 Income tax 2022-2023, itemized deductions overview. 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 1 tax year 2022 instructions you can find on the IRS website, irs.gov, irs.gov. Looking at the income tax formula, we're focused out here on the itemized deductions. Remembering that the first half of the income tax formula is in essence an income statement, although a strange one, where we have income minus the equivalent of the expenses being the deductions equals the equivalent of net income, that taxable income. Everything's upside down with taxes, everything's topsy-turvy, meaning that the taxable income we want as low as possible, as opposed to normally we want net income as high as possible. Now in prior sections, we went over some of these other line items in the equation. We'll just recap it right now as we then focus on the itemized deductions. So we went over the income line up top. Now clearly income is good. Yes, the money is good. We want income, but for taxes it's bad. So we would like to have income, but not have to include it as taxable income if we're not legally required to because it's exempt or something like that. And then we have the adjustments to income, which you can think of as deductions and sometimes are referred to as above the line deductions or as schedule one deductions as opposed to possibly below the line deductions here or in our case the itemized deductions are going to be the schedule A deductions. You can also think about these up top deductions, the adjustments to income as contra income accounts because they're going to go decrease the income like a deduction, but they're going to arrive at this subtotal of the adjusted gross income, the AGI, that adjusted gross income is often the number used or at least based upon when we have phase outs for income thresholds as income thresholds go up and we phase out certain deductions and certain credits. The below the line deductions, whether that be standard or itemized, are not going to have an impact on the phase outs because we don't calculate the phase outs generally on taxable income but rather on the adjusted gross income. So that's another kind of component it's useful to keep in mind. So now we're down here and we take the greater of the standard or itemized deductions. Exactly, good deduction. We talked about the standard deductions before. It's important to understand the standard deductions to the extent that when you think about the itemized deductions because you have to clear the hurdle of the standard deductions you're able to take the itemized deductions and it's a fairly substantial hurdle that went up in a few years ago therefore most people are going to be taking the standard deduction. And if there's no hope of taking an itemized deduction if it's not going to be anywhere near as high as the standard deduction then you don't have to go through some of the burdensome task of pulling together all the information for the itemized deductions because the person's going to take the standard deduction maybe it would be more of a simplified situation. So that leads to kind of some discussions in terms of your tax planning if you're doing tax return preparation your strategy might be either I'm going to focus on more basic tax returns which means you might not be looking for clients that are itemizing the higher income clients for example because you might be saying I'm focused on scaling up the lower income tax returns which means that I'm going to do more of them I'll try to scale them up at a lower profit margin or you might have a strategy that you want to take on the higher more difficult high income tax returns and then you're going to do less tax returns because they're more difficult and higher income tax returns are often going to require more research and stuff like that but you can have a higher profit margin per return also note that higher income tax returns because they have more cash flow also leads to the need for more income tax planning and that kind of stuff you also could specialize as we've talked about before on terms of do you want to just focus on individual tax returns or take on business tax returns like a schedule E, a schedule F and those types of things do you want to focus and take on bookkeeping needs which often small businesses need to help them shore up those types of needs do you want to specialize in certain industries if you're taking on those more of business needs like escort or types of entities as corporations LLCs and type of industry construction and that kind of thing so those are other things to think about when specializing now the next thing to kind of understand is when would someone be pushed up from a standard deduction to an itemized deduction the normal thing is related to the home the home purchase because the home mortgage interest is quite significant of a deduction and then you've got the property taxes and state taxes are often deductible for federal income tax purposes so the purchase of the home that combo the property taxes and the interest on the home often pushes people over to the point where they're no longer standardizing but itemizing now there were changes to the law a few years ago which increased the standard deduction which I believe is an attempt to simplify the tax code right if everybody just took a standard deduction and we didn't do all this itemized deduction it would be a simplification to the tax code so you've got more people even if you're purchasing a home that might still be taking the standard deduction which is a significant thing to keep in mind because often times when you talk to mortgage brokers and whatnot they will tell you that the government is incentivizing you to buy the home which they kind of are but you've got to be careful in terms of how big that incentive is because it's really only kicking in until you clear the standard deduction before you're really picking up the incentives related to home mortgage interest and property taxes there's also caps on it so we'll get into that in more detail but if you're in high cost of living states like California and New York for example then it's quite likely that even an average home could push you over to itemizing but if you're in an area where you don't have as high cost of living areas you might see situations still where you're purchasing a home and people are still taking the standard deduction because it's fairly high and they're not taking on as big a loan with the standard deduction or paying as much of the property taxes in that case so in practice then the general idea that we want to keep in mind with the standard and itemized deductions we want to have an idea of what the standard deductions are when people might itemize what kind of things push people over from the standard to itemizing usually purchasing a home is the big one and when that might take place so we can explain that to clients and then determine when it would be worthwhile for us to compile the added information of the itemized deductions because we think it could possibly clear the threshold of the standard deduction okay so we're down here on line 12 standard deduction or itemized deduction note that the normal standard deductions that we talked about in the past are on the left side of a form so we have the single filer at the 12950 doubling that to the 259 head of household at the 1904 we'd have to clear those thresholds before it would be beneficial for us to take the itemized deductions the itemized deductions then would be populated on the schedule A so here's the schedule A this is the itemized deductions and we won't have the full schedule A here but these are the items you can see on the left hand side if you go to the schedule A and you can look at the medical expenses taxes, interest and so on and so forth we'll dive into each of those in more detail at least most of them the standard deductions which you want to be able to keep in mind because these are the hurdles that you need to clear so if someone is nowhere near clearing these hurdles then you can be quite certain you're just going to take the standard deduction fairly easy so this is from the left side of the tax return that we saw before right here so that's going to be the single it's going to be the 12950 married, you double that so you might just want to memorize 12950 double it to 259 head of households in the middle between those two 1904, those are the general the general hurdles so if you have a single filer and you're like, they're nowhere near having itemized deductions up to 12950 you're fairly close you're fairly sure they're going to be taking just the standard deduction 25900, fairly large number for the married couple so if they're nowhere near that, you can say okay, they're just going to take the standard deduction and then we have these added components if they were over 65 or blind or both so in those situations we up the standard deductions for those particular situations and that's what this table is doing on the right alright, itemized deductions use schedule A form 1040 to figure your itemized deductions in most cases, your federal income tax will be less if you take the larger of your itemized deduction or your standard deduction so we're going to figure the two if the itemized deductions are greater we'll typically do that one obviously tax software is kind of useful to do these calculations because it'll help us to determine what the best tax benefit situation would be but if we're nowhere near the itemized deduction it might not be worth compiling all the data related to it so we're just going to take the standard deduction so if you itemized you can deduct a part of your medical and dental expenses and amounts you paid for certain taxes, interests, contributions, and other expenses so these are the categorizations we'll dive into each of these categories most of them at least in more detail you can also deduct certain casualty and theft losses so if you and your spouse paid expenses jointly and are filing separate returns for 2022 CIPLA publication 504 to figure the portion of joint expenses that you can claim as itemized deductions CAUTION don't include schedule A items deducted elsewhere such as form 1040, 1040 SR or schedule C, E, or F now this gets a little bit messy because you can imagine situations where a deduction might have been included on a schedule C or a schedule E and you can't, what I would call double dip you can't take two deductions for the same thing you can't say I paid this much for this thing and I'm going to deduct it over here like I paid mortgage interest or whatever and I deducted it on the schedule E and then I'm also going to deduct it on the schedule A that would be double dip and you paid the one amount so you don't get two benefits from it so often times we have to then think where would we get the best benefit or where does that particular deduction most properly belong and we might have to allocate something like a mortgage interest or something we have a mortgage, a reverse mortgage paid off mortgage to where it properly would be would be along a schedule C, schedule E and schedule A so we'll get into some of those issues what's new mortgage interest premium the election to deduct qualified mortgage mortgage insurance premium the election to deduct qualified mortgage insurance premiums you paid under mortgage insurance contract issued after December 31st 2006 in connection with a home acquisition debt that was secured by your first or second home doesn't apply for tax years beginning after December 31st 2021 then we have the charitable contributions for non itemers, itemizers so the election to claim a charitable contribution for taxpayers who do not itemize their deductions expired December 31st 2021 so it's kind of interesting a few years ago they increased the standard deduction to try to simplify the tax codes because now more people can just take the standard deduction instead of doing the itemized deductions but you can kind of predict what's going to happen when they try to simplify the code like that because a lot of favorite categories that were in the itemized deductions no longer have as much influence so you can see for example with the charitable deductions they kind of seeped over out of the itemized deductions on the schedule A allowing charitable deductions actually on the first page of the form 1040 so that was kind of an interesting development but now that has expired so now that has been removed again so if you're going to take the charitable deductions they're going to have to be taken on the itemized deductions it'll be kind of interesting going forward because once again as it currently stands the standard deduction is making the itemized deductions those special categories less relevant than they were in the past so we might see more laws in the future trying to make some of those items more relevant by possibly putting them somewhere else outside of the schedule A or possibly attempting to lower back down the standard deduction to make those itemized components more relevant this is kind of like the push and pull that we end up seeing with the tax code so in any case health coverage tax credit the health coverage tax credit has expired if you are a trade adjustment assistant a TAA recipient an alternative TAA which is an ATAA recipient a re-employment TAA which is an RTAA recipient or a pension benefit guarantee corporation which is a PBGC payee then you will no longer use form 8885 before completing schedule A line 1 and have the standard mileage rates now note when we think about the standard mileage rates the first thing that usually comes to most people's mind is for applicability to the schedule C but there's different rates depending on what your mileage is for we're talking here for medical reasons because it's being applied to the schedule A so the standard mileage rate allowed for operating expenses for a car when you use it for medical reasons is to 18 cents a mile for January 1st through June 30th 2022 and 22 cents a mile from July 1st through December 31st 2022 so those could differ then from other standard mileage rates you might use for other reasons obviously we've got this difference in the middle of the year that complicates things if you're trying to calculate that standard mileage rate note that the software is often helpful for those types of calculations so the 2022 rate for use of your vehicles to do volunteer work for certain charitable organizations remains at 14 cents a mile so they haven't been like increasing these as steadily as they generally do for like the mileage rates for a business like the schedule see mileage rates if you are applying mileage rates for vehicle use related to a business a sole proprietorship which we'll talk about in a separate section when we do the schedule see discussions