5 Common Tax Questions

January 1, 2021
Five Common Tax Questions, Wealth Planning

Q: Does it make sense for me to itemize deductions on my taxes?

A: It depends. If your itemized deductions are over the 2021 standard deduction of $25,100 for couples, $18,800 for head of household or $12,550 for singles, then it may still make sense to itemize. These numbers represent a slight increase from 2020.1

Keep in mind, though, that some of the items you may have deducted prior to 2017, currently have monetary limits or are no longer able to be deducted. For example, state and local income taxes (SALT) are limited to $10,000 for most tax filers, and you can only claim this deduction if you itemize your tax return. The limit applies to tax years 2018 to 2025.2

Q: How much mortgage interest can I deduct on my taxes?

A: You can deduct up to $750,000 in mortgage principal. For mortgage debt that occurred prior to Dec. 16, 2017, you can deduct up to $1 million.3

Q: Can I deduct interest from my home equity line of credit?

A: It depends. You can’t deduct interest on your home equity loan unless it is used to substantially improve a qualified residence or acquire a second home. So, if you use you HELOC to purchase a car, as an example, that interest will no longer qualify.

Q: What are the tax advantages to using a 529 plan to save for my child’s education?

A: Contributions to 529 plans are considered gifts for tax purposes. In 2021, gifts totaling up to $15,000 per individual will qualify for the annual gift tax exclusion. You can maximize these gifts, for example, if you and your spouse have three grandchildren (or children) you can jointly give $90,000 without gift-tax consequences, since each child may receive $15,000 in gifts from you and $15,000 in gifts from your spouse. By using a “front-loading” method, you can contribute as much as $75,000 to a 529 plan in 2021 if you treat the contribution as if it were spread over a five-year period. The five-year election must be reported for each of the five years. And, as long as you don’t contribute again over the next five years, there are no tax consequences.4

You can also receive state income tax credits or deductions, and the amount varies by state. Over 30 states, including the District of Columbia, currently offer a deduction or tax credit. For example, New York residents are eligible for an annual state income tax deduction for 529 plan contributions up to $5,000 ($10,000 if married filing jointly).5

Q: What are the tax advantages of giving gifts and transferring wealth?

A: You can give a gift of up to $15,000 without being taxed, and your lifetime gift tax exclusion is $11.7 million in 2021.6 

Your federal estate tax exemption is the same as your lifetime giving limit—$11.7 in 2021 per individual, so giving large gifts may increase the chance that your estate will owe tax when it’s passed on. Consider consulting with an estate planning lawyer if you’re using annual gifts to transfer your estate before your death.

1“IRS Provides Tax Inflation Adjustments for Tax Year 2021,” irs.gov

2“IRS Explains Treatment of State & Local Tax Refunds.”

3 “Frequently Asked Questions: Mortgage Interest,” irs.gov

4“529 Plan Contribution Limits in 2021,” Investopedia.com

5“State Section 529 Deductions,” finaid.org

6“Estate Tax” irs.gov

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