as processing charges loan organization fees etc paid on a loan are
also deductable.
 Investment interest is deductable to the extent of Net Investment Income.
 Investment Income is:
 Income from Non trade/Non Business/ Interest/ Dividend /Rent /Royalty.
 Gain on Disposition of property held for Investment.

MORTGAGE INSURANCE PREMIUMS:-

 Treat the amount paid during the year for qualified mortgage insurance as home
mortgage interest.
 The insurance must be purchased in connection with the acquisition indebtedness
of the taxpayer's qualified residence.
 This deduction decreases by 10% for each $1,000 ($500 MFS) of AGI above
$100,000 ($50,000 MFS).

Note: The Consolidated Appropriations Act, 2021 extended this deduction through
2021.

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INTEREST ON MARGIN ACCOUNTS:-

 Cash method taxpayers may deduct interest on margin accounts to buy taxable
securities as investment interest in the year paid.
 Interest on these accounts is considered paid only when the broker is actually
paid or when payment becomes available to the broker through the taxpayer's
account.
 Generally, the deduction for investment interest expense is limited to the
amount of investment income.
 Investment income includes taxpayer's gross income from property held for
investment (such as interest, dividends, annuities and royalties).

4) Gifts to Charity:

 Contributions can be made:

o In cash
o In Kind or non cash or property.
 Documentation is mandatory REGARDLESS OF THE AMOUNT.
o Receipt or letter from qualified organization
o Bank Record
o Certain payment deduction record
 Contributions must be made to Qualified Charitable organizations
 Donation to the following organizations are limited to percentage of AGI:
o 60% of AGI for General Cash Contributions
o 50% of AGI for Non – cash Contributions
o 30% of AGI for Capital Gain Property
o 20% of AGI for Certain Private Foundation.
 Qualified/Qualifying organization:-

Includes Does not Includes

Religious places or organization Sports/Social Clubs

Salvation Army/War Veteran Groups Labour Unions

American Red Cross Chamber of unions

Charitable Miles ($0.14 per Mile) Political groups

Home Owners Association

VALUE OF TIME OR SERVICE

VALUE OF BLOOD

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RECORDS FOR CASH CONTRIBUTIONS:-

Cash contributions include those paid by cash, check, electronic funds transfer,
credit card, or payroll deduction. To claim a cash contribution, taxpayers must have
one of the following:

 Bank records (canceled check or statement)

 A receipt (or other written communication) from the qualified organization
show ing the name of the organization, the date of the contribution, and the
amount of the contribution
 Payroll deduction records

Note:- To deduct a cash contribution of $250 or more, the taxpayer must receive
an acknowledgment of the contribution from the qualified organization or have
certain payroll deduction records .

OUT-OF-POCKET EXPENSES IN GIVING SERVICES: -

 A taxpayer cannot deduct personal expenses for sightseeing, fishing parties,

theater tickets, nightclubs, or expenses for family members.
 To receive a deduction, the expenses must be as follows:
 Unreimbursed
 Directly connected with the services
 Expenses incurred only because of the services provided
 Not personal, living, or family expenses

5) Causalty and theft losses :(FORM 4684)

 A taxpayer can claim PERSONAL CASUALTY OR THEFT LOSS only if it is from a

FEDERALLY DECLARED DISASTER AREA
 A federally declared disaster is any major disaster declared by the President of
USA.
 If a taxpayer suffered a qualified disaster loss, they are eligible to claim such loss
on CURRENT YEAR RETURN or AMENDING PREVIOUS YEAR RETURN.
 Any theft loss can be claimed based on the FMV/Cost of the lost asset, which ever
is lower (valuation on FIR is needed).

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 Computation of DEDUCTABLE LOSS:-

Step 1: Computation of SUSTAINED LOSS
a) Least of:
- ADJUSTED BASIS of property before the casualty /theft or
- DECREASE IN FMV because of casualty XX
b) Less: Insurance or Other Reimbursements Received (XX)

Step 2: Computation of DEDUCTABLE LOSS:

a) Sustained loss (in Step 1) XX

b) Less: $100 for each casualty event XX
c) Less: 10% of AGI XX XX

XX

6) Other itemized deductions

The Taxpayer can no longer claim any miscellaneous itemized deductions that are subject to 2%
AGI limitation.

Only the following Taxpayer are eligible to claim Unreimbursed Employee Business expenses:

 Reservists
 Armed forces
 Fee based state/local government officials.
 Performance artists.

The following items are Deductable and are Not Subject to 2% AGI Limit:

 Gambling (Lottery) losses to the extent of gambling winnings

 Hobby losses to the extent of Hobby winnings
 Casuality /theft loss from Income producing property.
 Federal Estate Tax on Income in respect of decendent.
 Amortizable premium on Taxable bonds.
 Impairment related work expenses of persons with disability.

Special $300 Charitable Contribution Deductions for 2021

 Cash Contributions of upto $300 ($600 MFJ) made in the Tax year 2021 is now
deductible even if itemized deductions are Not claimed.
 The Donation must have been made to a qualified tax exempt Organization.
 Cash Donations:-
 Includes those made by cash/Check/Credit and debit card
 Doesn’t Include value of securities/Household items/non-cash items.

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