Discover essential tax breaks available for 2021. This guide covers child-care credits, home-office deductions, and more to help you maximize your tax return this year.

Many aspects of life have changed recently, and you might be eligible for new tax breaks. If you experienced job loss, had unexpected child-care expenses, worked remotely, received extra stimulus funds, or took on freelance work, you may need to adjust your tax filing. Here’s what to keep in mind:

CHILD-CARE EXPENSE TAX BREAK

The American Rescue Plan Act of 2021 expanded child and dependent care benefits, making them refundable for eligible U.S. residents. Families can claim costs for daycare, nannies, preschool, after-school care, and summer camps for children under 13.

For 2021, the credit amount ranges from a percentage of qualifying expenses starting at $3,000 for one child and $6,000 for two or more, with caps of $8,000 and $16,000 respectively. The credit percentage increased from 35% to 50%. If your income is below $125,000, you can claim the maximum credit, which phases down to 20% for earnings between $125,001 and $183,000. For incomes between $183,001 and $400,000, the 20% credit remains until it drops to 0% for those earning over $400,000. If your adjusted gross income hits $438,000, you won't qualify for any credit.

UPDATED HOME-OFFICE DEDUCTION RULES

With many working from home during the pandemic, questions about the home-office deduction have arisen. Unfortunately, employees who worked remotely for their employer aren't eligible for this deduction. Since 2018, only self-employed individuals can claim it. To qualify, you must use a specific area of your home “regularly and exclusively” for business. This area can be a designated space, but not a spot where you engage in personal activities, like your dining table.

Eligible self-employed individuals can deduct a portion of expenses like rent, mortgage interest, utilities, or insurance, based on the size of the office space. Alternatively, there's a simplified option allowing a deduction of $5 per square foot, up to 300 square feet, totaling a maximum of $1,500.

TAX BENEFITS FOR FREELANCERS

If you earned self-employed income in 2021—whether through consulting, side gigs, or starting a business—you must report this income on Schedule C. You're also eligible to deduct various business expenses, including the cost of equipment like computers (proportional to business use), office supplies, advertising, and more. Don't forget to retain all receipts for your business-related purchases!

UNEMPLOYMENT BENEFITS ARE TAXABLE

Those who received unemployment benefits in 2021 should remember that these payments are taxable. If you didn’t have sufficient withholding from your payments, you might owe more taxes. Expect to receive Form 1099-G in January detailing your unemployment benefits and tax withholdings.

STIMULUS PAYMENTS ARE NOT TAXABLE

Similar to 2020, the stimulus payments received in 2021 aren’t counted as taxable income. Currently, there are no anticipated stimulus payments for 2022. If your income decreased or you welcomed a new child in 2021, you might qualify for additional stimulus funds. Ensure you file your income-tax return and report any changes on the Recovery Rebate Credit line.

CHARITABLE CONTRIBUTION BREAK

The Tax Cuts and Jobs Act influenced charitable contributions. Typically, you can only deduct these if you itemize your deductions. However, since fewer individuals itemize due to the increased standard deduction (which is $12,550 for singles and $25,100 for married couples filing jointly in 2021), the CARES Act allowed deductions of up to $300 for cash donations to charities in 2021, even for those who don’t itemize.

You have until April 18, 2022, to utilize several tax benefits for 2021. If you had any self-employed income, including freelance work, you can still make tax-deductible contributions to a Simplified Employee Pension. If you had a high-deductible health insurance plan eligible for an HSA in 2021, contributions to an HSA are also tax-deductible and can be used tax-free for qualifying medical expenses in the future. If your modified adjusted gross income is below $140,000 for singles or $208,000 for married couples filing jointly, you can contribute to a Roth IRA for 2021. (These income limits will increase in 2022 to $144,000 for singles and $214,000 for married couples.) While you won’t receive an immediate tax break for Roth contributions, you can withdraw earnings tax-free after age 59½, provided you’ve held the account for at least five years, and contributions can be taken out any time without taxes or penalties.