 Income tax 2021-2022, itemized deductions overview. Get ready to get refunds to the max, dive in into income tax 2021-2022. Most of this information can be found on the Schedule A Instructions Tax Share 2021 found on the IRS website, irs.gov, irs.gov. Here's our income tax formula focused in on the itemized deduction. In prior presentations, we looked at the income line. We looked at the adjustments to income, which could also be called the above the line deductions, deductions for adjusted gross income or Schedule 1 deductions. And then we have the adjusted gross income subtotal, and then we have our deductions down below taking the greater of the standard deduction or itemized deduction, meaning we always have to compare and contrast those two to get down to the taxable income. Remember that this top half of the formula is in essence a modified or tax income statement and an income statement in essence is just gonna be income minus the expenses to get to basically net income. So this is kind of like the equivalent of net income for our income tax system, which we're gonna apply the tax on. We wanna keep distinct the adjustments up top, which you can also think of as above the line deductions from these items down below and then these items down below, the standard deduction and itemized deduction. We have to look at the relationship between them so we can understand what is gonna happen with regards to the tax return and get some tax planning. And if we're taking on clients, this is gonna be important to get a grasp of the complexity of the tax return so we could focus on those returns that we have chosen to focus in on preparing. So note that this is like a confusing line up top, the adjustments to income, because you could call it an above the line deductions or deductions for adjusted gross income. So why would they call them adjustments to income? Because really remember that this line item down below, the adjusted gross income, the AGI, is often what is used when you think about income phase outs for things like credits and deductions. So these above the line deductions are deductions that are gonna have an impact on the AGI, the adjusted gross income, which is typically the number that is going to be used to calculate phase outs on expenses and credits. So you might call it an adjustment to income, a lowering of income, like a reversal of income, like kind of a contra income account as opposed to a deduction, but in essence with regards to the decrease of the line item, it's gonna do the same thing. In other words, a deduction, you can call this a deduction or you can call it an adjustment to income. It's gonna lower basically the bottom line, the net income in essence, getting us to the adjusted gross income. The deductions down below, whether they be the standard deduction or the itemized deductions, obviously are not gonna have an impact on the adjusted gross income. They're gonna have an impact on the bottom line, which is the taxable income. So these deductions down below are not gonna have an impact on like the phase out kind of calculations that are going to be taking place with regards to certain deductions and certain credits. So you wanna keep those things kind of distinct in your mind. And then whenever we think about the itemized deductions, we always have to compare it to the standard deduction because the only time that we would take the itemized deduction is if it was higher than the standard deduction, because remember that with taxes, everything is reversed. We want to look bad. We want the taxable income to be low. In other words, if I was to talk to someone normally about income, income's usually a good thing, right? You can go overboard, you could be greedy or whatnot, but income is typically good. If you wanted to get a loan or something like that, you would wanna look good to try to impress the loan that you can repay the loan and get money for whatever you want to do. But for taxes, income is bad because obviously as income goes up, you have to pay more taxes because the IRS wants to tax you at the higher income. So that means that the deductions are good, which again, it's kind of weird because usually expenses from a normal sense are bad. The more expenses, if you're spending too much, it's usually bad. But here, the expenses are good in essence, those being the deduction. So we want the higher deduction. So if the standard deduction is higher than the itemized deduction, we're gonna take the standard deduction. Now, a couple of years ago, they actually increased the standard deduction and that made it so a lot less people are going to itemize. The rationale I believe for doing that was to try to simplify the code because if everyone just took a standard deduction based on like the filing status and a couple other things, that would make the tax return a lot easier. The itemized deductions are usually gonna benefit people who are more well off because they're gonna have more kind of things that fall into that category as itemized deductions, some of the largest being things like mortgage interest and things like the property tax on the home, which you might think, well, everybody should have a home and own the home and have property taxing. But even if you have an average sized home, you might not be giving as big a benefit as if you had a multimillion dollar home with a loan taken out on it, or two homes or something like that where obviously then the itemized deductions can get a lot higher quite quickly. So we always have to be comparing these two things. And this is important when we do, if we're working in the field of taxation, we wanna be determining what level of tax return we want to be working on. If we're trying to crank out as many tax returns as possible, possibly then using the automation of tax returns, trying to take the data input forms to W2s, to 1099s and use the fancy new technology and the softwares, we can scan the forms and whatnot and try to get the tax return done basically automatically with that kind of stuff, then you're not gonna be able to do that as easily with returns that are itemized because they're usually gonna be more complex because they're usually gonna be higher income individuals. So that'll be an indication that you're working with a more complex return if they are itemizing. And or are you working in a situation where you really want to take on people that are itemizing, typically people that have higher income levels and more complex returns, ones where you can't automate the whole process, where you can't just throw the tax, the actual documentation into a scanner and have the return do a lot of it in and of itself because it's too complicated to do that. Usually in that case, you have more complex returns, more research, more tax planning that could take place on it and you often have higher profit margins. So that's kind of the trade-off from the tax preparation standpoint. In order to determine if someone's gonna itemize or not, you gotta have an idea of their filing status. So if they're married filing single, you gotta know, okay, if they're married filing, I mean, I'm sorry, if they're single, then you gotta say, okay, what's the standard deduction if they're single and how many itemized deductions would I need in order to take me over that cap to where it would be beneficial to add up the itemized deductions because if I don't have enough itemized deductions to take, then it might not be worthwhile to ask my client, hey, pick up, go find all of your medical expenses that you spent all year and stuff like that. If you don't need that information because you're not gonna be able to itemize because you're gonna be taking the standard deduction. So it's a good idea to have a general idea of that. Obviously, if they're married, then the standard deduction is typically gonna be doubled. Head of household is typically gonna be somewhere in between. So let's take a look at, this is gonna be the first page of the Form 1040. We're looking here on line 12A where we have the 22.5. Now notice what 12A says. It says standard deduction or itemized deduction from schedule A. So it's gonna take either or, just like we saw in our formula up top, one of these two are going to be taken. You can look on the left-hand side and see that for a single or married filing separate individual, you've got the 12,550 for the standard deduction. So that means if they were filing single or married filing separately, they would have to have higher itemized deductions than that threshold, the 12,550, in order to itemize. And by the way, married filing separately could have added complications because if one person is filing out for the itemized deduction and the other was not, so you have kind of an added complication there. But generally, if single, the cutoff is gonna be that 12,550. And then you could double it if they're married. So if they're married, you would double that to the 25,100. So they would have to have itemized deductions over that in order to be able to itemize. So if they're not close to these amounts, then they ask you, well, should I be adding up all of my medical costs and so on? If they're not close to that, it might not be worth doing it. If you are somewhat close to that, then it might be worth adding those up and checking it out. If it's head of household, you're in between at the 18,800. Now also just realize what's the thing that mostly pushes people over to being able to take the itemized deduction. It's usually when they own a home. So if they don't own a home, it's likely that they're not gonna be pushed over because the thing that pushes most people over to being able to itemize is the fact that they have a lot of mortgage interest possibly, and they have the state taxes with regards to property taxes, too huge itemized deductions. Those are the things that often push people over the threshold. So in general, if they don't own a home, unless there's something more, an unusual thing going on, your default assumption would be, possibly they're not gonna itemize. If you're taking on a new client, then what you wanna do is ask about that. You wanna get a feel for how complex their return is. As you itemized last year, do you own a home? Those are the kind of questions that are gonna help you to determine how complex the return will be. And also just realize with regards to the itemized deductions, you'll often get questions with those big itemized deductions, like should I buy a home given the fact that I get this deduction? And obviously if you talk to real estate brokers or something like that who are in the business of selling homes, they're gonna say the government wants you to buy the home because they give you this big deduction. And you get that deduction, but it actually complicates things more than I think simplifies it. It's another area where if they never put the deduction in, then what would happen is the market would adjust around the more simple regulations. After they put the deduction in, you would think what happens in the long run is the home prices go up in order to compensate for the added regulation that goes up. So is it kind of baked into the price and that kind of stuff is basically an open type of question. But what you want to make clear is the fact that if you're buying a home to get the deduction, you might not be getting the full deduction related to the interest because the difference between where you were at before with this and the cap at the standard deduction isn't really a benefit for you. So in other words, let's say that you got a $10,000 interest that you would be paying for the home, but let's say that you're a single filer and you only had like 6,000 itemized deductions. So now buying the home would push you over to being able to itemize, but if you were only at 6,000 before and the cap for was 12,550 that you're going to get, then there's 12,550 minus the 6,000. That's 6,550 that you were already getting without the home, right? And then if the home allows you more itemized deductions of another $10,000, well, 6,550, you were already basically getting because it was baked into the standard deduction. So you'd have to subtract that out minus the 10,000 and you're really only getting an added benefit of the 3,450. So it's a bit more complex than just saying, I'm gonna get to deduct the full 10,000, which is my taxes and my mortgage interest because if you're not already itemizing, then you're probably got a standard deduction that has a pretty good space or gap between your current itemized deduction. So really the best way to do it, if that's gonna be an influential factor and it could be for a home purchase is to run actual projections with tax software so you can get an actual fuel, what the savings will be by running mock tax returns and running projections. Okay, so then we've got the itemized deduction, which is gonna be reported on schedule A. You got the major categories on the left-hand side and in future presentations, we'll go into some of those categories in more depth. You can obviously look at the instructions for the schedule A if you got any questions about a particular item within the itemized deductions. So this is the standard deduction and a bit more complex here on the standard deduction. Remember the left-hand side are your standard deductions for single filers, married filing, joint head of household and on the right-hand side, we have those added kind of components that would be in place if someone was older over the age limit to increase the standard deduction and if they were blind, for example, then you can have those increases in the standard deduction, which again, you'd wanna keep those kind of in mind, have those in mind as you're thinking about whether or not someone's gonna benefit from the itemized deductions or not. So itemized deductions overview, if you itemize, you can deduct a part of your medical and dental expenses and amounts you paid for certain taxes, interest contributions and other expenses. You can also deduct certain casualty and theft losses. If you and your spouse paid expenses jointly and are filing separate returns for 2021, see Publication 504 to figure the portion of joint expenses that you can claim as itemized deductions. So then we have, don't include on Schedule A items deducted elsewhere, such as Form 1040, Form 1040SR or Schedule C or F. So in other words, clearly, if you're taking the deduction in some other area, you can't also take that same deduction in general on the Schedule A. So for example, if you had the mortgage interest and you used part of your home for a business and you deducted it say on the Schedule C, you can't also deduct it basically on the Schedule A, you'd have to allocate it appropriately. Now again, also realize that if you're married filing joint and you file a separate return, I'm sorry, if you're married and you choose rather than filing married filing joint to file married filing separate, then the itemized deductions can kind of be a confusing component because the IRS is going to be skeptical that a married couple purposely tries to file married filing separate in order to maximize both the itemized deductions and then take the standard deduction on the other spouse's return. So there could be limitations there. That's another area where that married filing separate could run into kind of complexities or problems there. For that, you could take a look at publication 504, which you could find on the IRS website for a little bit more detail on it. So what's new? Personal protective equipment, PPE, amounts paid for PPEs such as masks, hand sanitizer and sanitizing wipes for the primary purpose of preventing the spread of coronavirus or qualified medical expenses. If the amounts were paid or reimbursed under a health flexible spending arrangement, Archer Medical Savings Account, health reimbursement arrangement or any other health plan, the amounts are not deductible on Schedule A. So you've got those added, which before this point in time possibly wouldn't be like medical related items. So standard mileage rates, the standard mileage rate allowed for operating expenses for a car when you use it for medical reasons, decreased to 16 cents a mile. The 2021 rate for use of your vehicle to volunteer work for certain charitable organizations remains at 14 cents a mile. So this is when we're calculating basically a mileage rate and the mileage rate could differ based on what type of deduction that we're looking into.