 Income tax 2021-2022, software example, interest you paid. Get ready to get refunds to the max, diving into income tax 2021-2022. Well, assert tax software, you don't need tax software to follow along, but you might wanna have the form 1040, which you could find on the IRS website at irs.gov, irs.gov, starting point single filer, Adam Smith, living in Beverly Hills, 90210, 100,000 at the W-2 income. We got the 12,550 standard deduction getting us to the 87,550 on the taxable income, mirroring that in our income tax formula, the 100,000, 12,550 taken the standard deduction, 87,450 taxable income, jumping back on over to the software page two, calculating the tax on line 16, 15, 15, that tax being calculated, bringing that on over, this is going to be then the tax of the 15015. So that's gonna be our starting point. We're looking at interest now, so I'm gonna go back to page one on the taxes and we're going down to line number 12. We're taking the bigger of the standard or itemized deduction, standard deduction currently being larger and two of the big ones, as we've seen in prior presentations to push people over will often be related to the home purchase, that being interest for the mortgage interest, if there's a loan on it as well as the property taxes. So that's the first one we'll think about with interest. Now there's other things that could be involved with the interest as well, like investment interest, for example, but the big one that you wanna keep in mind is of course the mortgage interest. Once then you're over the cap, once you've cleared the standard deduction, most likely with the home purchase and the interest related to it and the standard and the property taxes, then that opens up the field possibly for other itemized types of deductions. So if I open up the item on the left-hand side, we're going into the schedule A and we're scrolling down to the interest. So we're looking at the interest generally here in line eight and we're focused mainly on the mortgage interest at this point. Now usually the interest is gonna be fairly straightforward because you'll get the form, you'll get the form 1098 and that's gonna be coming from the institution and so you'll have the mortgage interest typically in line one, generally straightforward type of process with the mortgage interest then. However, you can have situations, for example, where the amount of the loan say was higher than the threshold where you have to get into a little bit more of the weeds in terms of the deductibility of the interest portion. The amount is fairly high, 750,000 in general at this point in time in terms of the loan amount, not the home value, not the amount of interest but the loan value. So that's pretty significant for most people but it depends on who you're doing the taxes for in terms of who might hit that limit there. Also, what did they use the money for? Was it used for then basically the improvement or purchase of the home in general? So you wanna keep into consideration those kind of limitations but once taken into consideration, usually this form will be fairly straightforward helping us to do the data input for the interest. So let's think about the interest first. So I'm gonna go back on over and say if I go back to the forms and we're gonna go into the deductions here, we're gonna go to the itemized deductions and we're going to be picking up, we're looking at the interest. Now, as I interest the interest down here, I'm always gonna be thinking in the back of my mind, well, I see this form which represents they got a home loan typically. So then I'm also gonna be thinking about the property taxes. They should most likely have property taxes which is another significant item. So let's say that the home mortgage interest reported on the schedule on the form 1098 was, let's say 7,000, 7,000 there. If I go back to the forms, then I could see that the schedule A is still not being populated or is not greater than the standard deduction with just that 7,000 reported here. I also have then the state taxes. Now, this is a state tax that I put on the W2. I'm gonna take that out for now. I'm gonna go back on over and go to my income. So I'm not focused on these state taxes for the W2. Let's take a look at it again. So all we have then is that 7,000 and then the state tax calculated on the rate for, I believe this would be the sales tax kind of tables calculation we looked at in prior presentations. But you would expect then, even without substantial state taxes that were related to state income taxes or sales taxes, that you would have property taxes too, which could help to push over. So if I went back on over and then said, oh wait, they've got property taxes now, going back into the taxes line and looking at the real estate taxes, which would be here. And let's say that was 5500 for example, and note that the real estate taxes may have been something that you've kind of set up to pay out with the loan or the financial institution that you have the loan from. So therefore when you get the 1098, you might, they might provide you the information that they're paying for the property taxes as well. But you don't have that same kind of requirement, meaning this form 1098 is for the reporting generally of the mortgage interest. It just might so happen that you kind of are going through them to help out to kind of package together the payment of the property taxes. So they might provide that information for taxes as well. If not, then you might not get a document for property taxes, you would have to just go to the standard bill. You would be getting the bill for the property taxes and different areas might have different tax systems for property taxes. They might tax it generally like twice a year. And then when they actually issue the bill could vary depending on where you are at. Typically you're on kind of a cash basis system. So it would be when you paid the bill, although there could be restrictions to basically prepaying too much in advance and so on, trying to kind of game the system by prepaying a bunch, for example. But that's the general idea. So you might have it reported by you to you by your financial institution or you might just have to pick up the property tax bill that you're paying to whoever the entity is you're paying the property taxes to. So that's something that as a preparer, you should just kind of trigger in your mind. You're gonna say, oh, I see that you own a home or I see that you own the home from the fact that you have the mortgage interest. I assume that you own the home. And then I'm gonna follow up with the question on the property taxes to make sure that we're picking up that one because that's the other kind of big one that along with basically the state taxes might then be enough to push us over in this case, the 13379 pushing us over the threshold. So now if I go back to the first page of the form 1040, we're at the 13379 instead of the standard deduction at the 12550. We can mirror that on our schedule over here. We can say we got the 100,000. And then I could say, let's go to the itemized deductions. And we said that we had then the taxes. Let's go to the interest first. And we said the interest I think was, I said 6,000, did I say? Let's go back on over. I forgot 7,000 in the interest and 5,5 on the taxes. So 7,000 on the interest taxes on the property taxes. We said we're 5,5 and that opens up the ability to take either the state taxes or the state taxes or the sales tax. I'm letting the system calculate the sales tax at the 879 at this point. So we're gonna say 879. And so that adds up to the 13379, pulls over to the first page of the 1040. So now the 13379 is greater than the 12,550. Therefore we're itemizing as opposed to standardized the taxable income now 100,000 minus the 13379 is the 86621. Let's check that out on the tax return. So scrolling down 86621, is that what I said? 86621, yeah. Page two, letting the software do the tax calculation 14,811, 14,811, 14,811, 14,811. So there we have that. Now notice that when you got the property tax that's kind of coupled in with that, there's that cap of the 10,000. So if I go back on over here and we saw that with the state taxes, it's likely that you end up hitting that cap if you have a lot of basically the property taxes. So for example, if I went back on over here and I said my state tax from the wages withholdings was 5,000 and I go back on over to the forms, now I've got 10,500 that would have been deductible except for the cap that took place of the 10,000. So, and I bring that up here because you're gonna link those two things together typically mortgage interest and you're thinking about property taxes. I'm gonna take that back down. Take that back down. Take that back. You take that back. Okay. Now the next thing that can be a little bit confusing are the concept of points. Now points is a type of thing that kind of developed within the making the deal for the purchases. And you can think of them oftentimes as basically like prepayments of the interest. But it can get a little bit tricky. It's getting kind of more and more standardized so it depends. So actually oftentimes they'll report it here in line six but if you read the instructions for line six just let's take a look at them. Line six, not all points are reportable to you. Box six shows points you or the seller paid this year for the purchase of your principal residence that are required to be reported to you. Generally these points are fully deductible in the year paid but you must subtract seller paid points from the basis of your residence. So that's generally if you got them in here then it would be a fairly straightforward we could basically enter the points. Now then in the timeframe that you have the purchase that take place you might take a look at the closing documents or when the refinance happens to see if there's any other kind of points that you might be able to take. And it's possible that they put something under the term of points that aren't deductible like that would be if they're not basically prepayments of interest. And it's possible that you would have to amortize in some instances the points over the life of the loan and you might have to scour through the closing documents to make sure to pick up any of those items on there. Otherwise it would be fairly straightforward if here and we can go back then to the forms and we can say, okay, let's go to the points item and I'm gonna go then to the deductions for the schedule A and then they got the home mortgage and points on form 1098. So you could basically I can include the points here points that could be included and then we can make that adjustment. Now, if you have to amortize the points it gets a little bit more tricky. You basically have to then it's kind of like a depreciation schedule. So you could go into the deductions and you'd go into the, in this case and I'm just showing you how to do it in an assert but it would be the same kind of concept that you would be taking the points over the life of the loan in essence. So I'm basically gonna say we have points. I'm gonna say they're gonna go into the form schedule A for the points. The category I'm gonna say is amortization. I'll say the point started on 1121 cost. I'm gonna say is a 1000. We're gonna say the method will be the, let's do the straight line on the method and then the life or class or how long this is gonna be would be the term of the loan. And let's say it would be something long oftentimes like 15 years or something because if like 15 or 30 years depending on the loan that we took. So that's why it could be a fairly small amount for over a long time period. It'd be nice if you could take the points in the current period if that was something that would be possible to do due to the fact that you have to amortize it over such a long timeframe. So if I go back on over, so now we've got the 7001 here and then we've got the points not reported to you on form 1098. So remember these would be the points that would not be reported on the form here because if they were reported here then you typically get to take them unless there's some kind of exception on that were on the form. So then I can take a look at that schedule. Let's take a look at the schedule down here for the depreciation for 2021. And you can see it's a straight line calculation for the depreciation. If I pulled out the trusty calculator, we're saying that it's gonna be 1,000 over 15 years. There's the 67 right there. So there we have it. Okay, so there's the points. The next thing we might see is mortgage insurance. And again, that should be fairly straightforward. Most of the time here reported on the form 1098. So you could go down here and say, okay, on 1098 we've got the mortgage insurance line five. We can always take a look at the instructions and get more detail on that. If an amount is reported in this box it may qualify to be treated as deductible mortgage deductible mortgage interest. So it's gonna go in the same kind of category in the schedule A in other words. So if I go back on over and say, okay, now we've got the mortgage insurance, qualified mortgage insurance. Let's say that was $1,000. And then I go back on up to the forms onto the schedule A onto the schedule A. And now within the interest we've got the mortgage insurance of the 1,000. Now note that there is a cap on the mortgage insurance. So if it goes over 109,000 I believe then you're gonna lose the deductibility of the mortgage insurance. So just to check that out. And that's for the single filer. And then it's 54,000 for married filing separately. So let's take a look at it. We're gonna go over here and say, okay, let's bring the income level up to like 110, 110,000 and then go back on over just to check out that cap. And you can see it goes away right there, right? So it went away. So we don't have the deduction at that point. So remember with the mortgage insurance you might get a question like that. They might say, well, what about mortgage insurance? Is that gonna be a beneficial thing for me if I need to pick that up in order to make the deal happen? You will if your income is below a certain threshold that then you typically get the benefit on that. Going back on over, let's go to then the client information and let's say they were married, married filing jointly still at the 100,000 picking up. Then notice I'm not itemizing now because now the standard deduction is still over even with the information we put on the mortgage interest and the taxes. So 25,100, but if I go into schedule A and check that out for the interest still not there. So we still got that cap at the 109,000. If I bring down the wages then, married filing joint, bringing the wages down, let's say brought back down to 100,000, 100,000 and then going back to the forms. So now we've got the 1000 back in play. Okay, let's go back to where we were before. I'm gonna go back over. I'm gonna go to the client information, put it back to the single filer. So we're gonna be itemizing again back on over to the schedule A which is now being populated because it's greater than the standard deduction. Now the next thing you would have is possibly investment interest. And you gotta be careful with investment interest because investment interest is interest paid on money you borrowed that is allocable to property held for investment. So you got that same kind of concept of course with we're using that money to generate revenue which is why it would possibly be deductible. It doesn't include any interest allocable to passive activities or to securities that guarantee tax exempt income. So you gotta keep aware of those kind of exceptions to it as well. So we're gonna put then the investment, what did I say investment interest? Let's put the 1000 here and I'm gonna take this 1000 away up top and then go back on over to our forms. So now we've got the investment interest which may need to be netted out against investment income. So you can see down here the investment interest attached form 4952. So if I go to form 4952, 49 that's not the right one. So there it is. And so we have a carry forward at this point in time because it was disallowed. Let's say that we had say income on the income line which was let's say dividend income, div income, let's say 2000 and 2000 and go back on over to the forms. And so now we've got some 2000 of property held for investment. And so now we're picking up that interest and taking that here now. So if I go back on over to the schedule A now we see the interest, the interest investment interest attached here on the 1000 which of course flows through to the 14546 flowing through to the form 1040. So there's the 14546 there.