 Income tax 2023-2024. Itemized deductions overview. Get ready and some coffee because to be a great tax preparer, you need to be like a scarecrow, outstanding in your field. Most of this information can be found in the instructions for Schedule A Tax Year 2023, which you can find on the IRS website at irs.gov, irs.gov. Looking at our income tax formula, we're down in what I would call the below the line deductions, more specifically the itemized deductions. Remember that the first half of our income tax formula is basically a funny income statement. Most income statements have an income minus expenses resulting in net income. Here we have income minus various deductions resulting in taxable income. In a prior section, we focused on what could be called the above the line deductions or the adjustments to income, which could also sometimes be called the Schedule 1 deductions. And now we're focusing in on what I would call the below the line deductions, which are actually the greater of either the standard deduction or the itemized deductions. We have to keep these locations of deductions in our mind because they will have different tax implications. As we saw in prior sections, the adjustments to income or above the line deduction are probably not as popular. They're probably not as well known as some of the items and the itemized deductions. However, if you qualify for some of these above the line deductions, one of the most common ones being, for example, an IRA, they are beneficial because you don't have to clear a hurdle before you get a benefit from them, as is the case with the itemized deductions, in which case we have to have enough itemized deductions to clear the standard deductions to get a benefit from the itemized deductions. First, a word from our sponsor. 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Another distinction is that these adjustments to income will have an impact on the adjusted grossed income number. That's important because many of the deductions and credits that we will talk about have a phase out. Remember that deductions are good, credits are good for taxes. As income goes up, a common thing to do would be to say, I'm going to reduce the amount of the credits and deductions you're going to receive as your income goes up. However, typically that calculation will not be based on the top line income, but rather the adjusted gross income. So then there might be modifications to that when we see things like phase outs. So that's another important distinction because these below-the-line deductions, such as, for example, if you have more itemized deductions, they will be good in that they are deductions, but they're not going to reduce your adjusted gross income in the same way as the above-the-line deductions would. A lower adjusted gross income usually being better, remembering everything flipped on its head for taxes, income is bad, deductions are good. And if we had a lower adjusted gross income, it's more likely that we would qualify for more deductions and credits due to not hitting a phase out. All right, so if we look at the below-the-line deductions, we have the standard and itemized deductions. Now, a few years ago, in an attempt to simplify the tax code, they increased the level of the standard deduction, which means more people are not going to be itemizing because the standard deduction will be greater than the itemized deduction. And that's probably good for lower income individuals, low to moderate income individuals, because usually the people who are benefiting from the itemized deductions are more well off and have more types of deductions that will fit into that category. The major thing, the major deduction that will typically push people over to itemizing from a standard deduction is usually the ownership of a home. And that's because, as we will see, the interest on the mortgage of the home is possibly deductible, as well as possibly the real estate taxes on the home. Those two things in combination with any other kind of itemized deduction are the things that push most people over to possibly be able to itemize. It's also something that people get confused about as to whether they should purchase a home or not. It could be kind of confusing to think about the actual tax benefits that you would be receiving if you were to own a home and be able to write off the interest. And we'll talk more about when we get there. It could be beneficial, but it's not really useful to think that you should buy a home just to get a tax benefit, because it really depends on the particular situation, so we'll talk more about that later. Now remember that the standard deduction is going to be different based on filing status as we've seen in prior presentations. So when people have questions about should they be tracking things for itemized deductions, because sometimes it takes more paperwork, like to track the medical expenses and whatnot, if that were to be deductible, charitable expenses, possibly should we be tracking that kind of information, or is it not worth doing, given the fact that we're just going to be taking the standard deduction. So again, usually you can look at the prior tax return and say, did you itemize last year? And if you didn't, has anything changed? And therefore it's likely that you're not going to be itemizing in the current year. And you can also basically again think, does someone own a home or not? If they don't own a home, especially if they're not well off, they're on the low to moderate income and don't own a home, it's likely that they're just going to be taking the standard deduction because their itemized deductions will not be large enough to be clearing the standard deduction. So this is the first page of the form 1040. We're focused down in line 12, where we have the standard deduction or itemized deduction. You can see that it's referencing the schedule A here. The schedule A is the itemized deduction form. Note on the left-hand side, you can also see the standard deductions. These are the general standard deductions based on filing status, if they're not adjusted for age and like if someone was blind or something like that. This is the itemized deduction worksheet. We can only see a few of the categories, but you can see medical and dental, taxes you paid, interest and so on and so forth. We'll go through each of these categories in more detail as we go through this section. This is actually on the 1040 SR for older filers and it has a little bit more detail about the deductions. So you can see the itemized deductions which are important. I mean, sorry, the standard deduction which is important when thinking about itemized deductions because these are the hurdles that would have to be cleared. So for a single filer, 13, 8, 50, generally if you double that for married, you get to the 27,007. That's how you might memorize it. You could say, well, it's around 13,850 for single. Doubling that gets you to the 27,700, head of household in between 20,800. And then if you're over a certain age or blind, then you got these added amounts to them. So if they were single and they checked one of those two things over a certain age or blind, if it was just one, 15, 7, 2, 17, 550 from the original 13,850. If married, then you have a combination of four between the two of them over a certain age and blind. So if they were 1, 2, 3 or 4, 29, 2, 30,007, 32, 2, 33, 3 and qualified surviving spouse. So that would be someone died so it's similar to the married and then head of household like in between. You can have one or two of those items checked. So that's the general idea. You're going to use Schedule A for Form 1040 to figure your itemized deductions. In most cases, your federal income tax will be less if you take the larger of your itemized deductions or your standard deduction. So the general idea, you calculate your itemized deductions and then you see if they're greater than the standard deductions. If so, you take the itemized. If not, you take the standard. Now, of course, in practice, is it worthwhile to try to really dig down on all of like your medical expenses and whatnot? It might not or like other kind of expenses for charity and this kind of stuff tracking all of this stuff for itemized deductions. If you're nowhere near being able to itemize it might not be worth it. And that's one of the questions that come up in practice in terms of the data input. And of course, in advising customers and clients in terms of how much time they should be putting into thinking about these itemized deductions. How close are they to be itemizing? So if you itemize, you can deduct a part of your medical and dental expenses and amounts you paid for certain taxes, interest contributions and other expenses. You can also deduct certain casualty and theft losses. So we'll go into those in more detail in future presentations. If you and your spouse paid expenses jointly and are filing separate returns for 2023, see Publication 504 to figure the portion of joint expenses that you can claim as itemized deductions. So if you're married filing joint, note that you have to clear that threshold of the standard deduction in order to itemize. What this IRS will be skeptical of are someone trying to say they're married but now they're going to file separately one person taking the itemized deductions, getting the benefit of the larger itemized deductions and the other person taking like the standard deduction. Trying to split it in a way that's going to be beneficial. That's what the IRS is always going to be skeptical of for married couples. Remembering then that when married, you don't have the option of just going back to head of household or single. You only have the option of going back to the married filing separate unless there's like a divorce or separation. And the married filing separate is often going to have these limitations because the IRS is going to think it's that the couple is going to do like manipulative things, right? To split up in certain cases if there's tax advantages, taking advantage of things like income thresholds and whatnot. Caution, don't include on schedule A items deducted elsewhere such as on form 1040, 1040 SR or schedule CE or F. Now some of the things on the schedule A can be a little bit tricky because you might be able to deduct them in other places sometimes. This is a good point or a good time to think about the general concept of what should be deductible or what would be making sense to be deductible for an income tax type of system. So remember we're taxing income. So that means that you would think the natural type of deduction would be those things that you needed to expand in order to generate income. A concept you can see most clearly on the schedule C with business income where for example, if we earned $100,000 gross but it took us $80,000 to generate the $100,000, it wouldn't make sense to tax the $100,000 gross income but only the $20,000 net income because if you tax the $100,000 gross income, you're really going to be given a huge benefit to those types of businesses that don't have expenses that they need to invest in order to generate the revenue. So it only makes sense to tax the net income. When we talk about the W-2 wages, it's kind of harder to see that because if you're an employee, the assumption is that your employer is providing the expenses and therefore we're including the W-2 income on the top line and possibly they might be arguing that the standard deduction will be large enough to pick up any other kind of deductions in that kind of scenario. The itemized deductions, you'll see the IRS using the tax code sometimes to do things outside of that natural thing. I mean, in other words, if taxes was only intended to generate revenue for the federal government, because we're talking about federal taxes, so they can do what they need to do, which is to defend us with the military and instead of our business, if that was what they were trying to do, then you would think they would just allow deductions that were necessary to generate revenue. However, the government likes to try to nudge us and manipulate us with other types of things. And so you can argue whether that's good or not, but it does add complications to the code and you can see the itemized deductions, you have a lot of that going on. So you get to deduct medical expenses and whatnot. What does that do? It subsidizes the medical industry and whatnot. Now, the argument that they would give is that they're giving... But you get to deduct mortgage interest. Mortgage interest on your personal home is a personal expense. So you would think that you wouldn't need to deduct it as a personal expense, but the government's argument was, well, they're trying to get everybody to be able to own a home because it's the American dream or whatnot, probably more likely that the lobbyists for the home builders got that in there because it propped up, again, supplemented the housing market and so on. If you have charitable deductions, again, they're trying to incentivize people to give to charity, which, again, you could say, well, that's a noble cause or whatever and whatnot, but I would still... To me, I would still think that the idea of giving to charity shouldn't be to give a tax deduction for the gift to the charity, but you can see what's happening here. All these kinds of deductions happening that really have nothing to do with just taxing people based on their net income in order to do what the government's supposed to do, which is just make sure that we're not getting attacked by Britain, the King of England coming over here and trying to take my land or something, right? Or whatever. So that's going to be... So that's the general idea. Now, that means it also gets confusing when some of those Schedule A deductions conflict with where they could legitimately be written off as a business expense. So for example, with a Schedule C, you might actually work from your home, in which case it's not just a personal expense. The mortgage interest on the home, you're paying as basically an office in that case because you're working in part, at least in part of the home. That means you should be able to deduct some of that as a business expense, not on Schedule A but on Schedule C. But if you deduct it on Schedule C, you can't deduct it again on Schedule A because you would be, I would call that double dipping, right? You'd be deducting two places the same amount. So then you run into these problems of, okay, I was able to deduct it more naturally as a business expense somewhere else like a Schedule C and therefore I can't deduct it also on the Schedule A and we'll talk about some of those scenarios later. So what's new with the form? You got the standard mileage rate. That's going to be something updated all the time because we have the massive government-induced inflation that we're dealing with these times, that they try to hide with shrinkflation. It's the company's fault because they put less chips in the bag. No, you caused it. It's the same thing. Either they raise the price or they put less chips in the bag. What do you want them? I mean, anyway. So standard mileage rates. So the standard mileage rate allowed for operating expenses for a car when you use it for medical reasons is $0.22 a mile. The rate for use of your vehicle to do volunteer work for certain charitable organizations remains at $0.14 a mile. So notice that there's different mileage rates depending on where you are driving because they're actually in different parts of the code. Most people think of the mileage rate related to like a Schedule C type of business, which we'll talk about later when we get into the Schedule C. Here we're talking about mileage rates for these reasons. So the medical, the standard mileage rate allowed for operating expenses for a car when you use it for medical reasons because that's a Schedule A deduction is $0.22 a mile. The rate for use of your vehicle to do volunteer work for certain charitable organizations remains at $0.14 a mile. They don't seem to update these quite as often as they do with the other mileage rate for the business miles, which we'll talk about later.