 Income tax 2023 2024 itemized deductions interest you paid tax software example Get ready and some coffee because we're looking at some useful hacks for income tax Preparation hey, hey, I said useful hacks Get that mainstream of sewage media reporter hack off the screen for crying out loud or else our ratings are gonna experience a bloodbath Here we are in first a word from our sponsor Yeah, actually we're sponsoring ourselves on this one because apparently the merchandisers they Don't want to be seen with us, but but that's okay Whatever because our merchandise is is better than their stupid stuff anyways like this CPA thinking cap for example CPA thinking CAP you see what we did with like with the letters and This CPA thinking cap is not just for CPAs either Anyone can and should have at least one possibly multiple CPA thinking caps Why? 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That's the 14 266 Okay, let's go back to page one and our point of focus is online number 12 Where we have the greater of the standard deduction or itemized deduction Remembering that we have to clear the hurdle of the standard deduction to itemize That being connected strongly to filing status summarized on the left-hand side for single filers 13 850 doubled for married filing joint 27,700 head of household in the middle of 20,800 if they're over a certain age and or blind we can see those on 1040 SR page number four Single filers one or two of those conditions We can see the related increases to the standard deduction on the right same for married filing joint where we have one through four Conditions given we have two people and two conditions and the standard deduction levels that we would have to clear to itemize on The right let's go back to the form 1040 We could see of course online number 12 that if itemizing we would be including a schedule a So let's go to that schedule a we're looking now primarily at the interest line item And when we think about interest we're typically thinking mortgage interest quick recap and remembering that When we have a normal income tax system What kind of deductions are natural to an income tax system? Those deductions that were incurred in order to generate revenue which we can most clearly see on the schedule C, which is basically an income statement income minus expenses, which are business expenses business deductions getting us to the taxable income taxed on net income not gross income These are natural kind of deductions that you would expect in an income tax system Most of the things on the schedule a are Deviations from that natural or normal type of deduction things needed in order to generate revenue like the medical Expenses like the taxes that are personal taxes like the interest that is personal interest Such as interest on your home because the home is Personal why are they on there because of other kind of incentives and so on most likely because of lobbyists in? Particular industries I would think right that's going to be the general idea, but in any case The thing that usually pushes people over from standard deduction to itemized deduction will be the ownership of a home and Usually the people that own the homes and more high cost of living areas are going to get a bigger benefit Because of course the homes are going to be more expensive to live in those higher cost of living areas If you're in a lower cost of living area then the federal government you're getting a disadvantage from a tax perspective Of course because you're not going to have the the same kind of cost of living costs that are kind of the same over the whole country when we talk about deductions like Interest or home related deductions so the biggest deduction of course is if you have a home You're going to have possibly a loan on it And then you might be able to deduct the mortgage interest on that which will typically reported be reported on the form 1098 also included with that is typically property taxes Which also might be deductible and could be quite expensive especially in higher cost of living areas the combination of those two things Will typically push you over once pushed over to being able to itemize Then of course we have to look more closely at all these other types of things To see if they will benefit us now that we've cleared the threshold where they were as they would not benefit people who had not cleared the threshold right and then also when we think about interest we also might have other interests such as like an Investment-related interest which is kind of similar to what you would normally expect and that you might be expending money in order to Help generate money although that being a little bit more speculative You can see why they might like restrict the deduction of that kind of interest meaning taking out a loan to invest in like the stock Market seems kind of like more of a gambling thing in some cases But possibly an investing depends how you want to basically look at that type of investing and then Leveraged type of investing in that case and then we could also have other taxes such as Local taxes the most common one would be like the DMV Car registration once we're already itemizing then that's something that we can always basically ask for With regards to the car registration in essence So the most common thing is that we would expect to get like a form 1098 if they were a mortgage interest So if we've got this form then of course we're gonna assume that we'd be able to deluck deduct The mortgage interest related to it now clearly we would also probably be looking at the prior year tax return If they itemized last year and owned the same home last year Didn't refinance or anything like that You would expect a similar kind of thing to happen in the current year and the form 1098 to give us the reflection of the mortgage interest That was paid now sometimes you might have a situation where they did not On the home last year and they purchased a home in the current year in which case It could get a little bit more complicated Because the 1098 hopefully will pick up all of the mortgage interest and whatnot that could be deductible but you might have to go through the closing statement of The sales transaction or purchase transaction in order to pick up say points for example to see if you can deduct The points that will be involved also note that sometimes when you set when people set up their Their situation of paying back their home loan They sometimes set it up where they're going to be paying part of the property taxes As well through the financial institution, which can be useful because That allows you to basically make all your payments the same However, usually you pay property taxes like once or twice a year So if you're paying property taxes directly to the state and locale, you're probably paying them once or twice a year Whereas if you have them broken out by your financial institution They're going to break it out. You basically on a monthly basis, right? And then you pay them they compile the money and pay your property taxes in essence for you So that you have a nice even amount that you're paying So that means when you get the 1098 if you pay property taxes through your financial Institution they might give you that information as well although possibly not required to do it that way because They're required by the government to give the mortgage interest to 1098 but possibly not the property taxes If you don't see property taxes, but you do see that someone owns a home You're going to need to ask for the property taxes because almost certainly no matter where they are There's going to be some kind of property taxes on the ownership of the home now this 1098 obviously box one Mortgage interest received most common thing that we would see there and then to outstanding mortgage principle Could be useful to help you determine The the amount of the loan but remember the general idea would be you get to deduct the home Mortgage interest if you used it the money the proceeds to purchase the home or Possibly to improve the home and so on so if you and there's a cap on it So basically if the loan amount was over the cap Then you you run into those more complicated situations where it's like, okay This is just reporting the interest on the loan how much of that interest is deductible if the loan is Basically over the cap that's only going to happen for more well-off individuals You would think of course and then you also could end up with situations where someone took out a loan used the home as as a Collateral so the bank would give them a loan But they didn't use the loan proceeds to purchase or invest in the home possibly for a good reason Like they wanted to consolidate their debt and get rid of all that credit card interest and what and whatnot Possibly for a bad reason or you know one that's you know more frivolous They just wanted to go on vacation or something I buy a car or whatever and then again you end up in a similar situation where you have the mortgage interest here and the question is Well, how much of that then is going to be deductible or not? And that's when we talked about in prior presentations You might have to go into more detail and figure that out But usually it's pretty straightforward because most people are going to take out the loan against their home and use it to purchase The home or possibly refinance the home or possibly take a second on the home, right? And then we've got the mortgage Origination date the refund of Overpaid interest if that is applicable doesn't always is not generally applicable oftentimes Mortgage insurance premiums so sometimes when you take a second or something like that on the home possibly because you have a large amount that you need to be financing the Insurance the financial institution because maybe they're not the primary Person on collateral in case of default of the loan might want more assurance such as insurance And then the question is will that be deductible and then we've got the points on the purchase of the principal home which Points can be defined multiple different ways when you buy a home So that's another kind of area of contention Normally if they're on the 1098 that means that you paid them in the current time and possibly are there are then deductible But you also might have things on the closing statement That qualify as points and the question is do you have to put them on the books and amortize them? So for example, if I look at the instructions over here for box six It says not all points are reportable to you box six shows points You or the seller paid this year for the purchase of your principal residents that are required to be reported to you Generally these points are fully deductible in the year paid, but must be Subtract subtract seller paid points from the basis of your residents other points not reported on box six may also be deductible for more information see Publication 936 so the general idea would be these might be the points and points sometimes are kind of like prepayments of Interest that they're categorizing as points. I don't want to get into too much detail of that but if it's here you might be able to deduct them because they're basically paid them and For taxes were basically on a cashed-based system However, you might have points that were accumulated on the closing statement that might qualify as points for example Which aren't being reported on the 1098 which you're going to need to pick up at the point of the closing statement And then amortize them over like the life of the loan So if you've done that correctly when the house was purchased, it'll be pretty easy going forward To track everything and everything should be reported on the 1098 But if you do have points that are rolling forward that you're amortizing Then you're going to want to make sure that you're using the same software as you used last year Or if picking up a new client or using new software It would be best to enter the information into the prior software To get it right and then roll it over carry it forward to the new software Which is something I would recommend anytime you have a more complex return Which would generally include any return that has a schedule a so let's go let's go back in and just do the normal mortgage Interest we'll just say okay We're gonna go mortgage interest dude and Well hold on let's do it this way deduction Schedule a and then we're gonna say interest mortgage interest home mortgage interest and On the schedule 1098 a so let's say it was 12,000 so that that's a pretty significant amount of just the interest not the principal So and then I can go back on over notice of course that isn't enough to push me over that brings me to 19305 if I go to the form 1040 Then I'm I'm at the actually it did bring me over. Let me check it again. I went but I went to the oh I also had the state taxes here. Let's take the state taxes off to start with so I can then Show you that I'm gonna take that off to do it So now if I go back to the schedule a it's still including the sales tax 1205 plus the 12,000 brings me to 13205 if I go to the form 1040 notice that's going to be below the 13850 now the thing I want to point out is that many people they get in their mind or some real estate Professionals might not be as clear or straightforward in terms of the deductibility of mortgage interest and and the the property taxes So you want to make sure that if you have someone that is if you're thinking about purchasing a home What is the actual benefit that you're that you're going to be getting it because it's because you have to look at the difference between So so for example this first one Here we basically had no itemized deductions and we were still able to deduct the 13 850 if I bought a home under those conditions you could see here I paid $12,000 of interest and I'm still under the threshold and it's not giving me any added benefit because because I'm not clearing the standard deduction if I just barely clear the standard deduction, let's add now the property taxes We're going to say okay. Let's go to the itemized deductions to do it and say we're also going to have taxes and say that the property taxes are Principal residents 6,000 was our what we've been doing here. So 6,000 of property taxes that brings me to I'm going to add that to the sales tax to the to the sales tax Calculation which we talked about in the prior presentation sales tax or the income tax plus the 6,000 brings me to 7 205 and now we're at the 19 205 if I go back to the first page of the 1040 We are now at the 19 205 Although I got to deduct 19,005 primarily coming from the ownership of the home I really only got a benefit of the 19 205 minus the 138 50 Because I would have got the 138 50 anyways So you have to take that into consideration when you're doing like budgeting or planning of of should I purchase a home? Or not if part of the purchase is that you think is of course based on the deductions. It's just a more complicated Calculation so if I go back on over here, for example, and I add that in here I'm going to say that the schedule a now had real estate taxes of 6,000 It calculated the sales tax, which is a state tax on the sales tax 1205 1205 and then we calculated the mortgage interest at 12,000 that comes out to this total itemized What happened here? It's not summing up what is happening. What is happening? Oh, let's put this on the side 1205 6,000 delete these 12,000 over here to delete that that comes out to 19 205 first page of the form 1040 19 205 is greater than the 138 50 So the benefit I got though is really only the difference between the two 5,233 difference and so that gets us to the 80,795 if I go to The first page of the form 1040. We are now at the 80,795 page to calculating the tax at 13778 So I was at let's put this over here 1 4 2 6 6 now. I'm at the 1307 8 right 1307 8 on the tax calculations of the difference is really only that amount and if I look at that difference divided by by the Change There's the 22 percent based on this change But really the deduction that I had to spend in property taxes and so on is This amount right so if I compare that then Let's do hold on a second to do Then I got a benefit of really only 6% on On the deductions that I that I took right I had to pay basically 19 205 Although I did get to include the sales tax as well And I'm only getting the benefit of 6% why because really I had to clear the standard deduction before I got the benefit and So this is really the difference that I'm looking at which is really only 5,000 So you might say should I buy a home? Well if you buy a home the argument that you might hear from people that that are in the business of selling homes is you're Gonna get a 19,205 deduction a little less than that because this includes sales time But but there it is and but really if you look at where you stood You're only getting the difference between the standard deduction and that amount, which is really only 5,355 deductions that I have to pay around $19,200 to get right which is a you know, it's a big significant difference So it's not like it's insignificant But you have to do the actual projections and software to really get an idea of the benefit and that gets more into planning rather than just Data input, but it's something to keep in mind Because again whenever the tax code puts something in that they claim is trying to help What probably happens in the long run is the price of the home goes up And it just makes it more complex for normal people that now just have to do more calculations Than they otherwise would if they never put this in place the home prices would probably be lower Right, and then you would have a less complex calculation of what to do They just subsidized basically the housing industry, right? And that's why it's it's more complex and more expensive at the same time. So in any case that's gonna be that one now let's say that they just purchased the home and they have points that you picked up on the on the Closing document so this would only happen when they first purchased the home which becomes a little bit more complex So then you might have then like depreciate depreciable points That you'll have to put on the books hold on a sec We're gonna say that this is gonna be so that might look something like this You're gonna say the form it's gonna go on to is a schedule a for points and then I'm gonna say the category I'm gonna amortize the points. I'm gonna put it on the date placed in service six six Let's say we paid we pulled this off the closing document of 600 It's not on the 1098 Because these are points that you're basically prepayments of interest So the government wants you to pay the interest when they actually pay it and I'm gonna use the easy method Which is just straight line which is typically something that you can often do with the points amortizing them evenly over the life of the loan Sometimes you might have to use a more complex but more accurate kind of system because but We're just gonna use generally the straight line and then the life I'm gonna say if it was a loan of 30 years You might have to amortize it over 30 years Which means you're gonna get a very low amount of benefit per year on it, right? So it gives a lot of complication for a relatively low dollar amount of benefit So if we pull that over then I had it in 2024 2023, it's $12 the whopping $12 So so that's because we have to amortize it over so many years and notice that also adds the complication of having a depreciation schedule now so now I've got a track depreciation of The 600 and it's a straight line 30 years so 600 divided by you know, the 30 is basically the idea of it to do it let's do the 600 over 30 would be 20 and then you basically have Six months divided by two it's close to that because basically we got half the year We put it on like in the middle of the year So that's the general idea of it and then in the following year if we go to 2024 you'd get the full year's worth which would be the $20 in The following year so the fact that now this is going to carry forward to the next year This is why once you have a schedule a and certainly once you have depreciation schedules It's useful if you pick up a new client to enter this information into the prior software So that you can then get your depreciation schedules to tie out to say the paper return You're looking at and then carry it forward so that the software can properly carry forward the depreciation Schedules and you can kind of double-check them to see that the calculations are properly done instead of Entering it into the current year to try to figure out and make sure that the depreciation schedules are properly calculating All right, let's go back to the schedule a now You could of course also have points that were on the form 10 the 1098 so if you went to the to the deductions and If the forms were were on The points were on the 1098 then you'd have the points on The 1098 here, okay, so then You could have investment interest which is kind of an another type of interest that we would think would be more natural to an income tax system because you needed to pay the interest on the purchasing power of the loan to generate the Revenue although you could see why the iris would be skeptical of some kinds of investment that look more like gambling such as Taking out a loan to do short-term investments in the stock market for example But if we have that type of investment interest that might go here you probably see it less often You also could have in like types of investments for example If there's ownership of property that's not being rented or and it's also not your principal residence Which is again not something that you see all the time but if it's not being rented as rental property and it's not being a Principal resident doesn't qualify as a principal residence and there's a loan on it then basically it's just an investment, right? You're still trying to generate money by it going up in value and possibly in that case You might have investment interest So normally if it's like credit card interest or stuff like that Usually you can't take a deduction for it But if you have some other other loan that's related to like an investment Then you might do a little bit more research and see where you can deduct that again normally You would like to deduct it as a principal resident first home second home or possibly Or Something like that Okay, then the next thing to note is that it's possible that you have your home that you're using as A business as well. So you have an office in the home Well in that case you would think that part of the interest that you pay is now actually a legitimate deduction with regards to normal rules that you would expect for for income taxes and that you should be able to deduct the purchasing power of The home as a business expense because it's basically like purchasing an office However, if you deduct it over here on the schedule c you can't also deduct the same amount on The the schedule a so I don't want to dive into it in too much detail now We'll get into it more when we get into the schedule c But the general the general idea would be if you have a home that's used for personal use as well Both the interest on the mortgage of the home that it has the home office as well as the property taxes Might be deductible over here Which is usually more beneficial because if you can deduct it over here It might have an impact on Even if you do not itemize number one and possibly on not only your income taxes But also on the self-employment taxes which can be significant So generally you'd want to take it over here first if possible Anything that you're not taking over here you put over on the schedule a the question then will come up How much can I deduct over here versus what's on the schedule a you probably want more over here if you can Well, it's you're going to use some kind of ratio calculation, right? The home office is what proportion of the entire home And then we'll use that ratio that percentage to to bring that amount here versus the schedule a We'll talk about that more when we get to the schedule e and the home office I mean the schedule c and the home office deduction Related to the schedule c you might have a similar situation with like a schedule e Which is like business income but related to like rental property You get all kinds of messy situations when you have a home But you're renting part of a home for example that could be that can cause problems as well Let's go back to the schedule a Now remember also That the irs is going to be getting this form this 10 98 So if you're reporting something different on your return then the 10 98 They've got a whole another line for that right home mortgage interest not reporting on 10 98 because this is such a big deduction The irs is kind of looking at it pretty closely So so so it says if paid to person from whom you bought the home see instructions So so if for example, you're you're paying the person who purchased the home Then well, we looked at that in a prior presentation But the general idea is that you would like to structure your mortgage interest in such a way that you will have the proper amount reported to you by the financial institution on the form 10 98 But sometimes You might not get a 10 98 and you'd have to report it down here on a form That's not a 10 98 and then you'd have to tell the in the irs why that was the case You might for example have a 10 98 that's going to someone else But for which part of the of the interest is should be allocated to you Right, so now we the 10 98 is only going to one person one person got the 10 98 But part of it should be allocated to you Well, then you might be able as we discussed in a prior presentation tell the irs. Hey look This is the amount reported not reported on the 10 98 to me, but i'm going to give you the payer's name Jane social security number of them And their their address and so on and so forth so that you can then possibly go to their You can then go to their Tax return under their social security number and verify That they haven't reported the entire 10 98 in other words if the 10 98 said 20 000 And i should be allocated 10 000 They on their return should have received the 10 98 for 20 000 But only deducted 10 000 of it and we are going to deduct 10 000 telling the iris Who actually got the 10 98 the total of the deductions? That are claiming that 10 98 should add up to what's on the form 20 000 right that would be that would be like the general idea Now one one other thing i want to point out is when you're thinking about purchasing a home the two big things Are the mortgage interest and the property taxes? And we saw that if you're nowhere near itemizing you got to be careful in terms of actual tax benefits from it You also have to be careful of the cap Especially if you live in high income areas or or high cost of living areas like california and new york Because the prop the state taxes as we saw before is capped at 10 000 So you can hit 10 000 really easily if you have a fairly high income because your state Income tax is also already going to be a substantially close to that And then your property taxes might go over that which means that you're going to lose the benefit of the property taxes On the high income side of things then right it's going to hit 10 000 You're not going to get any benefit above that. So I just want to point that out again just to reiterate that you can't just say Uh, should I buy a home? Well, what are my tax benefits? Well, I know that I'm going to be paying 12 000 of of mortgage interest and 6 000 of state real estate taxes and therefore I'm going to get a benefit of 18 000 because You're already getting a standard deduction benefit and because the state taxes could be capped At the 10 000 which you might be hitting if you have significant income because of your state income taxes So the only way to actually do those projections Is to use tax software of some kind