 Income tax 2022 2023 itemized deductions interest you paid tax software example let's do some wealth preservation with some tax preparation support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page we also include added resources such as excel practice problems pdf files and more like quickbooks backup files when applicable so once again click the link below for a free month membership to our website and all the content on it here we are in our example form 1040 populated with lesser tax software you don't need tax software to follow along but it's a great tool to run scenarios with you can also get access to the form 1040 related forms and schedules at the irs website irs.gov irs.gov starting point as usual single filer mr anderson 100 thousand w2 income the 12,950 for the standard deduction gets to the taxable income 87,050 we're mirroring that on our excel worksheet 100,000 12,950 87,050 page two doing the calculations on page number two we've got the tax at the 14774 the 15,000 withheld gets us to the 226 on the bottom line mirroring that on our equation here now we're going to focus basically on the calculation of the taxable income and really focus in on the itemized deductions and the particular deduction of the mortgage interest so let's go back on over and just kind of consider the itemized versus the standard deductions which are down here we would only be itemizing if they are greater than the standard deduction which are a pretty large threshold for most normal people to clear which is 12,950 for single filers double to 25,900 for married filers now the one the big thing that kicks people over often time is the ownership of a home because that usually comes along with a loan a mortgage and the interest on the mortgage is usually the big one that often adds a lot to the itemized deductions as well as the property taxes on the home so you often if there's two things you want to kind of consider the one is just the tax preparation how do you do the data input from the form 1098 that you're going to be getting if someone owns a home and make sure that you populate in the tax return properly and the other is when people ask questions about whether or not they should rent or purchase a home because now the IRS has kind of kind of gotten into the decision making process which always confuses things and manipulates the markets to kind of work around the incentives that the tax code is having people ask well the government is basically telling me they want me to buy a home and not rent because they're giving me this big deduction and to some extent that's kind of true but oftentimes the people that you end up talking to have an incentive and you purchasing a home in other words if you talk to someone like the bank that wants to give you a loan or a mortgage broker or a real estate broker and stuff obviously they have some incentive to kind of over incentivize not that they all do or they're not being honest but you typically want to be talking to someone who's neutral when you're thinking about these big decision making processes and possibly pay them for just their opinion and when it comes to the taxes you can't just say well you're going to get this big deduction of interest and the property taxes because it really depends on on how close you are to the to taking the standard deduction in terms of how much of benefit you're going to get in other words if you had to pay you know $10,000 of mortgage interest first of all it's still payment it's still rent that you're paying you're basically just the money's going away it's not paying down the principal you're paying you know rent on the loan but you might be able to get a deduction for that however if if you're not if you're nowhere close to this 12,950 the actual benefit you're going to get from that $10,000 deduction is less than $10,000 right because because you could have got the standard deduction anyways so it gets quite messy you messy beast to try to determine what the actual benefit is even though you get the full deduction of the property tax and the interest and the only way to really get an accurate calculation of that is to do tax projections so that's the best way I would think to do that so that's something to just kind of keep in mind when that question comes up and so let's look at an example for example let's say so this person 12,950 we've got nothing at this point in time in terms of the itemized deductions therefore the itemized deductions are nowhere near high enough all we have are state taxes which in like California could be quite high the state taxes could be pushing you pretty close to the limit already and so for high cost of living areas you could be you could be close right because I might be with I might happen to be paying like $10,000 state taxes already and it wouldn't take much for me to clear the threshold after that point but let's let's say we're at this point right now so I'm not taking the state taxes these are just the these are just the sales tax calculation tables and then I'm going to go to the to the tab over here and let's say we had in the deductions for the schedule a the big one we're looking at here which is the interest now recording the interest is usually a pretty straightforward you'll get a 1098 once everything has been set up and then we'll have the mortgage interest and sometimes the company that that is paying or processing the mortgage interest will also be taking care of the property taxes and they'll give you the property taxes paid as well but you can't depend on that because the property taxes could be bundled with your mortgage payment but don't have to be you might be paying the property taxes separate so if you don't see the property taxes with the the information that comes with the 1098 for example that doesn't mean that there's no property taxes obviously there's property taxes almost everywhere so you're gonna have to get the property taxes uh some other way those two things should go together all right so we're gonna say that the mortgage interest and points so I'll put that up here let's let's say it was 10 000 and so we're gonna say 10 000 that's the interest so you're already paying you know you're not paying down the principal this is just the interest also realize that the interest for year one is the highest amount of interest the interest is going to be going down from year to year so when you think about your tax benefit the highest benefits you're going to get is when you're paying the highest interest at the beginning of the loan at the end of the loan if it's a 30 year loan it's 30 years from now but at the end of the loan your interest is going to be very low even though your mortgage payments are the same because that's that's the way the the the amortization table works we try to fix the payments that you're making and in order to do that we have to have a deviation or a difference between the the dollar amount go into the the interest versus the principal portion of the reduction so so that means that's another thing that just kind of keep in mind you might say well there's a huge tax benefit in year one but you also got to realize that as time passes that tax benefit's going to go down even though the mortgage paid off mortgage is going to stay the same in terms of dollar amount generally depending on the type of mortgage you have but usually it'll be the same if it's a 30 year fixed or 15 year fixed or something like that and then if you have interest you would assume that there's going to be property taxes so let's go to the property taxes and and we're going to say that's in my taxes area and let's say that they are at 2000 let's say 2000 so if I do that and I go back on over note that this individual is just barely clearing at the 1317 so if I go back to the form 1040 now we're at 1317 so so if you were to talk to someone that's trying to over and so emphasize the set like if you're talking to someone that wants to wants you to buy a home or something because because they want to make their commission on it or whatever they're gonna they're gonna emphasize and say look at this did you got a 10,000 deduction plus a $2,000 deduction for the property taxes I mean and you know you're in a home and this and that but really uh if I if and and by doing that by doing that also you you you were able to open up your other your other kind of deductions such such as the more the interest interest interest right here but if I go back on over to the form 1040 and I say well yeah but before I was I had 12,950 and so so really that barely that barely pushed me over right because now I'm taking 13017 minus the 12,950 I only hold on a second 13017 minus the 12,950 I only got a benefit of like $67 over over what I was doing before right so it's so it's not it's not as cut and dry so if I look at my actual tax consequences of this and I go okay well here's my schedule my schedule a and we're going to say that the taxes the real estate taxes we said was 2000 and the mortgage interest we said was 10,000 and that's going to add up to 12,000 if I pull that to the first page then I've got I'm still under I've got to add the tax as well so let's add the tax and so this is this is the tax being calculated for the state tax which is I'm letting the system do this is the sales tax that I'm I'm using here uh 1017 so I'm going to say okay 1017 17 and that brings up to 13 17 so now the 1317 is greater than the 12,950 but barely right and so it's $67 difference so now I'm at 86 86 983 so if I go back on over here and say does that match up here 86 983 that looks good and then page two the taxes at 14 552 let's put the old tax here 14774 14952 so the difference in the tax is a whopping 178 178 that still seems high to me is that right 14752 14752 that's why it should be 14752 so $22 difference right that looks right so so then in the 15,000 in the 248 so so you can see again it's not always it may not be the perfect you know always be the greatest thing now some people like if you're in a situation let's reverse that and say okay let's take it out for now and let's say that you're paying you live in California and you're paying state taxes of $10,000 already you know but okay so if that's the case and I go back on over here I could say okay now I if I don't have the mortgage interest then then I'm on the 1040 page one so so now I'm have the 12,950 but I'm paying all the state tax so if I go down to the schedule a and it's being capped at the 10,000 but you know and if I made more than that it might be capped so if I put if I put the state tax up to as we saw before 15,000 then it's now being capped right at the 10,000 but the 10,000 is a lot closer to that 12,000 you know number that we needed so so now if I added the mortgage interest you you might have more of us it might be you know closer you're going to get a bigger benefit so if I go back on over and say okay now let's add my mortgage interest I'm going to say the interest and home mortgage and what did I say it was 10,000 here I think and then the taxes I'm going to say were the principal residents of 2,000 I think is what we said and then let's do that and so now if I go back on over now that allows me to to open up also the the 10,000 though was close I was right close to being able to itemize anyways just on the state taxes right so now I've been able to open up that added 10 you know that added 10,000 so now if I pull that on over to here and I said my schedule a is to do that and then this is at 10,000 and this comes up to 22 22 uh so hold on a second it should be I'm at 22 k passo so let's say I've got the 10,000 for the state taxes oh taxes are limited this one's going to be limited I should use an if formula here because now I'm also being limited by the state taxes for the property taxes because my so let me do an if formulas equals if so this is a logic function to cap it at 10,000 so let's try it out so equals if brackets the sum brackets of these two of adding those up closing up the brackets is greater than uh 10,000 then with a comma I want you to cap it at 10,000 but if not meaning it's less than 10,000 I want you to take the sum of these two and that should cap it at 10,000 so the bracket at the end so there it is so that if it was less than 10,000 because this was like 1000 then it would do that and then it's going to cap it at the 10,000 okay so there's that and so that brings us down to the total itemized at the 20 and here it's saying it's 20,000 and if I go to page one then we've got the 100,000 minus the 20,000 gets us to the 80,000 as we have here so it's taking the greater of the two which brings us to the 80,000 and notice now we have a much more substantial difference that we had before because we were pretty close even though on the high income side you could see that it gets it gets capped on that state taxes which is one of the big kind of components as well so it's not it's not a clean picture is what I'm trying to say here and so then if I say that the tax on page two is uh 13223 so now it's going to be 13223 so now we had a savings I believe if that's still correct of the 1,051 which which is a better you know uh scenario but it's still kind of a confusing scenario because again we had to pay 10,000 in the interest in order to get the tax savings and we lost the property tax benefit because our state income tax was high enough that it hit the cap of the 10,000 so you can see everything gets kind of messy it's not a clear cut picture uh with the deductions and to really understand them you have to basically run a run a projection and see what the actual cash flows are and you would have to do it not only for the current year but also going into the future as your interest I have taken out a very high interest low amount deduction decreases over time which doesn't happen significantly from one year to the next if it's a 30 year loan but it is significant over the span of the 30 years okay so that said we've got the data input for the interest now you could have a situation where we have for example uh if I look at the interest here we've got the home mortgage interest and points if you if you don't use all of your home mortgage loans or buy or build your home see instructions so remember we've got those caps and limitations on on the mortgage interest if we use the if we use the loan for the home and if we have a caps in terms of the loan limitations to see the deductibility of them so we saw that in a prior presentation and so you might have a situation where you have the 1098 but you have to you have to limit that for one reason or another due to those caps so just be aware of that we've got the home mortgage interest and points I'll reported to you form 1098 so notice here that that 1098 will be provided to the IRS so the IRS would expect this number to be the same or less than the amount on the 1098 you can imagine if it's less than the amount on the 1098 the government shouldn't have a big issue with that because now you're taking less of a deduction than the form that they have says you might be able to take that even though there might be reasons why it would be smaller than that and if it's greater than the amount that's on the 1098 you can imagine the IRS would be skeptical of that and possibly want some rationale as to why that would be because the form they have looks like it should be at whatever it should be and not greater than that right and then be here says the home mortgage interest not reported to you on form 1098 so now this is where the interest goes if it's not on the form 1098 and we ran and looked at multiple scenarios and like our prior presentation so you might have someone else got the 1098 for some reason or possibly you have a seller financed mortgage for example so now you don't have a financial institution that has the loan but basically an individual and in that case you might have to report it on 8b because you didn't get a 1098 which means again the iris is going to be skeptical about the deductibility of it so if I bring this for example down here and I say that this is the home mortgage interest not on the form 1098 so now they want the payees name so I'm going to say Sam and social security number debt debt debt debt pair or EI or EIN number the address and the zip and so on and then the amount so if I I won't populate all of that but if I pull that on over you can see what's happening here the iris is going hey look if you're getting a benefit from the deduction I want to know who should have issued you the 1098 because they're going to look at the other side of the transaction just like any normal thing when you get a 1099 or a W2 they're going to look at the other side of the transaction and see if that person included the income on their side of things right and then you've got the points not reported to you on the form 1098 so they're getting better and better these points is another just messy kind of factor because one the points sometimes when you look when you talk to mortgage brokers and stuff they talk about points that don't relate to interest any at all which means they're not really deductible so they use points that terminology to to refer to things other than interest which isn't and then and then when it does refer to interest sometimes that interest is going to be like they're trying to prepay the interest is the is the idea and then the question is well if it's a prepayment of the interest do I get to do I get to deduct it at all if they're points and if I do do I do I get to deduct all of the interest points at the at the beginning when I paid them which is like a kind of a prepayment which iris usually doesn't like to do that or do I have to put them on the books and amortize the points over the life of the loan right those are the things that have to be set up now usually this is a complexity that only really comes up when the first trend purchase of the home takes place and you might have to look at the closing documents and whatnot and determine what qualifies as points and then determine whether or not you could take the points at that point of time or whether or not you have to amortize the points over the over the future period and once that has been set up then the amortization if applicable will will be done automatically and it'd be pretty easy going forward they're getting better at reporting points and kind of standardizing what they mean and the deductibility of them on the form 1098 but it's still kind of a a messy type of situation so if you had to put the points on the books and amortize them it might look something like this usually the data input in the software would be the similar place that you would put like depreciation type of information for like a schedule c or something and then I'm going to say that there are points and you might want to refer to the actual loan that the points are in and then I got to determine that this is going to go to not a schedule c or anything but to to the points and then we're going to say that the the the date I'm going to put is here one one twenty twenty two in this case I'm going to say that the cost was 500 and then I'm just going to do a straight line amortization of the points applying them over like the life and that's one you know method that can be that's kind of like the easy way to deal to do with it if you're allowed to do a straight line kind of method and then it's going to be 30 years assuming it's a 30 year loan just because our loan is 30 and so I'm going to say okay boom and then if I pull that over to the schedule a then you'll have the points pulling over in here so now the points are being calculated so that's something that oftentimes again is confusing when a home is first purchase and you might have to go through the closing documents and determine how the points need to be calculated and then put it on the books with your amortization schedule and so on going forward after that time the data input should be quite easy because in future periods if you've got this amortization populated properly and you're using the same software it should populate itself you know going forward from that point in time and now you've got your depreciation schedules here which I just did a straight line points depreciation 17 and then if I looked at the the next year 2023 what's going to happen same same thing right it's going to be depreciating another 17 until the whole $500 of the points has been removed or allocated which is going to be fully allocated over 30 years because it's just been evenly allocated over 30 years so that's gets a little bit messy on the points situation okay and then if I go back on over to the schedule a and we look at the interest the other the other is investment so and then you would attach this form 40 49 52 so let's look at the good old form 49 52 49 52 49 where are my glasses 49 52 okay so now you've got your investment interest now remember when we talk about interest the it's the natural thing to deduct are the things for an income tax system that helped you to generate revenue so so notice that the mortgage interest on the home is funny because that that's that's not in alignment with the normal rule you can argue why they would do that and I'm not trying to say they should or shouldn't do it or anything but I'm just saying it's not like a the normal kind of thing because the home is a personal property and it's not like you needed the home to help you to generate revenue and if you had the interest for a schedule c business in order to buy property planting equipment so that you can use it to generate revenue that would be a normal and natural kind of deduction for an income tax type of system the argument for the mortgage interest of course is that everybody should have a home so we're going to incentivize the home purchase my personal opinion is in the long term of that happening all that happens is you just distorted the economy so that the market takes into consideration all these complex tax consequences and at the end of the day once all that settles out it's no one's really benefiting everybody's just adjusted their all their positions around this complexity and all the prices have changed to reflect the new reality of the tax laws so to me it just adds complication in the long run although in the short run but you know it is what it is but if you look at the end if you look at the investment interest it's the same kind of thing you would think if you had some kind of property that wasn't real estate property if it was I mean it wasn't like your your personal residence but maybe it's a piece of real estate or property or something like that then you might be holding on to it as investment or other types of investments that you financed for that investment property then that would be another situation where you would think that the interest might be deductible because you because you're using it to generate income in that case but it's a little bit messy in this case in terms of the incentives for the government because it seems a little bit kind of weird for to to be incentivizing that leveraged for people to have like this leveraged position where they have where they're taking out debt for the investments but in any case if you have the investment interest and usually more well-off individuals would have investment interest and possibly not so much on the lower income side then we could pull it in here 4950 that would pull into the Schedule A and so it pulls in to the Schedule A down here so investment interest and I'm sorry it's limited to the investment income so I'd have to go through and basically have the investment income in order to calculate the limitations on the investment interest so if I add say qualified dividends let's go back on over and say let's say we had income from passive income I'm gonna say interest income and dividend income so let's say that this was miscellaneous dividend income it let's say was six thousand six thousand and pull that back on over so now we've got the dividend income and the investment income being pulled over to the Schedule A so there's there it is so that's just a general kind of calculate of the investment income again it's probably something that's going to be coming up more often on more well-off individuals you would think so that's just a general idea of how this kind of is put together remember that that credit card interest typically isn't deductible if you have a a schedule C type of business then and you have the business use of your home then you might have to allocate some of your your interest to to the business use of the home and some of it to the Schedule A right so you so then you can't double dip so you've got to be careful in that kind of situation you might have to do the same thing with the property taxes which runs into another kind of messy situation because now we have this cap on the state taxes and so on and so what happens when you you know pull over part of the taxes and try to deduct it on the schedule C when you would have been capped at the ten thousand over here if the cap wasn't applied and so on and so we have that that you've got to be careful of and again just in terms of the general rules you need to be careful in terms of what the actual benefits will be of purchasing a home and actually map it out map it out map out the cash flows as best you can with an actual with an actual projection and note that those projections will change in the future and take into consideration the tax code could change substantially in the future as it did you know a couple years ago when it increased the the standard deductions