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.