 Income tax 2022-2023, itemized deductions overview, tax software example. Let's do some wealth preservation with some tax preparation. Here we are in our example Form 1040 populated with LASERT tax software. You don't need tax software to follow along, but it's a great tool to run scenarios with. You can also get access to the Form 1040 related forms and schedules IRS website, irs.gov, irs.gov. Support a counting 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. Starting point as usual single filer. We've got Mr. Anderson. No dependence 100,000 on the W2 income 12,950 standard deduction gets us down to the bottom line taxable income 87,050. We're mirroring that on our formula in Excel 100,000. We've got, that's the wrong button, 12,950, 87,050. And then the software doing the calculation on page numero two 14774 15,000 withholding gets us to the bottom line 226. So there is our mirroring of that back on over. Now we want to think about the itemized deductions. So note that remember when you're looking at the itemized deductions, they're intimately related to the standard deduction. Because we need to clear the standard deduction before we're able to take the itemized deductions. So in practice, if we're talking to clients that are nowhere near being able to clear the standard deduction through brilliant deduction. And then we don't really have to worry about the categorizations on the itemized deductions. And we want to keep in mind those categories and what they are anyways, because when they ask us about it, we want to be able to say, yeah, well, that's an itemized deduction and you might not be able to take the itemized deductions because they're not going to be clearing the standard deduction. We also want to keep in mind the major things that usually help people to clear the standard deduction that being a home purchase. Oftentimes a home purchase in a fairly high cost of living area where a high mortgage was taken out because it's the interest and the property taxes on the home. That often are the big items pushing people over from taking the standard deduction to the itemized deductions. You want to be careful also of recommending that people purchase a home simply to be able to itemize because it's more complex than that. As we'll talk about when we get to like the home mortgage interest and the state taxes, but that's often something that they might hear from like mortgage brokers and stuff. So you want to have maybe a more nuanced perspective of that from the tax side of things because it will most likely come up. Now you can see the standard deductions on the left hand side where they have the $12,950. So you want to keep that number in mind. If they're married, you could double it. So now you have the $25,900. They would have to clear that number before it would be beneficial. And then the $19,400 is in the middle for the head of household. Note that if they're over 65 and or blind, we have another set of rules which you can see on the form 1040 SR. And they're on the last page of it. And that means if they're single, then you're going to add one. So now they're up to 14-7 if they were over 65 or blind. And then if they're both, it would be 16-4-4-50 married. It would be up to 27-3 if one of the married people were over 65 and so on. You can see these different combinations. And in our worksheet, we've shown that down here. These are our standard deductions. They would have to clear. And then if they were over 65 or blind, we would add. If they were single or head of household, this amount and married this amount for each of those components. So we could work that out and see where the hurdle is. And of course, the tax software helps us to find that hurdle as well. All right. So let's see the schedule A itself is going to be right here. And we could see the major components of the schedule A, which are going to be the medical and dental expenses. Now, let's just give a quick overview as we look at these. The medical and dental is probably not going to be the main thing to push people over to itemizing because there's this 7.5%, which is actually a floor. So you have to clear that before the medical expenses start kicking in. And then you still have to get over the standard deduction in order to itemize. So if someone had a really big issue like they went to the hospital, car accident or something, then they might have severe medical expenses that may in and of itself bring them over into itemizing. But most of the time, that's not the thing that's the real big factor that pushes people over. The taxes paid, the major taxes we often think about are the state taxes that are paid, that are the income taxes oftentimes if you're in a state that has income tax or the sales tax. But also the big one here is the property taxes, which could be applicable on a home again, because a home that's quite expensive could have quite large property taxes that can boost you over to itemizing, although they are currently capped as well, which we'll talk about more later, which limits some of the benefits from purchasing the home on high cost of living states oftentimes like California, New York. The major interest we think about here is the home mortgage interest. That's the big one, especially if you're purchasing homes in a high cost of living state, you could have quite a high mortgage, even for a fairly modest home, and that could push the mortgage interest to be quite high. The gifts to charity, that's one that often comes up. People think about gifts to charities a lot, but if they don't itemize, they're not going to get the gifts to charity. Then you got the casualty and theft, which has been limited a lot, the other itemized and the total itemized. So let's just add something here to the interest. This is the big one that often pushes people over, and let's say they had home mortgage interest just so we can see the flip from itemized to standard. So if I say they had more mortgage interest of, let's say, 14,000, then it's likely that they're also going to have taxes, property taxes, that is, related to the home. So if I see home mortgage interest, I got a 1098 or something like that, which we'll talk about later, for home mortgage interest, I would think, well, they must have property taxes. If they didn't, that would be weird. So I'm going to say that they, let's say, 3,000 on property taxes. I'm just making these up right now. We're going to go back to the forms. So that means now we've been populating the property taxes, the home mortgage interest, that brings us up to 18,017. If I go to the first page of the form 1040, that of course is higher than the standard deduction, and therefore we're taking the 1817 at that point. Now, if I mirror that over here on my schedule A in my worksheet, I could say, okay, schedule A, let's go back on over. I'm going to, I can then put this mortgage interest in from the mortgage interest statement, 14,000, I think I said it was. And then we have interest for the property taxes, which I think I said 3,000. Now, I'm saying that this is a California return. So that means I'm also going to have some other kind of taxes, meaning I'm either going to have state income taxes, or I'm going to have sales tax. So the software is currently calculating this tax right here for the sales tax. So that's something that oftentimes you might be reliant on the software to help you out to calculate. And every time you make a change, you might have a change to like the tax calculation for the state taxes. So I'm going to say 1,017, and I'm just going to plug that in and let the software do it. And that will then come out to my total of the 1817 going back to the first page of the form 1040. Now I've got the itemized deductions at the 1817. The standard deduction is currently at the 12,950. It's taking the greater of the two because I have my max formula here. So it's taking the 1817 taxable income is now at the 81983. So if I go back on over page number one, we're at the 81983. And then of course the software calculates the tax. I won't do the second half right here because I'm not really focused on that. Focus everything on that area. Right now. So there's that. So once you once you've cleared the hurdle, then of course you're saying, OK, now you're itemizing. Now it might be worth diving into the medical and dental expenses because you might get an actual benefit from it. Although it's kind of a double-edged sword with this one with your income going up because it's usually higher income individuals that are more likely to be taking the standard, the itemized deduction instead of the standard deduction. But this one has a 7.5 floor on it. So they have to clear that before it even starts to add into their to their itemized deductions and the higher their income then the bigger that floor is the hurdle that they have to clear. So we'll talk more about that later. But then you might say, well, it might be worthwhile for you to add up all your medical expenses where it wouldn't have been if you were nowhere near itemizing. And then it might be worthwhile to now add up all your charitable contributions, right? Because now you're getting a deduction for it. So let's just put in a couple charitable contributions. We'll say that we have 4,000 charitable contributions. Let's say we'll just throw that number in there. And so now we've got the 4,000. Now, if we were nowhere near itemizing, then, you know, that it's still good to give charity, but but it wouldn't be pulling over into into here generally in that case. So now it might be worthwhile, like I said, to go through more with a fine tooth comb, which will go through some more of these sections after you've cleared the hurdle. And you know, they're going to be clearing the hurdle in order to itemize. Now, my itemized deductions are currently at 2217. So if I change this to and let's let's bring that over here. I added 4,000 on my schedule a for charitable contributions. Do I have a charitable gifts to charity? Let's add a couple rows here. Add just a couple rows and I'll just say gifts charity. I might list them out here or I might not. So if I list them out, I might want more more rows than this, but I'm going to say total gifts to charity. Sum it up outside. I added up the 4,000 is what I want 4,000. So that brings my total to the 227. Now notice that I changed that number and that means that probably my state tax calculations going to change. Well, maybe it didn't. 1,017 brings us down to the 2217. So that's still good. Sometimes you got to keep it on that state tax though. Just saying it didn't change right there, but it could. Sometimes it does. So that brings us to the 2217, 77983. So if I go over here, we've got then the 77983. Now, if I change everything the same here, but I just changed to a married couple, they're no longer going to be taking the itemized deductions because if they're married, it goes all the way up from 12,950, the standard deduction to 25,900, which is then going to be higher than the itemized deductions here. So let's check that out. So now they're married. Mr. Anderson got married again. Yay, 100,000. We're keeping the income the same. Now, obviously that could result if you're married with a doubling of the income or an increase of the income, but we're going to keep it the same. Everything the same at this time. And now that standard deduction jumped way up, doubled to 25,9, which is now greater than what we had in the Schedule A. So it's a pretty large hurdle there. You can see that's fairly significant to try to clear that hurdle. Even with the mortgage, you got to be paying a pretty significant amount of interest on the mortgage in a pretty significant amount of taxes, which you can easily clear if you're in a high cost of living state. But if you're not, then you may not clear that even with a home because you might not need as big a loan or whatnot. So there's that. Now if I mirrored that on this side, I'd say, that would mean my standard deduction went up to married here. Boom, 25,9. And now I can see the 25,9 is greater than the itemized deductions that we calculated last time. So that means it's going to be taking the greater, the 25,9 instead of the 22,17. So that's the general idea. Now remember that if you had people that were over 65, those standard deductions change and you'll typically pop on over here to the Schedule 1040 SR and you can look at those standard deductions on page four. But that's the general layout. So we're going to go through some of the itemized deductions now category by category. So many categories. For the Schedule A, we'll look at each of these categories. But what you want to do in practice in your mind when you're dealing with someone is probably look at the prior year tax return, right? Did they itemize last year? Has anything significant changed from last year that means they're going to itemize this year, such as they bought a home or they had like a catastrophe happen, like a medical catastrophe or something that was very expensive because that's going to be the big thing that will lead you to see are they going to be able to itemize or not. Is it worth my time to dig down on the itemized stuff? If they are itemizing, then of course you want to spend more time on each of these categories on the itemized components because it's more likely that you might be able to squeeze out a few more benefits once they've cleared the hurdle. And also you always want to just keep in mind that if they have a home, you could ask that as a general question. Do you own your home or do you rent? Well, if you own the home, then it's likely they have mortgage interest. We would expect to see mortgage interest and we would expect to see property taxes, which are going to be the big ones that we would want to make sure we pick up. And then again, once we have those, then we want to drill in on all the other kind of stuff. So that means that when you're looking at this, you usually don't kind of look at it from top to bottom. You usually look at the Schedule A and go, interest, let's look at that first. And then taxes, property taxes in particular. And then you might go into the other items and kind of expand on it from that point.