 Income tax 2021-2022, software example, taxes you paid. Get ready to get refunds to the max, diving into income tax 2021-2022. Lassert tax software, you don't need tax software to follow along, which might want to have access to the form 1040, which you can find at the IRS website, irs.gov, irs.gov, starting point single filer, Adam Smith, living in Beverly Hills, 90210, 100,000 W2 income, we got the 12,550 standard deduction getting us to the 87,450 at the bottom line, taxable income, mirroring that in our income tax formula, 100,000, 12,550 standard deduction getting us to the taxable income, 87,450 matching our 87,450 here, then on page number two, relying on the software to calculate the progressive tax at the 1515. Pulling that on over here, we're gonna just plug that in, 15015, that's our starting point. We're gonna then go back to page one, we're focused on line number 12, standard deduction or itemized deduction. We're only taking the itemized deduction, if greater than the standard deduction, which is dependent on filing status, you got the general standard deductions on the left-hand side, single filer here at the 12,550, in essence you can double it if married, and somewhere in between the 18,8 head of household and then if over 65 and or some other conditions such as blind, you could have alterations to it as well. We're then gonna open up our information looking at that schedule A, which would be the support to the itemized deductions and we're focused here on the taxes. So when we think about the taxes, the main taxes you're thinking of are the state taxes that might be deductible for the Fed. This gets a little bit confusing because we're talking about the federal income tax with regards to the form 1040. We don't typically get to deduct the federal taxes on the federal income taxes because you could see how that would be kind of a circle reference because we're calculating the federal taxes here. But what about state and local taxes? Possibly we get state and local taxes as a deduction on the federal side of things. Why? If they're personal state and local taxes, I don't really know why they actually added that in in the first part. If it was up to me, I wouldn't have done it because I think it causes a lot of confusions, but that's what we have here. So the state and local, two major ways they conduct their tax business on their state and local sides with the federal government should not be involved in in theory, right? It's either gonna be the sales tax or typically a state income tax mirroring kind of what the Fed is doing. So then the question is, do we get those deductions over here? On top of that, the other big state tax that could be involved is the property tax. Now the property tax is usually the one that you're first thinking about to see if someone's gonna be itemizing at all. In other words, does someone itemize? First question often is, do they own a home? Because if they own a home, they got the two big ones which is gonna be the mortgage interest oftentimes and property taxes up here that could push someone over to itemizing. If itemizing, then it's more likely that they're gonna also be picking up the state taxes that they pay whether that be the sales tax if they're in a state that uses sales tax or the income tax if you're in a state that uses income tax. Now just realized that if you're a tax preparer you might be focusing in on your local area. So if you work in, if like I live in California if I understand California state taxes and I can, if I wanna just basically specialize on returns that I know about because it's around my area then that might make it a little bit easier for me. It gets a little bit more confusing, of course if you've got people that are in multiple states or if you're doing tax returns in states that you're not as familiar with and you have to jump back and forth between like a sales tax or if they're gonna be using a sales tax or a state income tax. And if you're doing tax returns where people are having income from multiple states then again that gets confusing as to what's gonna be the most beneficial thing the state tax or the sales tax and what's gonna be the primary state and so on and so forth. So as a tax preparer you're gonna wanna think about how, where do I wanna specialize? Do I wanna specialize in more complex returns? Do I wanna try to focus on returns that might be more simplified in some ways? One way you might simplify returns is by focusing in on the returns that are in the state or locale that you know as well. So just keep that in mind. So let's first just think about the income tax for the state income tax. So if I go back to our forms here and I'm gonna say, okay, we had the 100,000 wages. Let's say that there was withholding for the state income tax as well. And let's just say it was like 8,000. 8,000 was withheld for the state income tax. So if I go back on over and I'm gonna say, okay, let's go to my tax forms. Let's go to schedule A and now I've got this huge state income tax on 5A, which is the state and local income taxes or general sales tax line item. But because I don't have any other itemized deductions, even though that's quite large and it's a high income area, but I don't have anything in the mortgage interest, which is often the thing that's gonna be pushing people over. It's capped and we've got the 8,000 down here that's not gonna be greater than the page one. If I go back to the page one of the 1040 for the standard deduction, therefore we're still taking the standard deduction. I also note that if I go back on over here, let's test something else out. Let's say if I put this up to like 15,000, 15,000, let's see what happens there. Going back to the forms, taking a look at schedule A, notice that it has the 15 total, but it caps it at the 10,000. That was that controversial thing that happened a couple of years ago. And again, you would think that it would be falling more upon higher income individuals that have the state and local tax, the state tax being an income tax, most likely in high income and cost of living areas like California where I am and possibly New York where they got capped at this 10,000. If you're paying more than 10,000 in state taxes, they capped it there, which was a kind of controversial thing. And they're still kind of arguing about the current administrations. You'd think they might have tried to reverse that or whatever because the prior administration did the prior thing and capped it and so on and so forth. But it's still at that cap at this point in time. So just realized that you got that cap on the taxes in general, the state taxes at the 10,000. So even if I paid this large amount, the 15, I'm capped at the 10. And if I have no other itemized deductions, even though that's a huge deduction in and of itself, it's not enough in and of itself to push me over the main thing that would probably push us over to be itemizing would be if we also had basically the mortgage interest on top of that. So let's go back on over and let's also say that just, if I was to remove the state taxes and I didn't have any state taxes, for example, then I go back on over and go to the schedule A and say what's gonna be the calculation there. They still calculate something and you'll notice that the box is checked here and it says you include either income taxes or the general sales tax online 5A, but not both. If you elect to include the general sales tax instead of income taxes, check the box. We have the general sales tax then that has been included. Now the sales tax calculation is gonna be based on tables and that gets kind of complex because the sales taxes good tables are gonna be based on, you would think locale by locale. So in California, we have both sales tax and the income tax. You would think usually the income tax would be higher but if there was nothing paid into the income tax, it's gonna default to basically the tables taking into the account the sales tax. This is where the software is quite helpful. So all the stuff that we looked at on the different rules and the tables and so on, usually it's fairly straightforward because if you're in a state, for example, that doesn't have state income taxes and therefore is dependent on the state sales taxes, the tables typically will take that into consideration and of course give you a higher, you know, a rate based on your area and your income level. Then, so again, obviously this state sales tax in and of itself is not gonna be large enough to kick us over to be itemizing but it could be included with other things such as the mortgage interest. Now then if you had like large purchases for example or something like that and you actually wanted to figure out what your sales tax is and not rely on the table, then that's when you get it a little bit more into the weeds, a little bit more confusing in terms of actually doing the calculation for the state sales tax. So if I was to go into the deductions for example on the itemized deductions and look at my taxes here, I could get down here into kind of the weeds for the actual taxes paid state and local sales tax that was paid and maybe, you know, I paid 8,000 of state and local sales tax. That's when it's gonna get more burdensome to actually do that calculation on the sales tax side. That's gonna be more burdensome usually than obviously the tables which would be easy if you had software or the income tax if you're in a state that has the income tax like California because the income tax will typically be calculated as you do this as you do the taxes for the Fed too cause you'll be doing the state return as well typically. So that's gonna be the general concept there. I'm gonna take that out, bring us back down to here. So now let's do kind of a combination type of situation what we would expect to push us over which would be the interest for the mortgage interest and then the property taxes as well as possibly some income tax. So let's go back on over and let's imagine that we had withholdings on the state taxes for let's just say it was 5,000 state taxes going back on over. Now we got 5,000 here it's not enough to push us over to being able to itemize. Let's go back on and then let's go to my income and we're gonna go not income deductions and we're gonna go down to the schedule A then the mortgage interest is often a key component here and let's say we had mortgage interest and points that were let's say 6,000 here and then I'm gonna go to my taxes again and this time look at the property taxes the real estate taxes. Let's say that those are 5,5. Okay, so now if I go back on over you're gonna say now I've got that 5,000 in addition to the real estate taxes that took us over the 10,000 cap. So again, high cost of living areas with a housing is gonna be quite expensive the property taxes then would be quite high and the state taxes would be quite high in comparison to other areas will often in higher income individuals in those areas might find themselves quite more often hitting that cap of the 10,000 and then we've got the interest down here of the 6,000 and that will kick us over to the 16,000 kicking us over allowing us to itemize. So again, your question usually will be does someone own a home if they do they probably have mortgage interest and in addition to the state tax most likely gonna be two things that kick them over the top to being able to itemize if I go then to the 1040 we've got the 100,000 and now we're taking the 16. If you were to mirror that on our worksheet let's just take a look at it. We've got the 100,000 and let's say that we had let's go to our schedule A and schedule A we've got the medical I'm not gonna put anything in the medical the taxes we said the state tax now you could actually calculate this or pull this in if you had another kind of worksheet that was pulling in your withholdings from like your W2s for state taxes if that's how the taxes will be being paid and pull it in from here but I'm not gonna focus on state information at this point other than just to say we paid 5,000 on state taxes but where would you find those usually you'd have estimated tax payments from your withholdings or from other some kind of 1099 or documentation just like with the federal side and or you made estimated tax payments if you're a sole proprietor for example and then the local taxes and then the property taxes I said was 5,5 I think now notice that that's bringing it over to the 10,5 and there's a cap at 10,000 so let's do our basically our formula to cap it a logic test so I'm gonna sum this up on this side and I'm gonna do my logic test over here which is gonna be an if calculation I'm gonna say this equals if brackets this number if that number is less than $10,000 the cap then comma what do I do if that's the case I want you to pick up that number but comma if it's not what do I do then you put in the cap of 10,000 so that'll help us to put that cap in kind of automatically so there's the cap if this was at 5,000 then it takes the 5,000 if it sums up to something other over the 10,000 it caps it at that 10,000 then we have the mortgage interest that I put down here and I put the mortgage interest at 6,000 I think so there it is there's our 16,000 that pulls over to the first page of the 1040 100,000 now notice the itemized are greater than the standard therefore we're taking the itemized given our logic tests that we put in here the if logic tests and that gets us to the 84,000 if I go back on over 84,000 page number two now we've got the 14234 calculated by the software 14234 calculated by the software that's right right that's what the software calculated 14234 yeah it is so we can kind of mirror that on our formula here so those are the big ones now note even here if I was to basically say we were married filing joint then the 16,000 although significant here for the single we still might be going back to the standard so just keep those in mind the big differences in the standard deductions for the different filing statuses and the impact that that can have so if I go back to and I say I'm gonna say married filing joint now married filing jointly and then go back then to the forms so now we've got Adam and Eve married filing joint 100,000 and now we've got the 25,100 so that gives us the 75,009 we're taking now the standard deduction as opposed to the itemized deduction due to being married filing joint even though we had all those itemized deductions here because it's now adding up to something less than the standard deduction so those standard deductions were increased a couple of years ago they're higher so even somebody who's paying a significant amount of state taxes real estate and the property real estate taxes and the state taxes income or sales tax as well as some of the mortgage interest may be basically itemizing in that case and I can mirror that over here on our worksheet to say that now I'm gonna pick up the standard deduction at the 25,1 and now of course we're picking up the standard deduction as opposed to the itemized deductions here so that's gonna be the general idea of it