 Income tax 2021-2022 tax software example itemized deductions overview. Get ready to get refunds to the max diving into income tax 2021-2022. Lesser tax software as you don't need tax software to follow along but you might want the form 1040 which you can find on the IRS website irs.gov irs.gov our starting point here single filer Adam Smith living in Beverly Hills 90210 100,000 W2 income the 12,550 standard deduction 87,450 taxable income mirroring that over here on our equation 100,000 we got the standard deduction 12,550 87,450 taxable income letting the software do the calculation of the tax on page two of the 15,15 plug in that into our worksheet with the 15,15 back on over to page number one and prior presentations we looked at the income line items up top we looked at the adjustments to income which you could also think of as the above the line deductions the schedule one deductions and the reason they call them kind of adjustments to income instead of a duck deduction even though in essence they are basically the same thing they're decreasing the kind of income amount here or the net income is going down in essence they call it that because basically this line item the adjustments to income is usually the one that will be used when we talk about phaseouts related to things like deductions and credits when we look at these deductions down below which are going to be the greater of the standard deduction or the itemized deductions these then are not going to be included in the subtotal of the adjustments to income so they're not going to be included in that kind of phaseout calculation that is applied to many credits and and deductions so that's one way or one reason you want to keep these distinct another reason is that these items up tops the adjustments to income or the above the line deductions the schedule one deductions don't have that same comparison that need to be taken with the standard deductions and the itemized deductions in other words many times when people think about the deductions they think about some kind of itemized deductions so things that will come to people's mind are things like jumping over to the schedule A medical and dental expenses taxes paid state tax possibly property taxes interest paid like mortgage interest gifts and charities which is typically or mainly and traditionally although there's an exception on the schedule A casualty and other itemized kind of deductions over here and note if I go back up to the form 1040 you only get those deductions if you're able to itemize and you would only do that or itemized deductions are greater than the standard deduction that would be basically the general rule so you want to keep those things in mind when people bring up like their medical expenses or these do I have to track that kind of stuff well are you close to the standard deduction if you're not then you're not going to get a benefit from it because you're not going to be able to itemize this is also something you want to keep in mind as a tax preparer to see how complex the return are and determine whether you want to focus on more or less complex returns more complex returns will typically be higher income individuals which will typically have to itemize the deductions will be involved in them and you'll have more tax planning more data input that cannot just be automated us more simplified returns possibly you can automate the process a little bit easier and drive your whole process with basically data input forms 1099s and W2s for example I could might be a little bit easier to do that so keep that in mind now just to consider these itemized deductions if I go into the itemized deductions schedule a then the if I look at these and say well what's going to be the big one that's going to push us over note that if they're already itemizing then all the itemized deductions matter so if they're itemizing and they they ask you about the medical that they're still kind of this this this 7.5 that they have to clear on the medical so they're still kind of a question as to whether the medical is going to be beneficial we'll talk about that later but in general you might want to check out if any of these itemized itemized deductions apply once you're over a certain threshold and already itemizing because it's more likely that you'll get a benefit from them and if you're not able to itemize then the question is what are the things are going to push you over to being able to itemize the big one is usually going to be the interest in terms of mortgage interest that happens with the home purchase so the home purchase when you talk about a home purchase you're not talking about the purchase price of the home you're talking about the loan amount and not just the loan amount with regards to the deduction but the interest related to the loan amount so the higher the loan is and the higher the interest rate is at any particular point in time of the interest rate that someone qualifies for then the more interest they're going to pay that's going to be the deductible component here and that could be a significant amount there's limitations to it we'll talk about it more later but that's going to be the main thing so you're going to ask someone do you own a home and if they do it's likely they got a mortgage on it and it's likely they're paying significant interest and it's likely that that's going to be increased there if they're a new client you could ask them straight out do you itemize right do you own a home those are going to be significant factors the other thing related to owning a home is you've got property taxes so property taxes up top the other big one that could be a deductible item up top and and those are the two things that often push people over to being able to itemize now you also want to think about this from a planning standpoint so someone was to ask you whether or not they should purchase a home or something like that then you have to be kind of comparing the benefit that they would get from the added components to be able to itemize or not you could basically run projections in order in order to do that because this person right here for example if this was all they had for the itemize deductions before they purchased a home and you compare that to the standard deduction of the twelve thousand five fifty they're getting a huge amount of standard deduction over and above what they what they currently would be getting you know if they're if they would be itemizing so so even though the itemize deductions might push us over in this case to twelve thousand five fifty it's not like you're getting that whole amount like let's say that that was fifteen thousand it's not like you're getting that full amount of the fifteen thousand because you were already getting twelve thousand five fifty and you had no other itemize deductions right so you got to look at that difference to see with a true impact on the taxes would be so to do that we got to compare that to the standard deductions if they're single twelve thousand five fifty marriage you double it to twenty five one hundred head of household in between then at the eighteen eight hundred so you can also say well if there's added conditions like they're over a certain age or have conditions like blindness or something you can go to page four of the ten forty s or well you've got those other deduction limits here which are the single if one of those conditions apply fourteen two fifty and then fifteen nine fifty you can mirror that on the tax software by saying if they were single and they had the single plus the one condition there's where you get the fourteen two fifty and so on there so you can kind of use their worksheet to do that married filing joint if one condition applied twenty six four fifty two and because they're married so now there could be four conditions that could apply so you can you can mirror that here and say okay what if I had married filing joint plus two of these this times two or two conditions met twenty seven eight hundred so there's the twenty seven eight hundred and so on and so forth just to get an idea of the comparison there going to go back to the form at ten forty so let's add let's just add a couple of the most common kind of itemized deductions and look at the comparison here so if I go back on over and say okay let's go to my schedule a let's check it out let's go to the schedule a deductions and let's go down to the interest and let's say the interest was was let's say the interest was six thousand let's say seven thousand mortgage interest and point seven thousand and let's say the taxes on the property taxes on the property we're going to be let's say six thousand here on the property taxes so then if I go back on over so now we're at the thirteen eight seven nine thirteen eight seven nine seven nine which we could see on the schedule a which is now populated if I go down to the schedule a now now that you're you're in the area of being able to take the deductions then some of these other things might apply then you might have unlocked the capacity to possibly get some more medical to go into those and see if you can get a benefit from them that off the state taxes to could be something that would now be applicable to you in addition to the real estate tax that we put in there and then the seven thousand here could be applicable but still you really only up to the to the thirteen eight seven nine and before this point in time that's what you that's what you've kind of unlocked now before you were already at the twelve five fifty so it's not like you can't really say well now I got a deduction due to the due to purchase in the home of thirteen eight seven nine because you really only got the difference of the thirteen eight seven nine and what you got what you got automatically before which is the twelve five fifty that's the kind of thing you gotta you gotta consider when you're trying to figure out you know the tax benefits of like a home purchase or something like that you gotta get a little bit more nuanced than just saying yeah I get to deduct all the interest yeah you do but you might not be getting a benefit from the whole thing so that's the general idea now if you if you change this let's have them get married now so if we had married people going to marry jumping on over and say Adam is going to get married to Eve madam I'm Adam and then they get married so we're going to go back on over so now they're married filing joint same one hundred thousand the income of course could go up possibly but we're going to keep the baseline at the one hundred thousand and now we've got the the twenty five one hundred so now we've got the twenty five one hundred and there if they had the same amount of itemized deductions they're no longer going to be taking the the itemized deductions because obviously the standard deduction is higher at this point in time that's why you want to keep an eye on the what the standard deduction is and the standard deduction increased greatly a couple years ago and in an attempt to simplify the tax return and I think that that worked for a lot of people because again the itemized deductions are going to add a level of complexity and typically they're going to well in any case so now of course the itemized deductions over here are not being applied out because they're less than the standard deduction we can imagine a situation where these itemized deductions were increased over that threshold in order to be able to itemize in that instance so that's the you know the general idea thought process you want to be thinking on this when you look at our formula over here then we can mirror this say there's the hundred thousand let's bring it back to single let's bring it back to single and say I'm going to go okay let's bring this back to single single they didn't get married cold feet happened and they didn't get married you're just checking it out and so now we're going to go down so now we're at the thirteen eight seven nine if I was going to mirror that over here we could say okay there's the one hundred thousand there's the standard deduction was at the twelve five fifty and then we're going to look and compare that to the itemized deduction so that's going to be schedule a itemized deductions the big ones like we said was the interest which I think we said was seven thousand and then we've got the the property tax which we I think we put at six thousand now that would add up to the thirteen thousand but we also unlocked the capacity to deduct some portion of the state tax which I'm not going to get into at this point in time because it'll be dependent on your locale you might let the software do that calculation for you or at least help you out we'll talk more about it later but that gives a little added complication whenever you're you're kind of doing the itemized deductions with this because every time you make a change if you're using state income tax taxes then that could change the level of the state income taxes so in any case eight seven nine so we'll say eight seven nine eight seven nine and so that totals up to the thirteen eight seven nine so we're gonna say alright there's the thirteen eight seven nine that pulls over to page one of the form ten forty and now we can see this comparison taking place here and we're only gonna take the one that is higher so we're taking the itemized deduction because we got our if formula or logic test formula so now we've got the one hundred thousand AGI minus the thirteen eight seven nine gets us to the eighty six one twenty one mirroring that on the form over here there's our one hundred thousand minus the thirteen eight seven nine getting us to the thirteen there's the getting us to the eighty six one twenty one that's what they said it was over here right and then page two calculating the tax at the fourteen six nine six so we're gonna say this is fourteen six nine six nine six so that's kind of a thought process that you can go through and plug that information into your formula to get an idea of what's going on a little bit more intuitively and a more transparent Excel worksheet so in future presentations we'll go into some some more detail about these individual categories with the schedule a but just remember that you're generally thinking what's gonna be the big ones what's gonna be the ones that are gonna push people over to itemizing usually owning the home interest and the related property taxes