 Income tax 2022-2023. Itemized deductions, taxes you paid, software example problems. Let's do some wealth preservation with some tax preparation. Here we are in our example Form 1040 populated using LASERT 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 IRS website, irs.gov, irs.gov. Starting point as usual, we got the single file or Mr. Anderson, no dependence. Support account 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 then 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. We've got the W2 income 100,000, the 12,950 standard deduction to start with 87,050 taxable income, mirroring that in our Excel worksheet income tax formula, 100,000, 12,950, 87,050 page two, calculating the tax at the 14774, 15,000 withheld gets us to the 226 and we see that down here in our formula, but our major focus, my major focus will be on the calculation of the taxable income as we look at the itemized deductions and the taxes. So we're gonna go back up to page one. Let's open up the itemized deductions. That's gonna be the schedule A. Every time we think about the schedule A, remember that we first wanna think we gotta clear the standard deductions before they're beneficial. The things that clear or usually push people over are the home owning the home. Why? Because then you've got the mortgage interest and then you've got the property taxes related to the home. And then once that's included, the other big thing that could push people over is the state taxes that they're going to be paying because, and that might include, and that'll also be bigger for states that have a higher tax rate such as like California and New York, right? So you can get fairly significant state taxes as well as income levels go up. So you can see here by default, it's basically calculating on the tables for the sales tax. The software's quite useful to kind of do that calculation if you're doing the sales tax. Note that that's nowhere near by itself enough for us to be able to take the itemized deductions because if I go to the 1040, then we have to be clearing as a single file or that 12,950. If we were married, it'd be 25,900. Let's imagine they own the home and add the two big items. Let's add mortgage interest and property taxes. The taxes on the home being one of the items we're focused in on here. So I'm gonna go in, I'm gonna say all right, schedule A. Let's say we're gonna have deductions for the schedule A and they will be, the deductions for A will be. I'll add the interest here. Let's just say it was 14,000 and then we'll go to the property taxes and I'm gonna add the property taxes. I'm just making up numbers here for the principal residence. I'm gonna say is, let's just say 4,000. Okay, so then I'm gonna go back on up and say the forms then. If I go look at my forms, the schedule A is now being populated and it's pulling over not the standard deduction because our itemized deductions are adding up to 1917 over the 12,009 single filer. It wouldn't be enough to clear the 25,900 if married. Let's take a look at that schedule A now. So the mortgage interest is a significant factor helping to push this over. Once we're over that threshold, then the taxes could also be a significant factor and one of the major components of the taxes is gonna be the real estate taxes. If they own the home, the second major component is gonna be the state taxes that they used to fund the general activities of the state, which is chosen by the state either as an income tax or a sales tax type of system. So this 4,000, we're imagining where would we get that? We would get it from possibly if the mortgage payments that were being made on the form 1098. So we would expect, for example, to get the form 1098 which will report the amount of interest that was paid on the mortgage or loan. And sometimes the payments that we're making where they packaged it together so that they're also that company, the financial institution is gonna be paying some of the payments that you make to them, to the principal of the loan, to the interest which will be reported here and for the property taxes. And then they'll generally give you that information as well, but it's not required that that is the case. So if you don't get that information from the financial institution for the property taxes, but you know that they own a home, then you're gonna have to definitely get the information for the property taxes because they must have them. You know, everywhere basically has property taxes even though you have different states, the property taxes is a pretty universal type of thing throughout the entire country of the United States. So you wanna be asking for the property taxes. Sometimes they're paid in like a staggered kind of format like twice a year, they might be paid once a year but often they're paid twice a year. Generally we are on a cashed based system here. So the payments that were actually made in the year for the most part are what are gonna be included in the property taxes for the year, which does lead to the question from some people to say, well, what if I have more income this year than another year and I want to basically prepay my property taxes possibly as a way to increase my itemized deductions and lower my taxes this year, which means I won't have the property taxes in the following years. So you might say, what's the big deal? But if I had a lot more income this year than next year, my tax rate and brackets will be higher in the higher income year than the lower income year. So you can try to manipulate the cutoff dates that way. But you can't do that because, well, the IRS is gonna limit oftentimes. So anytime that idea comes up, you gotta think, okay, is the IRS gonna limit the amount of prepayments that I might be able to play with because I'm on a cashed based type of system? So beware of that. Normally it's gonna be kind of a cashed based system here and you're gonna pick up the taxes that were actually paid in the current year. Okay, then so let's actually put that into our worksheet over here and just see how this might work. I'm gonna go to the schedule A and I'm gonna say, all right, I had mortgage interest of 14,000. The taxes, I'm gonna say, let's say this is the real estate taxes. I'll say this is real estate taxes, which I said was 4,000. And then I let the software do the calculation, assuming because I haven't entered any other kind of tax, so the software said, well, we're gonna give you some tax and it's gonna use the tables to calculate the 1,017 tax of the sales tax from, in essence, the tax tables. So there that, let's just take a look at that and then I'll go into that more detail. That adds up to the 1917 and that ties out to the 1917 here, which pulls over to page one of the form 1040, 100,000 minus the 1917 gets us to the 80,983. As we see here, this pulls over to page one minus this gets us to 80,973. Now we're taking the itemized deductions as opposed to the standard deductions because it's a single filer, which is our 12,950. So we're taking the greater of the two with our max formula there. So there is that. I'm not gonna get into the tax down below because we're mainly focused on this line right now, getting down to the taxable income. So if I go back on over on schedule one, then this box, we have the state and local taxes on A, state and local income taxes or general sales tax. So remember the concept here, they for some reason allowed state taxes to be deductible and that was helping out the states that mirrored the federal tax system with an income tax. So that's a little bit easier to work with because now you know what you paid for the income tax for the state that would be deductible on the federal taxes. Now remember, the state government is different from the federal government. The form 1040 here is calculating the taxes for the federal government. If there was a state tax as well, such as California, then we would have a state tax tax return that we would have to do as we do the federal tax return. They're different, but oftentimes if there's an income tax system, the state tax system will mirror to some degree the format of the federal tax system and you'd have to do those two things at the same time with the same tax software and that would help you to figure out the amount on schedule A because you would be populating into the tax software as you prepare both returns, the amount that you paid to the state. So it's a pretty easy or a little bit easier to figure when you're dealing with an income tax kind of system, although it's still kind of confusing because you have those cutoff problems with regards to did they put the money in, last the cutoff between when the amount was due on an accrual based method versus when you paid it, but and we're generally on when you paid it. We'll get into that more in that in a second. The sales tax then gets a little bit more complex because then they had to say, well, look, that's not fair to states that choose to have a sales tax. You're imposing a tax system on the states who are supposed to be sovereign by giving preferential treatment to the people that have an income tax system and not a sales tax system. So then they had, instead of getting rid of deducting the state taxes altogether, they included the sales tax, which is a lot more complex because a sales tax means that you're basically calculating the tax on everything that you buy, right? So in order to not have to track everything that you buy, to calculate the sales tax, there's these general tax worksheets for like the average tax. And if I go in here, you got the state and local taxes and there's some worksheets helping us to calculate the tax. So here's the state and local tax, our worksheet that's being used to calculate it. I won't go into it in depth, but that's the general idea. So then the question is, well, do I want to use the easy worksheet to calculate the sales tax? Or do I want to do my actual sales tax that I paid? And if you're in a situation where you had paid for large items, such as a car or a boat or something like that, it's quite likely your sales tax is higher than the average on the table. And it might be beneficial to do the actual sales tax in that case. And then we looked at all the rules and prior presentations on the tax rate. You have to use the general rate and whatnot and so on. So I won't go into a lot more detail, but that's the general idea. Now you also could have issues if you lived in one state for part of the year and another state in the other part of the year and there was a different sales tax for both those different states and you're trying to use the sales tax table and you lived part of the year in each state, then you'd have to use a ratio analysis to kind of allocate using the proper two tables and so on and so on. But this is being calculated by the table. It's the bottom line. If I then jump to the sales tax and let's imagine that it was a sales tax system here, even though I'm in California personally, so I usually would do the income tax even though we have a sales tax, but usually we would do an income tax but because it would be higher for any case. State and local sales tax is paid. So if I go here and I put an actual amount of state and local sales tax is paid, which we would have to track if we're doing the actual amount and let's say it was, you know, whatever, 3,000 and then I pull it back on over. So now it's being calculated at the 3,000 for the amount that I populated instead of using, you know, like being reliant just on the tables to do the calculation. Okay, and then that would add up of course and so on and so forth. So then let's say that I had a state income tax system like California has an income tax which is often higher than the sales tax. So that would often be on your W2. So when you enter the W2, for example, for many people, you're gonna have the withholdings. So you might have the state tax withholdings that are on the federal tax return. So when I enter the state tax withholdings, let's say they were 2,500, let's say, then if I go back on over, now that's gonna be populated in my taxes here. So I've got the state and local taxes at the 2,500. So generally when you're doing a tax return that has state tax preparation within it, then usually when you enter the W2 withholdings, you're basically thinking of the withholdings on the state taxes in a similar fashion as being applied to the state return, not the federal return. So the thing that's usually in your mind is just like when you paid the federal income tax, which is the same like on the W2 here, 15,000, you would think, well yeah, on the 1040 that 15,000 is gonna be on page two of the form 1040 as the amount that we paid. So I'm gonna calculate the tax minus the amount that we paid. Same thing on the California return or any return that's an income tax system. I'm putting the withholdings in there so I can calculate the tax minus the amount that we paid in the withholdings. But then we have the added complexity of the amount that you paid with the withholdings for state taxes could be deductible on the federal tax side of things if you're doing an itemized deduction. So you don't get the benefit of that when you're doing the standard deduction, which is kind of annoying because again, it kind of benefits higher income individuals, which is a little funny, but it gets capped at the 10,000. So there it is at the 4,000 that's being pulled in. So that's the amount that we paid. Now let's play with that a little bit. If I pull that full 4,000 up to very high income levels that have a high tax and I pulled it up to like 12,000, then it's gonna be, it's gonna be capped. Well, the whole thing is gonna be capped. I got worried that the whole thing is gonna be capped at the 10,000 now. And that's that controversial law that came in to play a few years ago where people were saying, hey, look, you guys are really abusing this state tax thing because it helps out high income individuals, low income individuals don't get to deduct any of the taxes because they're not itemizing. Now you're deducting the state taxes and you get this massive deduction for high income individuals, plus it's subsidizing states that have high tax rates and so on and so forth. So they capped it at 10,000. So that was a very kind of controversial thing. So now you have a situation where the state taxes are quite beneficial and often push people or help push people over to the point where they're taking the itemized deduction versus the standard deduction, but you've got this cap. So then, and that's not that high if you lived in a high cost of living state that you could be paying over 10,000 when you include property taxes on the state and local tax. So that is a significant cap, which was controversial and interesting that they put that in. Let's put that back to 4,000 and also just realize that if you got a refund from last year that is included in the current year, then that means that you could have got a deduction. This is where the deduction is at that we talked about on the income side of things. In other words, in a prior presentation, we thought, do I have to include a state tax refund in the income line over here because sometimes they give you a 1099 for it. That would be on the schedule one and we said they got the taxable refund. Well, and we said the only reason that you would have to include the refund in income is if you got a benefit from it last year. So meaning if they had a schedule A like this in 2021 and they were able to deduct the 4,000 in this case of taxes, they got a benefit from that deduction. Then, and then the state said, you paid me 4,000 but I'm gonna give you 2,000 back. Well, that means that you didn't really pay 4,000 because they refunded 2,000. So what should you do? Should I go back to the prior year tax return and put only 2,000 here which is actually the proper amount I paid after the refund was refunded back to me? That would be tedious to do or we could do a cash-based system and try to fix it going forward. And that's why you might have to include in income the refund that you get in the following period. So that's gonna be how that kind of plays out. Now, remember that that does get a lot more confusing than you would think at first glance. Meaning if you got a tax refund of $2,000 because you paid 4,000 in the prior year, then the question is, well, if you didn't itemize last year then you didn't get any benefit and you wouldn't have to include it in income. If you did itemize, it's still questionable as to whether you've got a benefit from the taxes or how much of a benefit you got because notice that my standard deduction right here is $12,950. So what if my itemized deductions just barely cleared that? What if my itemized deductions came out to be like $13,000 or something? Then I just barely cleared the $12,940. So even though I got a $4,000 state tax deduction and I was itemizing, I really only got maybe $50 of it because the $12,950 I would have gotten any case. So it gets messy in terms. So that's why the tax software is quite useful to determine if you got a benefit in that case. And that's why I would suggest if you are dealing with a new client that had a schedule A in the prior year that it's worthwhile to data input the prior year tax return in the prior year software even though it might cost more, roll it over so that the software can help you out with some of those rollover situations like the refund situation. Now a similar thing could happen for the other taxes like if you have the sales tax then you might have to include it in other income like down here if you've got a refund situation for the other taxes that you paid but that's a little bit more unusual of a situation. Now you also might think well that would lead people possibly to try to like you could try to say if I had a lot of income this year and my tax bracket is gonna be higher you could, you know people may say well I'm gonna try to withhold a lot this year so that it lowers my income this year and I'll be at higher tax brackets this year because my income was higher and then when I get the refund next year I'll include it in income next year and because I'm at lower tax brackets next year it'll be a net benefit. People can try to play a little manipulative games like that with the cutoff and the reason that's the problem with a cash-based kind of system so you gotta be careful whenever the idea of that idea comes into play well I'm gonna prepay all my expenses this year or something sometimes the tax code will limit you in terms of how much you can kind of prepay but they have a little bit of a difficulty doing that with the state taxes because the state tax has a progressive tax system so it's quite likely that people have no idea how much to pay for the taxes because it's a pay-as-you-go system and a progressive tax system so there's that. All right and then we also could have included in here you gotta be careful of the cutoff kind of situations because if for example I made estimated tax payments or say I got a refund from my state taxes last year that I rolled over. Roll over or into the current year because I'm a Schedule C business then that is something that will typically be included in the taxes as well so let's take a look at that. So if I had my estimated tax payments so now I'm not having payments necessarily withheld from the W-2 although I still have those but what if I need to make estimated tax payments as well which are often done with like a Schedule C business if there was an overpayment applied from 2021 and you apply it then to the taxes let's say it was another 1,000 then that is gonna be included in here as well so now my state taxes went up to 5,000 so that's something you've gotta kind of be aware of as well if you're not a W-2 employee or if you have the kind of cutoff situation between when you paid the tax and what year it should be applied to also if I made a payment in the current year for taxes that were for 2021 for prior year taxes but I paid them in 2022 that may be included in the Schedule A because again they're tied to generally a cash based system when you paid them not an accrual based system when the tax year that's being applied to so for example if you paid with 2021 state tax return $1,000 let's say then that was applied to tax year 2021 but you paid it in 2022 so it increased my amount here by 6,000 by 1,000 again to 6,000 so it's basically generally on kind of a cash based system and again if you're using tax software it will usually help you to pick that stuff up but then you want to kind of double check it if you're looking at this number and if it's you want to say how is the system calculating? Calculating results and that if it's coming from the sales the taxes your income taxes you paid for the state then it would be easy if it just came from the W-2 but you also want to think about that cutoff kind of stuff did I have a refund last year did I owe money last year if I owe money in 2021 and I paid it in 2021 then I paid for 2021 in 2022 when I filed the 2021 tax return by April 15th, 2022 then that might be included in here as well and you want to get that kind of cutoff problem situated so then you can have the personal property taxes this is often with like the DMV like vehicle tax and whatnot and you've got to make sure that you're taken into consideration the deductible part of the value of it so I'll just say 160 and pull that on over so that's gonna be important it's usually gonna be a relatively small of course in comparison to the property tax and the state taxes but could still be relevant worth picking up of course now the other thing to note is that something like the real estate tax for example you might have it broken out between multiple different areas so you might have like a schedule C and you might have your business use of the home which we'll talk about when we get into a schedule C type of business and then you might say well part of my property taxes is actually applied to the schedule C because I have a home office or something like that and therefore in that event oftentimes it's useful to apply what you can to the schedule C using a ratio analysis possibly using the square footage of your office compared to the full square footage we'll talk about that when we get to the schedule C but the point is you can't double dip you can't take the portion of the property taxes on the schedule C and the schedule A you're gonna have to prorate it in some way if you don't have any deductions on the schedule A because you're under the threshold to be able to itemize then any deduction you can get on the schedule C is obviously good beneficial if you can itemize then you're gonna generally wanna prorate it and take what you can on the schedule C and deduct here and then deduct the other kind of portion generally on the schedule A is how that could play out so that once again is another kind of area where if you have more complex returns they can get kind of messy because of all of these no one rules very complex but when you put them all together you can come up with these kind of messy situations and breaking out the taxes and the same thing could happen with the mortgage interest down here between business related stuff for home office use and the schedule A can be a little bit messy but that's the general layout with the taxes.