 and welcome to this session in which we will discuss itemized deductions that goes on Schedule A and specifically we're going to be focusing on the taxes. Just to review itemized deductions are deductions from adjusted gross income. What does that mean? It means on your form 1040 on your tax return there is a line called adjusted gross income and those deductions comes after your adjusted gross income not before not for AGI from AGI. Itemized deductions include non-trade business expenses they're usually personal in nature they could include employee some expenses you incur as an employee or an or as investment expenses. In this deduction they only make sense or they are only useful not make sense they are only useful if they are greater than your standard deduction. So if your itemized deduction ID is greater than your standard deduction then they are useful then you can benefit from them why because this deduction is given by the government and it's given every year based on your filing status for example married filing jointly for example and this is not a number because it changes every year let's assume married filing jointly is 30 000 this is not true i'm just making up this number you add up all of your itemized deduction and if they are greater than 30 you would use your itemized deduction if they're not then you would use your standard deduction and those itemized deduction would include medical and dental expenses which we already covered taxes paid which we'll discuss in this session interest paid on mortgage and investments we'll discuss in the next session the following session charitable contribution and miscellaneous expenses which we already discussed in various sessions and as a reminder those miscellaneous expenses are suspended between the year 2018 and the year 2025 and this is what schedule a would looks like this is the medical and dental expenses we already covered this session in this session we focus on taxes paid such as state and local taxes state state and local taxes or general taxes which we'll talk about with this in a moment state and local real estate taxes state and local personal property taxes and you could have other taxes so those are the ones that are deductible but don't worry we're going to look at each one of them separately and learn about the rules so let's go ahead and get started before we proceed any further i have a public announcement about my company farhatlectures.com farhat accounting lectures is a supplemental educational tool that's going to help you with your cpa exam preparation as well as your accounting courses my cpa material is aligned with your cpa review course such as becker roger wiley gleam myles my accounting courses are aligned with your accounting courses broken down by chapter and topics my resources consist of lectures multiple choice questions true false questions as well as exercises go ahead start your free trial today so the first thing we want to know is we kind of understand why do they give you a deduction for taxes it doesn't make any sense if i'm paying my taxes why are they giving me deduction for other taxes well here's what the federal government says since you already got paid that money let's assume ten thousand dollars well first the federal government's going to take their share then the state then the local and we have other taxes we have phyca social security phyca medicare and we have other taxes when it comes to the state and local taxes what the federal government is saying since you are paying taxes multiple times on the same amount of money we're going to give you a deduction for the state and for the local so because it's affecting your ability to pay your taxes because you're receiving less money because the state and the local government is also taking dirt chunk of money therefore we're going to give you a break we're going to we're going to let you deduct dose you may or may not be able to deduct them but we're going to allow you to do so so state local foreign income taxes and real property taxes real property tax means is simply put you have a home are deductible in the year paid now when it comes to real property taxes which we'll talk about this later special assessment taxes assessed for local benefits which we'll see that that's not included and we'll give you an example later okay actually here's an example for example special assessments for streets sidewalks curbing and other similar improvement what happens sometime is this for example your property taxes your real property taxes is eight thousand dollar then the city fixes the sidewalk and for that year they will add a thousand dollar they call it special assessment well this one additional thousand dollar because it's for the special assessment not deductible state and local property taxes personal notice not real real is real property personal as long as that tax is based on value has to be tax and based on value it's called ad valerian are deductible in the year paid other taxes would include faika excise taxes those are not deductible unless we're dealing with faika and it's for a business or production of activity that's different anything anything that says fees fees are not taxes and fees are not deductible for example inserting state you pay a fee for having a car that's not deductible inserting state you pay a tax based on the value of your car that's deductible and this is a list of what's deductible and what's not i strongly recommend if you want to memorize memorize what's deductible what's deductible state and local income taxes or sales or use tax so you have to choose between the two we'll talk about this real estate property property taxes taxes on your home personal property could be deductible as long as that personal property taxes are based on value in some cities and some states they do have those taxes and foreign income tax what's not deductible so if you know this i would say if i'm gonna memorize i will memorize this section not this section not deductible is federal income taxes that's a dog if you're paying taxes why would i give you a deduction for paying me right if you're paying those taxes social security and medicare which is faika not deductible federal excise taxes not deductible custom duties transfer taxes anything you says fees sales tax on personal item not deductible notice it says personal here that's different than personal property taxes based on value estate taxes inheritance taxes gift taxes taxes on foreign property this used to be deductible no longer deductible be careful the cpa exam loves to teach two test noodles let's talk a little bit more about property taxes simply property taxes if you own a home in the us for personal use depending where you live it could range from 3000 up to some places depending on how big is your house up to 50 000 in some houses like in beaverly hills california right now if you have a property that's used for business then those property taxes will be on schedule c now if your property is rental it will be on schedule a as we mentioned special assessment not deductible if they fix the sidewalk and increase the property tax by 500 that's not deductible what you have to be careful is when the property is sold the real taxes for the year should be split between the seller and the buyer if that's not done right if it's not split adjustment must be made to the seller's profit and the buyer cost basis so if you don't split the taxes appropriately then the deduct then you have to adjust the the seller and the buyer let's take a look at an example to illustrate this concept now i'm gonna mention this i should not mention this but i should i heard again i heard that this could be you know it could appear on the cpa exam in a form of simulation now this is this is a straightforward exercise i have everything for you but what they do on the cpa exam they might give you the closing paper and they may show you they don't tell you how much was the home was sold you have to see they don't tell you what the total taxes are they might show you bills from the county so don't panic just take a look and let's see how we would approach this problem Stephanie sold her house her beach house to Jason on march 15 for half a million before the sale Stephanie paid the real estate taxes of five thousand dollar for the calendar year so here's the whole the full year the full year you have to pay five thousand dollar in taxes what Stephanie did she paid that tax early on in the year and some people do that but she happened to sell her house on march 15 now for income tax purposes who gets the deduction that Stephanie can Stephanie the dog the full five thousand and the answer is no what Stephanie has to do is the following this is what's going to happen Stephanie will have to figure out how much of the five thousand she is responsible for this is how we do it we would say she owned the house in january 31 days february 28 days assume it's another not another leap year and march 15 all in all 74 days we're going to take 74 divided by 365 and that's going to give us one thousand and fourteen dollars so her share is one thousand and fourteen dollars only and what is jason share jason share which kind of she paid that on his behalf three thousand nine hundred and eighty six so what's the basis for jason well jason paid half a million yes jason paid half a million yes indeed but included in that half a million the assumption is it's a prepaid taxes by Stephanie three thousand nine hundred and eighty six therefore we're going to take half a million minus three thousand nine hundred and eighty six and it's his basis is four hundred ninety six thousand and fourteen dollars now what's the proceeds what's the proceeds for Stephanie well Stephanie leave half a million dollar that's how much she received but included in that half a million dollar the assumption is jason included in that half a million took into account that she paid three thousand nine hundred and eighty six therefore she have to deduct her proceeds three thousand nine hundred and eighty six therefore her proceeds is four ninety six and fourteen dollars now we have to keep in mind if let's assume Stephanie sold the beach the property to jason and it's the opposite jason paid the real property then we would have to add the difference then we have to add what i'm going to do in a separate recording i will work the simulation and as an example because again i believe this topic is important let's take a look at state versus local and use tax well i told you that's deductible but you have to choose between either the state and local income tax or sales and use tax for the state and local income taxes let's assume we are dealing with year x2 you have to understand anything that you pay in year x2 is deductible so if you are working you might have a w2 for year x2 and w2 will have what held amount that's the that's deductible also for for year x2 let's assume you are again this is x2 this is the year that we are working with you might pay in year x2 you might make some payments for year x3 so on x2 for example you might prepay some taxes for year x3 that's also deductible in x2 and also in year x2 you might pay for taxes you owe for year x1 as long as you pay it in year x2 you add up everything in year x2 so simply put sales and use tax is deductible in the year paid it doesn't matter for it does not matter for which year it's when you pay it it's the year during the year that you pay it now for sales use tax you can either deduct the actual sales what does what sales and use tax sales and sales tax is when you buy stuff from the store and you pay a sales tax use tax is when you buy property from another state for example i live in pennsylvania okay i live in pennsylvania and next to me is the hellaware okay now in hellaware there's no sales tax many people what they do they go from pennsylvania to hellaware they buy cars they buy you know smart tv's they buy computers i know people from new york they they buy the computer and they ship it to hellaware to apple store therefore it's as considered as purchase in apple then they ask the apple store to ship it why because there is no sales tax in hellaware so what happened is this the law is this if you purchased something from another state for example if i let's assume i purchase a car from hellaware and i paid for it 20 000 i drove it to pennsylvania and i did not pay any sales tax because i bought it in hellaware at the end of the year i have to tell the state i'm responsible for six percent that's called the use tax so sales or use tax you have to keep track of either or or the irs they have a table and based on your income you could choose that number okay now what you can do if you purchase motor vehicle boats and large items you can add them to that number from the irs all what you have to know is this most people you if they're gonna be doing anything it's state and local income unless you are purchased you are making large purchases and you're keeping track of it okay now bear in mind all in all there's a limit on deducting taxes the limit is ten thousand dollar for me for married filing jointly and five thousand for filing separately this provision is made based on the tax from the tax cuts and jobs act of 2017 a policy administered by the trump administration now why did they do that to simplify the process what they did is they limited your tax deduction to ten thousand that's it however they increased they increased the standard deduction so rather than keeping track of all these taxes they would say we're gonna make it easy for you that's one that's one understanding of it the other understanding is this it was to penalize certain state who are the certain state the democratic states for example new jersey new york where the property taxes are high property taxes are high so if you own a home you pay a lot of taxes so they're saying president trump is trying to penalize those states because now they'll pay their taxes and they don't get a deduction because the maximum you can deduct is how much ten thousand okay so here simply put you can deduct ten thousand they limit you now we did cover medical and dental expenses on schedule a when this session we cover taxes you paid and guess what you know what in the next session i'm gonna cover interest paid now what should you do now go to far hat lectures and work mcq's multiple choice questions that's going to help you understand this topic better this is how you know that you know it is your practice good luck study hard and of course stay safe