 Income tax 2021-2022. Taxes you paid, part two. Get ready to get refunds to the max. Dive in into income tax 2021-2022. Most of this information can be found on the Schedule A Instructions Tax Year 2021 found on the IRS website at irs.gov irs.gov. Looking at the income tax formula focused on the itemized deductions keeping them distinct in our mind from the adjustments to income which you might hear called the above the line deductions, the deductions for adjusted gross income, the Schedule 1 deductions. Anytime we think about the itemized deductions we're comparing and contrasting them to the standard deductions to see which is larger taking the one which is larger that would mean we would only take the itemized deductions if greater than the standard deductions page 1 of the form 1040 looking at line 12a the standard deduction or itemized deductions here we're looking at then the Schedule A which would be included if itemizing the list of itemized deductions on the left hand side total of the Schedule A then if larger than the standard deduction flowing through back up to page 1 form 1040 line 12a these are going to be the standard deductions that you want to have a general idea of in your mind so that you can basically answer questions and run through different scenarios just basically in general depending on whether someone is going to be itemizing or taking the standard deduction so we're continuing on with the state and local taxes so state and local general sales tax if you elect to deduct state and local general sales taxes instead of income taxes so remember we have that either or there's a debate or kind of a fight that happened in the law a while back where there was this deduction for the state taxes which was income taxes but not sales taxes and again the general idea would be that the federal government's not supposed to be influencing what the state wants to do so if the state wants to fund their stuff by using something other than an income tax like a sales tax you would think that would be fine they could do whatever they want to do but if you get to deduct the tax if you take a income tax but not a sales tax you would think that that would be subsidizing the states that are doing the income tax and so then they basically said no that's not fair we should be able to deduct the sales tax if we want to do a sales tax because the Fed shouldn't be influencing our decision to tax wherever we think is best for our local area here so then they allowed basically the sales tax so now you got to decide are you going to take the income tax or the sales tax because some states might have both an income tax and you know a sales tax and if you're living in like a large like a state like a like that has a big income tax like California or New York's likely that you're going to have more income tax unless there was like a big purchase maybe you purchase something that was really big and you had a lot of sales tax on it or something like that so that's that's how this kind of kind of came about here so now we've got these two things that are deductible and you would think you got to take either one of the two so if you elect to deduct state and local general sales taxes instead of income taxes you must check the box online 5a to figure your state and local general sales tax deduction you can use either your actual expenses or the optional sales tax tables so the easiest thing to do using software is of course using the sales tax tables so in other words if you're not taking the income tax you're going to take the sales tax then it's like well how am I going to calculate that am I going to add up everything I've purchased or you could use the sales tax tables so the sales tax tables would be the easier way to go or you can go to the actual expenses which might be more applicable especially if you purchase something large which could put you out of sorts or out of distortion from the standard sales tax you would get from the tables depending on a particular area and the income level and so on how they build those tables so actual expenses generally you can deduct the actual state and local general sales tax including compensating use taxes paid in 2021 if the tax rate is the same as the general sales tax rate food clothing and medical supplies sales tax on food clothing and medical supplies are deductible as a general sales tax even if the tax rate was less than the general sales tax rate so in other words you would think you're using the general sales tax rate and but there's certain things where you would think they would lower the sales tax and that would be on things like food and clothing and there are certain things where you would think they might increase kind of the sales tax and that might be on like luxury items or items like maybe like a tobacco or something where they're trying to disincentivize the use of it or something like that so if you go and just as a general rule if you're thinking about an income tax versus a sales tax usually the arguments between the two some people say well the we got to use an income tax because it's a progressive tax and it has the progressive tables to it and the sales tax is regressive because it falls more heavily on people that have lower incomes however that that's not exactly true if you were to adjust the sales tax because it's possible that you could say well that's true if I if I include food clothing and medical supplies for example and possibly energy in the items that that are applied to the sales tax at the higher level but if I make those items lower on the sales tax then the people that are spending all of their money on the essentials food energy clothing are not going to be as subject to sales tax so you've basically now made it more of a progressive tax a progressive kind of sales tax in that way so there's ways to kind of modify both of those taxes and and so you know there's arguments on both sides what's a better kind of tax system so motor vehicles sales taxes on motor vehicles are deductible as a general sales tax even if this even if the tax rate was different than the general sales tax rate however if you paid sales tax on a motor vehicle at a rate higher than the general sales tax you can deduct only the amount of the tax that you would have paid at the general sales tax rate on that vehicle include any state and local general sales tax paid for at least motor vehicle motor vehicles include cars motorcycles motor homes recreational vehicles sports utility vehicles trucks vans and off-road vehicles trade or business items don't include sales taxes paid on items used in your trade or business instead go to instructions for the form you are using to report business income and expenses to see if you can deduct these taxes so in other words if you have a trade or business type of item then you might be reporting for example on a schedule C if you're a sole proprietor kind of situation and in that instance if you're buying something that you're reporting as an expense on the schedule C then you would think that you'd be taking the sales tax as a deduction in just the cost of the thing on the schedule C and you can't then deduct it on the schedule A as well as taxes because you're going to take the full deduction so for example if you bought supplies and there was a hundred dollars of sales tax on the supplies that you're going to use in your business then you're going to probably record the whole cost that includes the sales tax as a deduction on your schedule C to get to your net income on the schedule C so you've already deducted the sales tax in the cost of the thing and you can't then deduct the sales tax on the schedule A again because you'd be double dipping if that were the case so refund and double dipping meaning getting two deductions for the same thing is what I mean by that so refund of general sales taxes if you received a refund of state or local general sales taxes in 2021 for amounts paid in 2021 reduce your actual 2021 state and local general sales taxes by this amount if you received a refund or state or local general sales taxes in 2021 from prior year purchases don't reduce your 2021 state and local general sales taxes by this amount however if you deducted your actual state and local general sales taxes in the earlier year and the deduction reduced your tax you may have to include the refund in income on schedule one so this would be a similar kind of thing as we saw if with the income tax so if it was a state income tax and you got the deduction on schedule A and then you got a refund of it in the following year then we might have to record it basically as income in the following year so in other words let's take a look at that one more time general refund so the refund of general sales tax if you received a refund of state or local general sales taxes in 2021 for amounts paid in the same year 2021 the tax you were talking about then you're going to reduce your actual 2021 state and local general sales taxes by this amount so that's because it happened in the same year but if you had something kind of similar to the to the income tax whereas this one down below if you received a refund of state or local general sales taxes in 2021 for prior year purchases so purchases made in the prior year and then you got the refund in the current year then the question is well what should I do should I go back to the prior year and fix it lowering the deduction that I got most likely not most likely you might then include it basically as income in the current year in a similar fashion as we saw with the state and local income taxes but you can take a look at publication 525 for more details on that if that's going to be applicable optional sales tax tables instead of using your actual expenses you can use the 2021 optional state sales tax table and the 2021 optional local sales tax tables at the end of these instructions to figure your state and local general sales tax deduction now typically the software will help you out with the tables so normally it's going to be a more easy kind of thing you're going to say it'll it'll basically be based on where you do your tax your taxes if you may mainly do taxes for people in a particular state then you probably have an idea of the taxes that are happening in that state for example if I'm in California I know California has a high state income tax they also have sales tax but it's probably the case that the income taxes are going to be are going to be high and that's probably the one that we're going to take and that's probably the way it's going to go here if you're in a sales tax state then you're probably well aware that the sales tax is the one that you're going to basically want to be deducting and most likely you can just use the tables to do the sales tax deduction unless usually there's kind of some kind of big purchase where the sales tax was you have a large amount of sales tax for whatever reason that's going to be outpacing what you would typically get with with the tables and that's when you might have to dig into it a bit more detail with the actual sales tax so you may also be able to add the state and local general sales taxes paid on certain specific items to figure state local general sales tax deduction using the tables complete the state local general sales tax deduction worksheet or use the sales tax deduction calculator at irs.gov software very helpful once again with the tax calculations there and pulling things from tables and whatnot is quite useful to have the software to to help you out with that if your filing status is married filing separately both you and your spouse elect to deduct sales taxes and your spouse elect to use the optional sales tax tables you also must use the tables to figure your state and local general sales tax deduction so again the iris is going to be skeptical of someone saying we're married but now we're going to file married filing separate and then trying to have one of the spouses take basically the tables as the deduction and the other spouse trying to take the actual sales taxes as the deduction right they're trying to you know you can see how they you might have a situation where they're trying to game the system in some sense so they're going to have some uniformity that they want to see their instructions for the state and local general sales tax deduction worksheet line one if you lived in the same state for all of two thousand twenty one into the applicable amount based on your two thousand twenty one income and family size from the two thousand twenty one optional state sales tax table for your state read read down the quote at least but less than quote columns for your state and find the line that includes your two thousand twenty one income again software helpful in these instances note the family size column refers to the number of dependence listed on page one of form ten forty or form ten forty s r and any conditions sheet plus plus you and if you are filing a joint returned your spouse instructions for the state and local general sales tax deduction worksheet so we have the income your two thousand twenty one income is the amount shown on your form ten forty or ten forty s r line eleven plus any non taxable income such as the following so we got the veterans benefits the non taxable combat workers compensation non taxable part of social security now the reason I just want to go over these fairly quickly because again you're probably going to be dependent on the software to help you out with this but just to get a general idea of how the tables would work you would think that the tables are going to be based on some vital conditions to determine what the general sales tax would be if they're just going to give you a number and one of those things of course would be the income line you would think if people had more income then they would have more more sales tax that they would pay in a higher sales tax deduction instructions for state local general sales tax deduction worksheet what if you lived in more than one state now this could be a problem and as you're doing tax returns you want to think about the complexity of tax preparation that you're going to do do you want to work with people that are mainly in the state that you're in that you know or which might be easier do you want to expand out to people have more complex tax returns with multiple states possibly for an income which is one of the things they can complicate the tax preparation so if you lived in more than one state during two thousand twenty one used 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 to multiply the table amount for each state by a fraction the numerator of which is the number of days you lived in the state during two thousand twenty one in the denominator of which is the total number of days in the year so three sixty five three if you also lived in a locality during two thousand twenty one that imposed a local general sales tax complete a separate worksheet for each state you lived in using the pro-rated amount from uh... step two for the state on line one of the worksheet so you can basically do this allocation method again tax software helpful to do this kind of thing otherwise combine that the pro-rated table amounts from step one step two and enter the total online one of the single worksheet so like i say this this stuff gets into basically you know the calculations get somewhat in depth and whatever we do with these calculations whenever we pull from the tables and so on it's good idea to have a general idea of how things work just like we talked about with the progressive tax system what is the progressive tax system what are the kind of things that make it go up these kind of calculations pulling from the tables as well a general understanding what's the state's sales tax deduction in general versus the income tax and then what kind of things might increase the sales tax tables when might we want to take the actual deduction versus letting the tables to the calculation and then from there rely to some degree generally on the software to help you out once you once you've got the general strategy that you're putting into place