 Income tax 2022-2023, itemized deductions, taxes you paid, part number two. Let's do some wealth preservation with some tax preparation. Support accounting instruction by clicking the link below, giving you a free month membership to all of the content on our website, broken out by category, further broken out by course, each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files, and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. Most of this information comes from the Schedule A 2022 instructions you can find online at irs.gov, irs.gov. Looking at the income tax formula, we're focused down here on the itemized deductions. Remembering the first half of the income tax formula is in essence an income statement where we have income minus the equivalent of the expenses being the deductions equals the equivalent of net income, that being the taxable income, everything flipped on its head. We want taxable income as low as possible as opposed to normally when we want net income as high as possible. We've got the income minus the different kinds of deductions. We looked at the above the line deductions or adjustments to income in a prior section that got us to the subtotal of the adjusted gross income, very important subtotal because that's the number often used to think about phaseouts. As income goes up, we could phase out deductions and credits based on the adjusted gross income oftentimes. Then we have what might be called the below the line deductions, which is either the standard deduction or the itemized deduction. We only take the itemized deduction if it is greater than the standard deduction. So now we're focusing in on some of those itemized deductions. This is one of the Form 1040. It's located here, 12 standard deduction or itemized deduction. This is the Schedule A. We're looking at the itemized deductions related to taxes. Remember, when you're thinking about itemized deductions, what's the thing that's going to push people over? Usually home ownership because that's going to have or lead to a loan, a mortgage interest, and then also the property taxes. Those are the big two. We're looking at the taxes here, which includes one of those big two related to the home ownership that being property taxes. You've got to keep in mind the standard deduction when thinking about the itemized deductions because if they're nowhere near clearing the standard deduction, then it'll be a fairly more basic return at least because you don't have to worry about all the itemized kind of deduction stuff because they're going to be taking the standard deduction, the number for single filers $12,950, double that for married $25,900. So now we're on to the state taxes, the itemized, I'm sorry, the taxes, the deductibility of taxes for the Schedule A itemized deductions. What if you lived in more than one state? So this is another kind of issue, of course, and it also leads to kind of thinking about what kind of clients you want to take on again. When you're thinking about building your taxes. They get tax breaks to build a $5 billion stadium. Practice, if you're doing multiple returns, you want to think, do I want more basic tax returns where I'm going to focus on volume, do a bunch of more basic tax returns or do I want more complex tax returns where I'm going to do less volume but higher profit margins for those tax returns. And one of the things you can expand on is having tax returns from multiple states because that's going to make complications in terms of the deductions here, but also they could be different state requirements with regards to income tax reporting that you'll typically be needing to do if you want to do the federal income tax stuff as well. So do you want to take on those kind of clients that have multiple states, people that are moving around a lot or that have for whatever reason income subject to multiple states or do you want to stick to tax returns that are in a particular location that you know sometimes tax software that you're using could differ in terms of the cost on how many states and foreign stuff income sources and whatnot. So if you lived in more than one state during 2022, use the following steps to figure the amount to put online one of the worksheet. One, look up the table amount for each state using the rules stated earlier. If there's no table for a state, the table amount for that state is considered to be zero. So when we're looking at the table deduction, we're thinking about the remember you have the we talked about in the prior presentation if you can deduct the state tax, some states tax on a state income tax system and some states have the sales tax. So if we're dealing with the sales tax, then you can use actual sales tax, but oftentimes you might need to use a table to calculate the sales tax. Otherwise, it'd be quite tedious to kind of add up all your sales tax receipts. If you're in multiple states, then what table should you use is one of the questions that could come up. So number two, multiply the table amount of each state by a fraction, the number of which is the number of days you lived in the state during 2022 and the denominator of which is the total number of days in the year. So now this would be a common type of strategy when we have this kind of issue that would come up. Something came up. We lived in two states for a fraction of the year, so we can calculate that fraction and then apply one table for the fraction and the other table for the other fraction. So we can do a fraction problem, breaking out what percentage of the year was I in this state versus the other state and then use the appropriate tax tables times those fractions. So three, if you also lived in a locality during 2022 that imposed a local general sales tax, complete a separate worksheet for each state you lived in using the prorated amount from step one, I'm sorry, step two, for that state, online one of its worksheet. Otherwise, combine the prorated table amounts from step two and enter the total online one of a single worksheet. Now, obviously again, good software could help you out with these kind of situations oftentimes. Let's look at an example. You lived in state A from January 1st through August 31st, 2022. That's 243 days. And in state B from September 1st through December 31st, 2022, that's 122 days. So the table amount for state A is 500. The table amount for state B is 400. You would figure your state general sales tax as follow-ups. So now you're going to take the 500 from the one table and apply the fraction, which is 243 days over how many days in a year, 365 gets to the 333 and then the 400 times that same fraction. So we're in the middle somewhere here at the 467 between. I'm sorry. We're in the middle of the two amounts, which was 500 and the 400 at the 467, weighting it towards the place that we spent more time using that fraction approach. That approach, by the way, is a useful kind of concept to have in the toolkit as issues like that kind of come up. So if none of the localities in which you lived during 2022 imposed a local general sales tax enter 467 online one of your worksheet, 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. And then here's the actual state local general sales tax deduction worksheet. I'm not going to go through it line by line. You could check it out software again in practice helps us out to kind of deal with some of these issues. Line two, if you checked no box enter zero online to and go to line three. If you checked the yes box and lived in the same locality for all of 2022 enter the applicable amount based on your 2022 income and family size from the 2022 optional local sales tax table from your quality. Read down the quote at least but less than quote columns for your locality and find the line that includes your 2022 income. See the instructions for line one of the worksheet to figure your 2022 income. The family size column refers to the number of dependents listed on page one of form 1040 form 1040 SR and any continuation sheets plus and if you are filing a joint return your spouse. So obviously when we're looking at these worksheets and they're trying to estimate like the sales tax it's got to take into consideration the locality that you're in as well as the family size to try to get an estimate in terms of how much the average like sales tax would be to give like a generic type of deduction and this ironically this whole approach here is supposed to be easier on people because the other way that you would have to do it is to actually track all of your sales receipts for everything that you purchase that subject sales tax. 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 what if you lived in more than one locality? If you lived in more than one locality during 2022 look up the table amount for each locality using the rules stated earlier. If there is no table for your locality the table amount is considered to be zero. Multiply the table amount for each locality you lived in by a fraction. The numerator of the fraction is the number of days you lived in the locality during 2022 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 for the prorated table amounts for each locality in that state online too. Otherwise complete a separate worksheet for line two through six for each locality and enter the prorated table amount online too of the applicable worksheet. Okay let's take a look at an example similar kind of process. You lived in locality one from January 1st through August 31st 2022 243 days and in locality two from September 1st through December 31st 2022 122 days. The table amount for localities one is $100. The table amount for locality two is 150. You would figure the amount to enter online to as follows. Note that this amount may not equal your local sales tax deduction which is figured online six of the worksheet. So same kind of process here. We've got the 100 and the 150 and we're breaking it out using our fraction the number of days in locality one 243 over divided by the 365. Line three if you lived in California check the no box if your combined state and local general sales tax rate is 7.25% otherwise check the yes box and include online three only the part of the combined rate that is more than 7.25% if you lived in Nevada. Las Vegas is not a capital of Nevada. Check the no box in your combined state and local general sales tax rate is 6.85% otherwise check the yes box and include online three only the part of the combined rate that is more than 6.85%. So what if your local general sales tax rate changed during 2022? So now obviously you're subject to the sales tax. They're trying to figure out the average sales tax. We're trying to use a table to get a general sales tax for the locality that you're in and now the rate has changed in that locality again hopefully the software that you're using if it's a sophisticated software can help to figure out some of these changes and do some of this math for us but you can see how kind of messy this got because remember what this came from first they decided to deduct the sales tax which I think was or state taxes on the federal tax return which I think was a mistake in the first place but then they needed to still give the states leeway to tax however they wanted without favoring certain people that happen to mirror the tax system of the federal government which is an income tax system. Government wasn't taxing to be Jesus out of them. So that means that they had to include the sales tax and obviously the sales tax is quite messy to track because then you'd have to track all your actual sales so then they said well do the average sales tax to make it easy but now we can see even that isn't quite that easy because now you have all these different kind of scenarios that can come up you have two localities, two states and now of course they changed the sales tax rate and the state you're in so if you check the yes box and your local general sales tax rate changed during 2022 figure the rate to enter online three as follows multiply each tax rate for the period it was in effect by a fraction so you have a similar kind of thing you'd have to do right because now you've got a fraction of the year that it was at one rate versus another rate so the numerator of the fraction is the number of days the rate was in effect during 2022 and the denominator is the total number of days in a year that's 365 enter the total of the prorated tax rates online three so example locality one imposed a 1% local general sales tax from January 1st through September 30th 2022 273 days the rate increased to 1.75% for the period from October 1st through December 31st 2022 that's 92 days so you would enter 1.189 online three figure as follows so they have the one rate times the fraction which is 273 divided by 365 and then they've got the 1.75 times the fraction of the 92 days divided by the days in the year 365 you can see how this method is quite this kind of thing comes up quite often when you're doing different types of problems this kind of ratio fractioning out type of thing so it's a good tool to keep in mind although hopefully your tax software can help you to apply it in practice so what if you lived in more than one locality in the same state during 2022 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 2022 and each locality didn't have the same local general sales tax rate to figure the amount enter online three of the worksheet for each locality in which you lived except a locality for which you used the 2022 optional local sales tax tables to figure your local general sales tax deduction multiply the local general sales tax rate by a fraction the numerator of the fraction is the number of days you lived in the locality during 2022 and the denominator is the total number of days in the year 365 so example you lived in locality one from January 1st through August 31st 2022 that's 243 days and in locality two from September 1st through December 31st 2022 that's 122 days the local general sales tax rate for the locality one is 1% the rate for locality two is 1.75% so you would enter 0.666 on line three for the locality one worksheet and 0.585 so same kind of thing you've got one times the fraction of the year and so on line six if you lived in more than one locality in the same state during 2022 you should have completed line one only on the first worksheet for that state and separate worksheets for lines two through six for any other locality within the state in which you lived during 2022 if you checked the yes box on line six of any of those worksheets multiply line five of the worksheet by the amount that you entered on line one for that state on the first worksheet line seven enter on line seven any state and local general sales tax paid on the following specified items if you are completing more than one worksheet include the total for line seven on only one of the worksheet so one you've got a motor vehicle including a car motorcycle motor home recreational vehicle sport utility vehicle truck van or off-road vehicle obviously a larger purchase like that means that you're gonna have more sales tax applied to it than you may have if you didn't have a large person purchase in that year such as that so also include any state and local general sales tax paid for a least motor vehicle if the state sales tax rate on these items is higher than the general sales tax rate only include the amount of tax you would have paid at the general sales tax rate two an aircraft or a boat but only if the tax rate was the same as the general sales tax rate number three a home including a mobile home or a prefabricated home or substantial addition to or major renovation of a home but only if the tax rate was the same as the general sales tax rate and any of the following applies one your state or local imposes a general sales tax directly on the sale of a home or on the cost of a substantial addition or major renovation so if you purchased a home or renovated the home then is it subject to sales tax if it is you would think once again like the car and the motor vehicle and the boat those would be big purchases they have an impact on your sales tax so B you purchased the material to build a home or substantial addition or to perform a major renovation and paid the sales tax directly C under your state law your contractor is considered your agent in the construction of the home or substantial addition or the performance of a major renovation the contractor must state that the contractor is authorized to act in your name and must follow your directions on construction decisions and this case you will be considered to have purchased any item subject to a sales tax and to have paid the sales tax directly so in other words you could see kind of the problem there you hired some a contractor you hired someone to purchase to build your home they went and bought the stuff that means that they were subject to the sales tax right when they purchased the stuff to buy your home but you're the one that's purchasing them to ultimately to buy the home and if you purchased the materials directly then you'd get to deduct possibly the sales tax so now there should be a system or a way that you can deduct the sales tax even though the contractor is the one that bought the stuff because you're the one that told the contractor to buy the stuff so it gets kind of messy so don't include sales taxes paid on items used in your trade or business so if you received a refund or state or local general sales tax in 2022 see refund of general sales taxes earlier so if you if you paid for the sales tax in on your business you bought something for the business then you would expect that you would expect that you might get a deduction but you would be deducting the whole thing including the sales tax generally you would think or putting it on the books as a depreciable asset and then deducting the depreciation as applicable under the depreciation schedules all in one lump sum because it would include the sales tax that you'd get to deduct the business expense but if you don't get the business expense then you can only possibly get a benefit for the portion of the purchase that was for sales tax we talked about the whole refund situation earlier so I won't dive into that again line 5b state and local real estate taxes so enter on line 5b the state and local taxes you paid on real estate you own that wasn't used for business so this is the other big one someone owns a home that's the big one you've got the mortgage interest on it and then you've got the sales tax related to it as well so remember that the state sales tax I mean the state taxes could be what's their normal taxes either they have an income tax or sales tax or both and then you have the question of the deductibility of the state taxes there and then no matter where you live they almost certainly have a property tax so a property tax on the home so now we've got the home and the property tax no matter where you live you would think there would be state and local property taxes then the question is is the property tax just a personal home in which case we're looking to take that property tax as a state and local tax deduction on the schedule A if it was for business use you might be able to take it on the schedule C if you use part of your home for business home use of an office or something like that then maybe you have to have a ratio of your taxes we might talk about when we get to the schedule C but you can't double dip you can't deduct both on the schedule C and on A or on home office deduction or whatever so but only if the taxes are assessed uniformly at a like rate on all real property throughout the community and the proceeds are used for general community or government purposes so you've got publication 5.30 explains the deduction homeowners can take so don't include the following amounts on line 5B foreign taxes you paid on real estate so no foreign taxes we're not subsidizing foreign taxes here so it's itemized charges for services to specific property or persons for example a $20 monthly charge for house for trash collection $5 charge for every 1000 gallons of water consumed or a flat charge for mowing a lawn that had grown higher than permitted under a local ordinance so those are more like fees it sounds to me kind of like taxes or you're paying for something goods and services and taxes charges for the improvements that tend to increase the value of your property for example assessment to build a new sidewalk so if you're paying for an assessment to build a sidewalk then you're probably paying for an improvement in the home not being taxed for sales tax so the cost of property improvement is added to the basis of the property meaning you're increasing the value of the home so that when you sell the home you'll have less of a gain at the point in time you sell it and that's when you might have a tax benefit from it although the home would be most likely exempt anyways for a large portion of the game so it might not be all that beneficial to you but there it is however a charge is deductible if it is used only to maintain an existing public facility in service for example a charge to repair an existing sidewalk and any interest included in that charge so if your mortgage payments include your real estate taxes you can include only the amount the mortgage company actually paid to the taxing authority so when you deal with your property taxes you might pay the property taxes directly so meaning you have a home loan you're paying off the mortgage with the loan and then you pay the state and locality for your property taxes directly sometimes they package those together so that basically your mortgage payments are going to be paying for both your mortgage and then the mortgage company will actually be paying off the property taxes so that can be kind of convenient sometimes because then it's one less payment to not miss maybe you won't miss but then and then the mortgage company should give you the documentation of 1098 which should give you the information in terms of how much you paid in mortgage interest and the real estate taxes just remember not to miss that because anytime someone owns a home you would expect that they would have property taxes so if you don't see it on the 1098 or whatever then you've got to collect other documentation for it because they have to have property taxes for crying out so if you sold your home in 2022 any real estate tax charged to the buyer should be showing on your settlement statement and in box 6 of any form 1099 s you received so this amount is considered a refund of real estate taxes see refunds and rebates later any real estate taxes you paid at closing should be showing on your settlement settlement statement so that's another kind of issue in terms of when you first purchase a home or when a home is first purchased you've got this issue in terms of the who's going to handle in the agreement the property taxes right so then and so it could be a little bit messy to determine and you might have to look through the closing statement to determine the proper allocation of payments related to property taxes and who possibly could have a benefit for deduction related to it based on the agreement for the closing statement caution you must look at your real estate tax bill to decide if any deductible items charges such as those listed earlier are included in the bill so if your taxing authority or lender doesn't furnish you a copy of your real estate tax bill ask for it so prepayments of next year's property taxes only taxes paid in 2022 and assessed prior to 2023 can be deducted for 2022 so notice we're kind of have a cashed based system here for the most part and cashed based systems are actually more manipulable than accrual based systems but they're easier to track so if you have the cash flow you might say hey look I earned more money this year than I'm going to earn next year for whatever reason if that were the case why don't I just prepay a bunch of these expenses why don't I just pay for my property taxes for the next 10 years this year because I happen to earn a lot of money this year or something and the government doesn't want you to let you do that so they're going to limit the amount of prepayment of the property taxes so if you get a bright idea of I'm going to prepay stuff then you got to make sure and say am I able to prepay this or is the tax code going to explicitly say which they often do no we're not going to let you prepay a massive amount of your expenses because it's manipulative of the cutoff and what not so state or local law determines whether and when a property tax is assessed which is generally when the taxpayer becomes liable for the property tax imposed so refunds and rebates if you received a refund or rebate in 2022 of real estate taxes you paid in 2022 reduce your deduction by the amount of the refund or rebate if you received a refund or rebate in 2022 of real estate taxes you paid in an earlier year don't reduce your deduction by this amount instead you must include the refund or rebate in income on schedule 1 form 1040 line 8z if you deducted the real estate taxes in the earlier year and the deduction reduced your tax so this is the same kind of concept we saw before with the state tax refund for example if you got a benefit last year for something that you deducted and then they refunded it this year then what are you going to do are you going to go back to last year and fix the fact that you deducted something that you didn't really pay for because they refunded it to you or it would be easier and oftentimes the way to go the way the code lets you go is to do it this year meaning if I got a benefit for it last year I'm going to include it in income this year so it has a tax burden to me this year because I included it in income because I got a tax benefit from it last year kind of improperly because I got a deduction which I didn't really shouldn't really have gotten because I didn't really pay that but that's the cash base kind of problem again with this cash base system because I paid it but then I got refunded okay so see recoveries in publication 525 for details on how to figure the amount to include in income so line 5c state and local personal property taxes enter on line 5c and local personal property taxes you paid but only if the taxes were based on the value alone and were opposed on a yearly basis example you paid a yearly fee for the registration of your car part of the fee was based on the car's value and part was based on the weight so now you've got your other property taxes other you have the real estate taxes your home and another property like your car which is the common example where you have this registration fee so you may be able to deduct that but they want only to deduct the part of it so you can deduct only the part of the fee that was based on the car's value so property of next year's property taxes so let me do that one more time because this one gets a little bit confusing you paid a yearly fee for the registration of your car that's common part of the fee was based on the car's value that's the property tax and part was based on its weight which they're saying isn't you know a property they want it to be based on the value that's what they're considering the property tax so you can deduct only the part of the fee that was based on the car's value they're saying so prepayments of next year's property taxes only taxes paid in 2022 and assessed for 2022 3 can be deducted for 2022 same kind of thing limitations it on the payment for a cash based system they're concerned about that cut off problem with a cash based system state or local law determines whether and when a property tax is assessed which is generally when the tax preparer becomes liable for the property tax imposed