 Income tax 2023-2024, itemized deductions, state and local general sales taxes. Get ready and some coffee because we're setting our refund to the max with income tax 2023-2024. Most of this information can be found in the instructions for Schedule A Tax Year 2023 which you can find on the IRS website at irs.gov, irs.gov. Looking at the income tax formula, we're focused on what I would call the below the line deductions more specifically the itemized deductions. Remember in the first half of the income tax formula is in essence a funny income statement. Most income statements having income minus expenses resulting in net income here having income minus various deductions resulting in taxable income. Remembering deductions for taxes is good. Therefore, we're typically looking for more of them noting the difference between the adjustments to income or above the line deductions and the below the line deductions being the above the line deductions do not have to clear a hurdle such as the standard deduction before you get a benefit from them whereas the itemized deductions do typically have to clear the hurdle of the standard deduction before they become beneficial. First page of the form 1040 we're looking at line 12 standard deduction or itemized deduction taking the greater of the two. Our focus here the itemized deductions which come from Schedule A. Here is the first half of the Schedule A itemized deductions. We can see the categories on the left although this isn't the entire schedule. This gives us a look at the standard deduction hurdles that we have to be clearing which will be dependent largely upon the filing status. Single filers having a 13,850 standard deduction we would have to clear to then itemize doubling that to 27,700 if married in the middle head of household 20,800 and then if over a certain age and or blind we have increases to the standard deduction. Single filer could be one or two married filer two people with two items so you have one through four related standard deductions on the right and then we have the head of household and so on. So now we're continuing to look at our state tax deductions. Remember in the general premise we're talking about federal income tax here and therefore you would think you can't deduct the federal taxes to calculate the federal income tax because you would result in a circle reference. However, what about some state and local taxes? Can we deduct those on the federal income tax return? We did an intro into this in a prior presentation and are continuing with it at this point in time now looking at the state and local general sales taxes. So quick recap, you'll recall that the federal government pays for certain things. They should be paying for the military instead of out of our business with everything else but they do a lot of other stuff and whatever and then the state is responsible for taking care of certain things. First a word from our sponsor. Yeah, actually we're sponsoring ourselves on this one because apparently the merchandisers they don't want to be seen with us but that's okay whatever because our merchandise is better than their stupid stuff anyways. Like our CPA six pack shirts a must have for any pool or beach time mixing money with muscle always sure to attract attention. Yeah, even if you're not a CPA you need this shirt so you can like pull in that iconic CPA six pack stomach muscle vibe man. You know that CPA six pack everyone envisions in their mind when they think CPA. 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If you would like a commercial free experience consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com such as law enforcement on the state side of things for example the state then has to come up with some way to pay for the things it's responsible for but it's not required to use the same tax system such as implementing a income tax system because it's sovereign from the federal government so it might decide that a sales tax is more appropriate for the state so therefore the states are going to have different tax taxes for state and local taxes then you might see on the federal government and the states could differ from one another so when we come to the question of should we be able to deduct state taxes on the federal side it becomes confusing because not all states are the same in the format of how they're going to be calculated in the state tax we also have the normal confusion of the federal tax having an income tax system means that the natural types of things we should be able to deduct are business things things that we needed to expand in order to generate the revenue and if we had to expand sales tax or state taxes to generate business revenue you would think it a legitimate deduction but these itemized deductions are typically other kind of deductions that don't really fit that mold and they've allowed basically some state taxes to be deductible as itemized deductions for federal income tax calculations so some states like California for example have a state income tax which is the tax that you would typically take because it's going to be the greater than the sales tax when you're trying to see if you can calculate tax as a deduction as an itemized deduction but some states don't have an income tax in the same way and therefore you might have to calculate the sales tax so to be fair to those states to give them the same benefit and sovereignty to tax the way they want a tax you would think you'd have to allow the sales tax as something deductible or remove the deduction for the state tax as an itemized deduction so now we have to include the sales tax so now the question is well how exactly are we going to do that so if you elect to deduct state and local general sales taxes instead of income taxes you must check the box on line 5A so now we're saying we're not going to be using the state taxes to deduct on schedule A but rather the sales taxes I believe before that it used to be that they only allowed like state income taxes which again was clearly benefitting certain states who modeled their state taxes after the federal income tax most likely in an attempt to basically subsidize themselves whereas other states didn't subordinate themselves to the government in that way because they said that we're going to apply the tax we think is best for our place and we're not going to listen to the federal government and be under their thumb in that way and you see this tension that ends up happening and then they added the sales tax so that you could basically include the sales tax to try to even things out so to figure your state and local general sales tax deduction you can use either your actual expenses or the optional sales tax tables so this is going to be a little bit more difficult because sales tax is on everything you buy so does that mean that you have to track the actual sales tax that you paid which is kind of unusual because typically when we buy something we just record it at the price we purchased we don't break out the sales tax that we paid for it so possibly we can just use tables which will give us like an estimate of the sales tax or we might use the actual sales tax options and that might be the case if for example we purchased something large if we purchased something large in other words we probably paid an average sales tax higher than the average person in our income bracket or whatever that you would think the tables would be based on and therefore it might be beneficial to calculate the actual sales tax as opposed to using tables so actual expenses generally you can deduct the actual state and local general sales taxes including compensating use taxes you paid in 2023 if the tax was the same as the general sales tax rate so food clothing and medical supplies sales taxes on food clothing and medical supplies are deductible as a general sales tax even if the tax rate was less than the general sales tax rate so this is kind of an interesting situation where they're saying it should be basically the general sales tax rate that we're looking at but you will recall that if someone applies a sales tax the rule that people will try to fight against it the people that are against the sales tax for whatever reason will try to say that the sales tax is a regressive tax falling more heavily on lower income individuals who have less discretionary income spending all of their income on necessities like food, clothing and medical supplies or something like that the way to get around that if you still want to use a sales tax would be to say we're going to lower the tax or possibly remove the tax for those necessities and then the sales tax you would think you would eliminate that argument although it doesn't in practice the people that don't like sales taxes and want an income tax which are usually most of the media the legacy media try to just label something so I'm not saying we should have a sales tax especially on the federal level or anything I'm just saying to look at things fairly that's what kind of ends up happening so motor vehicles sales taxes on motor vehicles are deductible as a general sales tax even if the tax rate was different than the general sales tax rate however if you paid sales tax on a motor vehicle at a rate higher than the general sales tax you can deduct only the amount of the tax that you would have paid at the general sales tax rate on that vehicle so now you have some manipulation where the sales tax is higher than the general sales tax rate where we have maybe the cap that could be at the normal sales tax rate include any state and local general sales taxes paid for the least motor vehicle motor vehicles include cars, motorcycles, motor homes recreational vehicles sports utility vehicles trucks, vans, off-road vehicles and so on so clearly if you made a big purchase like a motor home or some kind of vehicle or a van or something then it's likely that you might not want to just use the sales tax tables because you're going to be paying a significant amount of sales tax because you purchased a large item that's going to be useful not only to the current period but to future periods and therefore there's going to be a bigger tax burden on that you would think so trade or business items don't include sales taxes paid on items used in your trade or business so here we come up with that issue of the idea of the sales of an income tax when we're talking about the federal income tax that we're calculating is that we should be taking those expenses as deductions that were needed to generate the revenue so you would think if for example on the schedule C if you bought stuff that you used in the business then you get to deduct the sales tax on it so if you bought supplies it's not like you're going to say I bought the supplies for $100 then I paid $20 sales tax and I'm not going to include the cost of the sales tax and the cost of the supplies no you're going to say it cost $120 basically and that's going to be the expense on the schedule C you would think generally well if you included that $20 of sales tax in the schedule C in the cost of the supplies you can't also include that $20 in the calculation on the schedule A so we have that would be double dipping and we have the same kind of issue in part because we have this weird phenomenon where the schedule A is taking into consideration the deductibility of things that aren't natural to a federal income tax which are those things needed in order to generate revenue on the business but now because they allow you to deduct on the schedule A personal expenses because you lived in a certain state and they taxed you it's not part of a business expense therefore if you bought supplies for the personal side of things you bought personal stuff you would think you wouldn't be able to deduct the sales tax usually you would only be able to deduct it if you bought stuff for the business deduct on the schedule A personal sales tax in essence you can imagine situations where we have this double dipping scenario where we have to be careful of making sure that we only deduct it in one place so instead go to the instructions for the form you are using to report business income and expenses to see if you can deduct these taxes refund of general sales taxes so if you received a refund of state or local general sales taxes in 2023 for amounts paid in 2023 reduce your actual 2020 state and local general sales tax by this amount so if you paid sales tax and for whatever reason you got a refund and it happened in 2023 before you filed the return for 2023 then of course you can just make the adjustment and say ok well just reduce the amount of sales tax I paid because I didn't actually pay that because they gave me a refund for it but if you receive a refund of state and local general sales tax in 2023 for prior year purchases don't reduce your 2023 state and local general sales taxes by this amount so now you are going to say I got a refund in 2023 but the sales tax that I paid was in the prior year so that doesn't so if you got the refund in 2023 it's like well what should I do about that should I reduce the taxes in 2023 that I paid because and the answer generally is no and you might say well I should because last year in 2022 I got a deduction maybe for the sales tax if I got a deduction for the sales tax last year do I have to go back and do a refund of the taxes last year because I didn't really pay that sales tax because they gave me a refund in 2023 no shouldn't do that either what should I do well if you got a deduction for it last year similar to the refund of a state tax if you got the benefit last year you might have to include it in income in other income this year would be the general idea so however if you deducted your actual state and local general sales tax in the earlier year and the deduction reduced your tax you may have to include the refund and income on schedule warm 1 form 1040 line 8z now this situation mirrors is similar to the state income tax situation however less common because with state income taxes as with the federal income taxes they're designed to over pay and get a refund so you're almost certainly going to get a refund for the state taxes if you're following the system the way they wanted it to be followed and then the question is is going to be well did you get a deduction as an itemized deduction last year if you did then you would have to generally include it in income with sales tax it's different because you don't always get a refund for sales tax that would be somewhat more of an unusual thing you pay the sales tax is what it is they can calculate it properly at the point that you pay it and therefore you're less likely to get a refund but if you did get a refund in a similar scenario in the current year that you deducted in the prior year then you don't lower the sales tax in the current year but instead possibly include that refund as income in the current year so optional sales tax tables so instead of using your actual expenses you can use the 2023 optional state sales tax table and the 2023 optional local sales tax tables at the end of these instructions to figure your state and local general sales tax deduction so if you didn't make a big purchase like a boat or a car or a mobile home or whatever then you might say hey look I just want to take the average sales taxes in essence is what you would think that these tables would then be calculating and that would be both the easy thing to do and usually somewhat accurate if again you have normal purchasing habits however if you purchase something that's going to be beneficial for multiple years in the future big ticket items in other words typically then of course that's when you might have to say hey look I'm not going to use the tables because I bought this big old thing and it's going to have a higher sales tax so I got to actually calculate that so you may also be able to add the state and local general sales taxes paid on certain specific items so to figure your state and local general sales tax deduction using the tables complete the state and local general sales tax deduction worksheet or use the sales tax deduction calculator you can find that at the iris.gov and you can calculate that if you want an iris.gov obviously tax software is great for that as well so it can help you to use those tables and and punch in the worksheet so you can kind of compare actual sales tax calculations versus the tables to do some comparisons possibly caution if your filing status is married filing separately so remember if you're married you only really have the option separately of married filing joint married filing separate married filing joint is typically better you can't go back to head a household or single unless you're divorced or separated so if you file married filing separate it's not the same as head of household or single and the iris will often severely limit some of the potential benefits so if your filing status is married filing separately both you and your spouse elect to deduct state sales tax your spouse elect to use the optional sales tax tables you also must use the tables to figure your state and local general sales tax so again the iris might say it sounds like someone's trying to double dip and it's useful to think from the iris aside and a tax manipulator side not because we want to be tax manipulators but because we want to understand the code so that we can understand what is happening here right so the iris so what would happen if someone's trying to manipulate things and they didn't change this if I was married someone's married they can say okay I bought a big item so what I'm going to do is I'm going to write off the the boat and take my actual sales tax on my return and then I'll file separately and my spouse then will take the general sales tax so you're kind of double you're kind of double dipping in that way right so because once taking the general sales once taking the actual so again the iris is saying well you can't do that if you file separate and so on so here's here's the table I won't go through it in detail here you could check it out we'll talk about it a bit in the calculation for when we get to the software instructions for the state and local general sales tax deduction worksheet line number one so let's just walk through it a bit just to get an idea of it on the line by line so if you lived in the same state for all 2023 enter the applicable amount based on your 2023 income and family size from the 2023 optional sales tax tables for your state so read down the at least but less than columns for your state and find the line that includes your 2023 income so if filing married separately don't include your spouse income note the family size column refers to the number of dependence listed on page one a form 1040 or 1040 SR and any condition sheets plus and plus you and if you are filing a joint return your spouse so if you are married and not filing a joint return you can include your spouse in family size only in certain circumstances which are described in publication 501 so obviously if you're trying to create a table for how much someone paid with the sales tax you can imagine just to get conceptually how would that work well you'd have to say where do I live what's the cost of living in the particular state and locale that I live in what's the income that I have because we can talk about the average income levels and average spending for that income level and then we can think about family size how large is the family and then we can look at trends in terms of spending per family size the tables possibly built on kind of actuarial type of calculate or you know average type of spending calculations based on that so income your 2023 income is the amount shown on your form 1040 or 1040 SR line 11 plus any non-taxable items such as the following so tax exempt interest so veterans benefits non-taxable combat pay workers compensation so these are items that aren't included in income but if we're trying to figure out the average sales tax there are things that you have received although not subject to income tax still having an impact on your spending habits which will have an impact on your sales tax calculation is the general idea so non-taxable part of social security and railroad retirement benefits non-taxable part of IRA pension and or annuity distribution don't include rollovers obviously rollovers you don't have access to public assistance payments now this is getting complicated note software is useful but we're getting just the concept down here what if you lived in more than one state so if you lived in more than one state during 2023 use the following steps to figure the amount to put online one of the worksheet so clearly this is going to happen with some people this is going to get confusing because if I'm trying to find the average sales tax of a particular location what if I lived in multiple locations that have different sales taxes and so on number one look up the table amount for each state using the rules stated earlier if there's no table for the state the table amount for that state is considered to be zero number two multiply the table amount of each state by the fraction the number of of which is the number of days you lived in the state during 2023 and the denominator of which is the number of days in the year so now we're using our good old ratio calculation to say this is the percentage of the year in essence I lived in one place versus the other three so if you also lived in a locality during 2023 that imposed a local general sales tax complete a separate worksheet for each state you lived in using the prorated amount from step two for that state online one of its worksheet in other words you're calculating it for one state looking at the fraction of the year in essence that you're in that state the other state that you moved to might not have a sales tax you might have moved to a state that has an income tax and not a sales tax in which case then you would have the income tax but you might have moved to another state that does have the sales tax and then you'd have to do the same kind of calculation with the proration rate of the fraction of the year in the other place so combine the prorated table amounts from step two and enter the total online one of a single worksheet software is helpful for this so let's give an example you lived in state A from January 1st through August 31st 2023 that's 243 days and in state B from September 1st through December 31st 2023 that's 122 days and the table amounts state A is 500 the table amount for B is 400 so you would figure your state general sales tax as follows so you've got state A you lived in it 243 days out of we're talking a whole year which has 365 days in it about times 500 so that's going to give us the 333 and then state B we lived the 233 days which you know the 243 sorry the 122 the 243 and the 122 adding to the 365 and so therefore we got the 122 over the 365 times the 400 so now we've got the 134 and the total then is going to be the 467 that we can possibly deduct if taken the sales tax deductions on the schedule A itemized deductions so if none of the localities in which you lived during 2023 imposed a local general sales tax enter 467 online one of your worksheet so this is the state you might also have the local sales tax otherwise complete a separate worksheet for state A and state B enter 333 online one of the state A worksheet and 134 online one of the state B worksheet line 2 so if you check no box enter 0 online 2 and go to line 3 if you check the yes box and lived in the same locality for all of 2023 enter the applicable amount based on your 2023 income and family size from the 2023 optional local sales tax tables for your locality read down the quote at least but less than quote columns for your locality and find the line that includes your 2023 income see the instructions for line one of the worksheet to figure your 2023 income the family size column refers to the number of dependents listed on page one of form 1040 so that's on page one of the form form 1040 SR and any continuation sheets plus you and if you are filing a joint return your spouse if you are married and not filing a joint return you can include your spouse in family size only in certain circumstances so what if you lived in more than one locality so now you have state and local sales tax right so you might add the sales tax could be you could be hit by the state and the locale so if you lived in more than one locality or during 2023 the total amount for each locality using the rule stated earlier if there is no table for your locality the table amount is considered to be zero multiple the table amount for each locality you lived in by a fraction same method that we're now using for the localities that we use for the states the number of the fraction is the number of days you lived in the locality during 2023 and the denominator is the total number of days in the year 365 if you lived in more than one locality in the same state and the local general sales tax rate was the same for each locality enter the total of the prorated tables amounts for each locality in that state line two otherwise complete a separate worksheet for lines two through six for each locality enter each prorated table amount on line two of the applicable worksheet let's see an example you lived in locality one from January 1st through August 31st 2023 243 days and in locality two from September 1st through December 31st 2023 that's 122 days the table amount for locality one is $100 the table amount for locality two is $150 so just to recap here we had the issue if you moved from state to state for state taxes and now we're looking at locality which could mean that you moved from one place to another place within the same state but have different localities therefore the local sales tax is different even though you might have the same kind of state sales tax situation or you might have moved from one state to another state which have both state and local sales tax in each place or any kind of combination in between so you would figure the amount to enter on line two as follows note that this amount may not equal your local sales tax deduction which is figured on line six of the worksheet so locality one you've got the 100 times the 243 days over the days in the year 365 so you have your fraction that comes out to 67 so locality two was 150 from the table and then you had 122 days you lived there over 165 365 days in the year that comes out to 50 so you're at 117 line number three so if you lived in California check the no box if the combined state and local general sales tax rate is 7.25% otherwise check the yes box and include on line three only the part of the combined rate that is more than 7.25% if you lived in Nevada check the no box if your combined state and local general sales tax rate is 6.85% otherwise check the yes box and include on line three only the part of the combined rate that is more than 6.85% alright but what if your local general sales tax rate changed during 2023 oh no so now you're living the same place but the rate changed in the year because they passed legislation to increase it most likely if you live in California they increase it so if you check the yes box and your local general sales tax rate changed during 2023 figure the rate to enter on line three as follows multiply each rate for the period at it was in effect by a fraction so we use the same kind of fractual of a year calculation method so the number of the fraction is the number of the days the rate was in effect during 2023 and the denominator is the total number of days in the year 365 enter the total of the prorated tax rates on line three alright let's look at an example let's see how it works in action locality one imposed a 1% local general sales tax from January 1st through September 30th 2023 that's 273 days the rate increased to 1.75% for the for the period from October 1st through December 31st 2023 that's 92 days so you would enter 1.189 on line three figured as follows so you got January through September one times the number of days 273 over days in a year 365 there's the 7.748 in October 1st through December 31st you got the 1.75 times the 92 days fraction of the year over the 365 adding those up that's how you get to the 1.189 okay but what if you lived in more than one locality in the same state during 2023 complete a separate worksheet for line two through six for each locality in your state if you lived in more than one locality in the same state during 2023 and each locality didn't have the same local general sales tax rate to figure the amount to enter on line three of the worksheet for each locality in which you lived except a locality for which you used the 2023 optional sales local sales tax tables to figure your local general sales tax deduction multiply the general sales tax rate by a fraction the number of the fraction is the number of days you lived in the locality during 2023 and the denominator is the total number of days in the year 365 alright let's not do another example let's go over the balls to show you it here similar concept being applied for this one just want to point out at this time it's very tedious right so however it will be dependent upon the state that you are in so the question for you will typically be if you're a tax preparer do I want to focus on people in my state in which case I will have the general scenario for that place do I want to take on more complex returns which have multiple states people living in other states or possibly have multiple states that they have lived in the return and noting that softwares is of course going to be quite helpful for these calculations so if you do the proper data input hopefully the software can help you to do some of these somewhat tedious calculations and allow you to then be able to explain why the calculations are happening happening deconstruct them so that you can double check that the calculations are done properly and communicate to say a client for example what the software is doing