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
