 Income tax 2022-2023. Taxes you paid part number one. Let's do some wealth preservation with some tax preparation. Most of this information can be found on the Schedule A Taxure 2022 instructions at the IRS website IRS.gov IRS.gov when looking at the income tax formula we're focused on the itemized deductions remembering that the first half of the formula is in essence an income statement although a strange one where we have income the equivalent of expenses being the deductions the equivalent of net income being the taxable income 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 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 our objective flipped on its head we want taxable income in other words as low as possible as opposed to normally when we want net income as high as possible if we go through the equation we've got the income line we've got what you might call the above the line deductions the adjustments to income to get to that subtotal the subtotal being that important subtotal of AGI because that's the thing used to calculate phaseouts for income levels for deductions and credits and then we have what you can call the below the line deductions which is the greater of the standard or itemized deductions we only take the itemized deductions if they're greater than the standard deduction and we're focusing in on the components of the itemized deduction at this time this is the first page of the 1040 if we look at line 12 we got the standard deduction or itemized deduction this is the itemized deduction schedule a we're focused here on taxes remember that whenever you see itemized deductions the first thing that usually comes to your mind is do they own a home because if they do those are the big ones those are the home mortgage interest and the property taxes and then you can get into the weeds once you've cleared the threshold to be itemizing to pick up everything you can beyond that point remember that the standard deduction thresholds are 12,950 for single it's double to 25,900 for married filing joint 19,400 for head of household if the client or yourself are nowhere near those numbers to be able to itemize it should be a more basic return always return to basic life then because you're just going to be taking the standard deduction that said we're talking about taxes now now note the first thing you might ask is well if we're talking about taxes how can they be deductible if we're trying to calculate the federal income tax and the answer is because there's a separation between state and local taxes and the federal taxes there should be a separation of duties between what the federal government does and what the state government does the federal government primarily being responsible for keeping us safe having the military and so on and the state and local governments are being responsible for taking care of what's happening on the state and local levels the state and local governments should be sovereign to some degree to do their own form of taxation however they want to tax income tax or or sales tax or whatever they want to do and they're and so so then the question is are the state and local taxes then deductible for the federal income tax level and the answer is well some of them are and some of them are not should they be taxable or deductible on the federal level should you be able to deduct state and local taxes on the federal level that's kind of another question my response would be that if you were starting this from scratch I would not say that you would want to deduct state and local taxes on the federal income tax because it gets the federal government too much influence I think on the state and local governments and it tends to subsidize certain types of taxations and certain states that said however now that we've already got the taxes in place and people are dependent upon them and have made long-term plans upon them it's difficult to adjust it even if it wouldn't have been a good idea in the first place to put them in you know in the first place and we saw this debate happen a few years ago when they put some caps on the state and local taxes which will take a look at as we go through some of the state and local tax stuff but that's the general layout so now the question is okay they're separate you got the state taxes you got the federal income taxes which taxes then are deductible for federal income tax purposes so taxes you pay taxes you can't deduct so first we'll talk about the ones you cannot deduct the federal income tax of course you cannot deduct because that would be a circle reference we're calculating the federal income tax and most excise taxes and then you got the Social Security Medicare federal unemployment or FUTA these are the payroll taxes can't deduct the payroll tax for federal income tax and railroad retirement RRTA then you got the customs and duties can't deduct federal estate and gift taxes the death taxes a different kind of federal tax so if you died and you're quite wealthy then or over a certain threshold at least then the iris comes in you know picture corpse and you can't deduct that as well however C line 16 later if you had income in respect to a decedent certain state and local taxes including tax on gasoline and and car inspection those aren't typically deductible those are types of taxes that are trying to be tied to how much you use a public good so the gas tax is supposed to tax people more who use the roads which is a public good and so on and so forth you might be able to deduct gasoline for example if you had a business a schedule C but you can't just deduct the gas tax on schedule a which is what we're talking about here so fees assessments for sidewalks or other improvements to your property tax you paid for someone else and license fees for example marriage license drivers and pet licenses you can't deduct your pet license or anything foreign personal and real property taxes so line 5 the deduction for state and local taxes in generally limited to ten thousand dollars five thousand if married filing separately this is the law that was passed a few years ago and and it caused a lot of kind of debate note that when you're deducting the state taxes the other thing that's kind of interesting is you've got this this difference between the high cost of living states and the low cost of living states and if you're able to deduct the taxes it tends to subsidize the high cost of living states like California and New York typically the ones that have a lot of taxes and income taxes related to it so so when they capped that it was kind of a it was kind of an interesting thing because more wealthy individuals that live in higher income states we're are going to be hurt more by that which is why in the first place it probably shouldn't have been in there in the first place where you have these taxes because it kind of subsidizes certain types of behavior and what not in terms of taxes but it is what it is so it is what it is it is what it's capped at the 10,000 now so you got to be aware of that state and local taxes subject to this limit are the taxes that you include on lines 5a 5b and 5c safe harbor for certain charitable contributions made in exchange for a state or local tax credit so if you made charitable contributions in exchange for a state or local tax credit and your charitable contribution deduction must be reduced as a result of receiving your expecting to receive the tax credit you may qualify for a safe harbor that allows you to treat some or all of the disallowed charitable contribution as a payment of state and local taxes somewhat unusual of a situation but you know that would usually come up in a more higher income type of situation for tax planning purposes possibly the safe harbor applies if you meet the following conditions you made a cash contribution to an entity described in section 170c in return for cash contribution you received a state or local tax credit you must reduce your charitable contribution amount by the amount of the state or local tax credit you receive if you meet these conditions and to the extent you apply the state or local tax credit to this or a prior year state or local tax liability you may include this amount on line 5a 5b or 5c whichever is appropriate out to the extent you apply a portion of the credit to offset your state or local tax liability in a subsequent year as permitted by law you may treat this amount as state or local tax paid in the year the credit is applied for more information about this safe harbor and examples you can see treasury regulation 1.164-3j us possession taxes so include taxes imposed by us possession with your state and local taxes online 5a 5b and 5c however don't include any us possession taxes you paid that are allocable to excluded income tip you may want to take a credit for us possession tax instead of a deduction so now you've got this question in terms of which one would be benefiting you more a deduction or a credit tax software often helps to make these kind of distinguishing questions you probably want to run it both ways and see which would be most beneficial if you're in that situation you can see the instructions for schedule 3 form 1040 line 1 for details line 5a state and local income taxes if you don't elect to deduct general sales tax include online 5a the state and local income taxes listed next so note that when we when we have the taxes that were deductible for the federal income taxes it used to be I believe it was just the state income taxes that were deductible which was kind of interesting because again the states are sovereign to tax any way they want to be taxing so when they have that law in place it really severely benefited or or burdened however you want to look at it the the states that had an income tax were were the ones that are going to benefit from that kind of situation and if they had like some other tax system that they thought was better for their particular state such as a sales tax then they didn't benefit so then they tried to adjust that so that so they couldn't remove the state taxes what they probably should have done is never have the state taxes deductible in the first place but they can't really remove that so they try to even things out by then adding the sales taxes to be deductible for the states that choose to have a sales tax and so now we've got this this system where you can deduct the state taxes and and you get a benefit if you're in a state that has the state income taxes like California for example then you can deduct those and if you're in a state that has a sales tax then you get some benefit for the sales tax so state and local taxes withheld from your salary raise your salary during 2022 so if you're in like California with a state tax then the withholdings are going to be much the same they try to mirror the same structure as the federal income tax system so for forms w2 we'll show these amounts so forms w2g 1099g 1099r 1099 miscellaneous and 1099nec may also show state and local income taxes withheld however don't include online 5a any withheld taxes you deducted on other forms such as schedule c e or f so it's usually fairly straightforward if you're in like California you're going to have the w2 for example which will show the withholdings so state and local income taxes paid in 2022 for a prior year such as taxes paid with your 2022 state or local income tax return don't include penalties or interest now when I say it's pretty straightforward I mean it's pretty straightforward with the data input and usually when you look at the withholdings for the state you're thinking about the state income tax return the tax calculation and then how much you paid but also note that you paid that taxes out of your paycheck to the government and that's the thing that might be deductible as a schedule a itemized deduction if you have the capacity to take the itemized deductions all right once again stake in state and local income taxes in 2022 for a prior year such as taxes paid with your 2021 state or local income tax return don't include penalties or interest so this is the other kind of funny thing you've got this cutoff problem because it's usually going to be determined on a cashed based system right so you might have made a payment for 2021 tax year for the state taxes which you actually paid in 2022 because you paid it because you owed money when you made your taxes but you actually paid it in 2022 so you might be able to deduct that as an itemized deduction in 2022 note that your your software often is quite useful to help you with these cutoff cutoff situations as well and it's useful to see what the software does and then deconstruct it and and try to figure out okay are we in a cash based or a cruel based system we're typically on a cash based kind of system here so state and local estimated tax payments made during 2022 include any part of a prior year refund that you chose to have credited to your 2022 state or local income taxes so now if you had a refund in 2021 for example and you said that you wanted to apply it to the estimated payments so maybe you have a schedule C for example and then you then you did your taxes for tax year 2021 by April 15th of 2022 let's say and then you got a refund from the state and you said okay just take that refund and make it my first estimated tax payment applying it to the taxes paid in 2022 well that would be kind of like the same thing as if they gave you the refund and then you gave it back to them and said now this is my payments for 2022 so you're paying taxes in 2022 so that might be included in itemized deductions if you're itemizing for state tax deduction mandatory contributions you made to the California New Jersey or New York non occupational disability benefit fund road island temporary disability benefit fund or Washington state supplemental workers compensation fund so mandatory contribution to the Alaska California New York New Jersey or Pennsylvania state unemployment fund don't reduce your deduction by any state or local income tax refund or credit you expect to receive for 2022 or refund of or credit for prior year state and local income taxes you actually received in 2022 instead see the instructions for schedule one so you might say hey look I if I if I paid the tax in 2022 but then I calculated my 2022 state taxes and I'm going to get a refund so what is that going to do so now what what do I have to do say this is my taxes that I paid in 2022 but then I'm going to get a refund in 2023 so shouldn't I have to take that refund that I know I'm going to get and reduce the amount that I paid by the amount that I'm going to get refunded and the general answer is you don't typically do that because the idea is going to be that we just want to keep it on a cash-based system if you paid it in 2022 you paid it and then when you receive the the refund in 2023 well if you have got a benefit from the deduction in 2022 as we talked on the income side then we'll include that state refund as income so that's why when we talked about the income side we said if you got a refund from the state you might have to include it in income you only include it in income if you got a benefit from the state tax deduction in the prior year now you might say hey that leads to some shady business that can happen right there because you might say well I'm just going to maximize the the payments my state taxes I'm going to pay a whole bunch of state taxes in 2022 lowering my my taxable income in 2022 and then I'm just gonna and then I'm gonna get the refund and I'll include it in 2023 so so there you can imagine someone trying to like manipulate the system that's the problem with a cash-based system and of course that would only be beneficial if like 2022 was a really high income year and you're like I'm gonna if it was beneficial to lower 2022 because in 2023 you're gonna have a low income year because you're not gonna make any money that year you made all the money this year and some whatever business you're in so you'd like to you know if you had income next year it's not gonna it's not gonna hurt you as much as you'd rather get the benefit this year right you have these timing problems that's the problem with a cashed based type of system versus an accrual based type of system but the benefit is it's easy or to do all right so state and local general sales tax if you elect to deduct state and local general sales tax instead of income taxes you must check the box online 5a so if you're in a state that doesn't have the the income tax then you should still get a benefit because you're still paying taxes it's just that now you're paying a sales tax which is generally gonna be higher than states that have an income stat tax except that in states like California and New York we have all kinds of taxes because they just waste money like crazy it's ridiculous in any case to figure your state and local general sales tax deduction you can use either your actual expenses or the optional sales tax tables so if you're using the sales tax tables it's quite easy to calculate but if you had actual sales some tax calculations that could be easier obviously it's difficult to know what your actual sales tax is because everything you purchased is gonna have a sales tax on it but if you have a if you have a large ticket item you bought a yacht or something then you're gonna have a large sales tax it's gonna be higher than the average tables that are gonna be used to calculate the sales tax so the actual expenses generally you can deduct the actual state and local general sales tax including compensating use taxes you paid in 2022 if the tax rate 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 motor vehicles sales tax on motor vehicles are deductible as a general sales tax even if the tax 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 if you paid some, you know, it's the general sales tax rate. So include any state and local general sales taxes paid for least motor vehicles. So you can see how, you know, businesses, if there's a deduction related to sales taxes, then you can, there's an incentive to try to manipulate the cost to be categorized as something that could be deductible like sales taxes. And you can see situations where they might say, well, that was applied to a higher sales tax so that you didn't get a deduction. But no, you have to use the general sales tax. So motor vehicles include cars, motorcycles, motor homes, recreational vehicles, sports utility vehicles, trucks, vans, and off-road vehicles. Caution, you must keep your actual receipts showing general sales taxes paid to use this method. Obviously that gets quite tedious because, again, you pay sales tax on everything you purchase, which is why if you're not buying big ticket items, sometimes the tables are just easier to use oftentimes. Trade or business items. Don't include sales tax paid on items used in your trade or business. 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. So the taxes on the trade or business, the schedule C is where you go for those items. So for example, if you bought a computer for personal use, then you might be able to deduct the sales taxes on the schedule A related to it as sales taxes. But if you bought the computer for business uses, then on the schedule C, the whole computer itself might be a deductible, including the sales tax, you would think. You might have to put it on the books and depreciate it, but you'd think you'd get the deductible capacity of the computer because including the sales tax because you're using the whole thing and you bought it in order to generate revenue for the business. We'll talk about schedule C businesses later and you can't double dip. You can't say, I'm going to deduct the whole computer and the sales tax on the schedule C and deduct the part of the sales tax on the schedule A. That would be taking two deductions for the same thing. Refund of general sales taxes. If you receive a refund of state or local general sales taxes in 2022 for amounts paid in 2022, reduce your actual 2022 state and local sales taxes by this amount. So the sales taxes are a little bit different than the income taxes or they're kind of the same thing, right? Basically if in 2022 you paid the sales tax and then you got refunded the sales tax, but we're talking that you got refunded the sales tax in 2022, then you can take care of that in 2022 and reduce your sales tax deduction for the amount that was refunded. If you receive a refund of the state or local general sales tax in 2022 for prior year purchase, don't reduce your 2022 state and local general sales taxes by this amount. However, if you deducted your actual state and local general sales taxes in the earlier year and the deduction reduced your tax, you may have to include the refund in income on schedule one form 1040 line 8Z C recoveries in publication 525 for details. So this is the similar rule as with the state income tax. So meaning if you got a refund of the sales tax for whatever reason, that's more unusual than with an income tax type of system. But if you got a refund for it and it was related to the prior year, then you have to do the same kind of thing that we talked about with this state income tax refund. You got to say, well, did I get a benefit from it last year by getting a deduction on the schedule a related to attack software is quite helpful to calculate that. And then if you did, then you'd have to include the amount as income in the year that you got the refund on. But again, that's more unusual of a system that you'd see, although maybe it's more common than I would know because I'm in a state with sales tax. So I don't see how common that is possibly. But I would think just the way the tax code is set up that that is not as common as with the sales tax refund optional sales tax tables. Instead of using your actual expenses, you can use the 2022 optional state sales tax table and the 2022 optional local sales tax tables at the end of these instructions to figure your state and local general sales tax deductions. That's the easy way to do it. And the tax software helps you to do that way. So you may also be able to add the state and local general sales taxes paid on certain special 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 could find that at the IRS website. And obviously, again, tax software will help you to calculate and populate those tables. So caution, if your filing status is married filing separately, both you and your spouse elect to deduct sales taxes, and your spouse elects to use the optional sales tax table, you also must use the tables to figure your state and local general sales tax, which kind of makes sense because again, the IRS is skeptical that you're going to file, you're going to say you're one taxable entity, but you decided to file separately possibly because one person bought a yacht on over here and they wanted to deduct the sales tax of the yacht that they purchased, which is going to be quite a lot of sales tax. And the other person is going to just take the sales tax on the table. And it's like, well, no, you have to pick one or the other because you're like one taxable entity, even though you're deciding to file married filing separate. So we're not going to let you do that with one person chooses to have the sales tax using the tables. Then the other one has to do that to any case, instructions for the state and local general sales tax deduction worksheet line one, if you live in the same state for all of 2022, enter the applicable amount based on your 2022 income and family size from the 2022 optional state sales tax table for your state, read line, read down the quote at least, but less than quote columns for your state and find the line that includes your 2022 income. If married filing separately, don't include your spouse's income. Note the family size column refers to the number of dependents listed on page one of form 1040 or form 1040 SR and any continuation sheets plus you and if you are filing a joint return, your spouse. So if you are married and not filing a joint return, you include your spouse and family size only in certain circumstances, which are described in publication 501 income. So your 2022 income is the amount shown on form 1040 or 1040 SR line 11 plus any non-taxable items such as the following. So this is when we're calculating, you know, the income items we're usually using the AGI and oftentimes they might have like a modified AGI. So we have line 11 plus any non-taxable items such as tax exempt interest, veterans benefits, non-taxable combat pay, workers compensation, non-taxable part of social security and railroad retirement benefits, non-taxable part of IRA, pension or annuity distributions don't include rollovers, public assistance payments. Again, hopefully tax software can help us with these types of calculations. We'll continue on with some more state and local taxes in a following presentation.