 Income tax 2021-2022 tax software example, taxable refunds, credits or offsets of state and local income taxes. Get ready to get refunds to the max diving in to income tax. Here we are in our lesser tax software. You don't need access to tax software to follow along, but you might want to have the form 1040, which you can find on the IRS website at irs.gov, irs.gov. We're looking at our starting point being the single filer Adam Smith living in Beverly Hills 90210. We have the 100,000 W2 income standard deduction, the 12,550 getting us to the taxable income of the 87,450, which we can mirror on our income tax formula worksheet 100,000, the 12,550 taxable income at the 87,450. And then we're going to verify on page two that we have the tax at the 1515 and put that into our worksheet 15015. Okay, and then now I'm going to go back to the first page and we're going to imagine that we've got a 1099 for the state refund. Now, this would come from the state, so it will be dependent on what state tax returns you're primarily doing taxes in. If you're working in a state where there is no state tax, for example, if like in Nevada or something, then you're not going to get the 1099 like this from the state. If you're working in say California, for example, then you'll typically get a 1099. Everybody will basically have a refund oftentimes if they got a refund from the state in the prior year. And it could be a confusing document because most of the time when we get the 1099, we automatically think that we need to record it as income in some way. But remember that if the 1090, if the benefit that they got in the prior period was not something that they got to deduct, then you don't need to record it as income. And so general rule here, we're looking at the form 1040, that's the federal income tax return. If I got a refund on the federal income tax return, I would not then need to record that refund as income in the following year. So in other words, in tax year 2021, if I got a refund on the federal tax return in 2022, I would receive that refund. I don't have to record that as income in 2022 because the definition of a refund means that I simply overpaid in 2021. It's not income that I made and I shouldn't be paying taxes on it in the following year. However, if you're talking about state taxes, for example, California taxes in this case, that if it was 2021, for example, this filing year and we got a refund from the state, then it still wouldn't be income in the following year unless I got a benefit from it and you would only get a benefit from it. Let's say that you paid the state taxes in the current year if you were itemizing. So if we go down here, we'll talk about itemized deductions later. But notice we have the standard deduction and the itemized deduction. The standard deduction was increased a few years ago to basically flatten or make the tax returns a little bit easier. So more people are taking the standard than itemizing. So you can have less people that really get the benefit from the state taxes. And then if I go to the schedule A, that's how you would know if someone was itemizing. So they would have to be itemizing and then you'd have the tax area here and the state and local taxes are something that you could be getting a tax benefit. So only someone that itemized in the prior year is someone that possibly could have had its tax benefit. If you got a tax benefit of taxes that you deducted, notice that these taxes that we're going to deduct are going to be on a cash basis. So in other words, if I paid in tax year 2021, 5,000 of state taxes, then I would be deducting 5,000 because I paid it in the current year. If I then got a refund in the following year, 2022 of 4,000, then I would have over, I got an over benefit of the 5,000 in the current year. And the 4,000 I really should have only got a $1,000 deduction in other words. So we could fix that by amending the return, but nobody wants to do that. Nobody wants to go back to the return and say, oh, I got a refund and therefore the deduction was only 1,000. Instead, what we're going to say is the refund that we got if you got a tax benefit from it in the prior year. So in this example, if you got a tax benefit of 5,000 in the current year and then you got 4,000 of it refunded to you, the 4,000 that you got refunded, we're going to count as income in the following year. In this case in 2022 would be the idea. So instead of adjusting the prior year taxes, we're going to basically count it as income in the following year. Now that all sounds fairly straightforward except for the fact that just because we're itemizing doesn't mean we got the full benefit of in this example, like the full 5,000. You can imagine many different scenarios where you didn't get the full benefit. And for example, if you're just barely itemizing or if there was a cap in terms of how much of the state taxes that you could take, for example, or the difference between the state taxes and what you would have gotten for just like the sales tax standards. The sales tax standard kind of deduction would be types of things that you wouldn't get the full benefit from. So if someone was actually recording or did get a benefit, they were itemizing and they got a benefit from the state taxes, then the question is, well, how much of the refund is going to be taxable in the current year. So if I'm trying to determine in 2021 whether or not the state taxes 1099 I got is income or not, I've got to go back to 2020 and see did they itemize. If they did not itemize, then I don't have to include it as income because they didn't get a benefit. If they did itemize, then they most likely got some state tax deduction. Then you would think I would have to include at least part of it, then the determination is going to be how much do I have to include. And that's what it gets a little bit more confusing. The general rule in terms of data input, I would say that if, for example, you have a continuing client, a client that you had last year and this year and you're using tax software, the software will help you out to determine if they itemized or not in the prior year. And it will already know what the refund is because it calculated the refund in the prior year and it will help you out to determine how much of the refund is going to be taxable if it's something other than all of it being taxable. If it's a new client that you're picking up, then instead of just entering the current tax year 2021, if it's a more complex client, for example, they're itemizing that would make them more complex in general. You might want to go to the prior year, go to 2020 and mirror just data input, the tax return based on the paper return that they give you into the system so that you can have that more complex information in it, including any kind of rollover information and the state tax information that then you can perform a rollover into the current year so that it will be more like a continuing client and it'll help you out with those kind of calculations like the state tax. That would be my general recommendation. Now, a lot of people when they get this if you're new to the data input, what you'll do is you'll go, okay, if I go to schedule one here, I can see where I'm going to put that state, the taxable refunds, I might jump to the data input. For example, a lot of software has this jump format and say it's going to be a 1099g. That's the one that's the one I have. So I'm going to say this is the state from the 1099g and I'm going to put that let's say it was 5000 into the refund category here, and I would jump back on over to the forums and expect it to populate right there. And it may not. And the reason it may not is because the tax software doesn't know if the client itemized last year because I didn't perform of the data forward. All it knows is the tax refund in the current year. So again, you might go to the prior year and perform it forward. And then it can help you determine if it's taxable or not. If you have no idea whether it should be taxable or not and all you see is the 1099 and you see this line saying taxable refunds, you would expect that it would be taxable given just that information, and you're going to be frustrated that that it doesn't show up here. So the way to kind of then what you could do if if it is a taxable item, you could go back on over and say, I'm going to go through basically the worksheet to determine if it's taxable. So I can basically jump on over here and go to my state tax worksheet, and I can enter this data so my options then are in the software I can basically go to the to the prior year and enter the data into the prior year perform it forward. Or I can try to input the data into the current year and this is like the prior year information that will help us to determine the portion of the state taxes that are that are going to be taxable or I could force it doing some kind of override and say I want that to show up. I'm going to right click on and go back on over and I'm going to override it to 5000 right there. Now if I if I was to enter this in the prior year, for example, if I was to enter 2020 taxes, and I saw that they had a refund that was taxable on the actual physical return that they turned in, then I might just override it in the prior year to get to mirror exactly what they have on their tax return and then possibly perform it forward. So the system can do it in the current year, but you want to be careful anytime that you're doing an override kind of thing in any kind of tax software you'd like the software to do the calculations if you're forcing something to happen, then it's likely that you're doing something, you know, wrong unless you know exactly why you're forcing it to to make that change. So now we've got the 5000 that are included. And then that would then sum up down here. Here's the 5000 down below. That's going to pull on over to the first page of the 1040 and line eight. And so now we've got our total income over here. So we can add that then on the schedule one worksheet I can I can mirror that, say in our tax worksheet for the schedule one. Actually, those are my adjustments so let's go back on over what I want is schedule one additional income so I'm making additional income schedule one and maybe I'll put it next to my schedule B. So I'm going to add another one I'm going to call this schedule one additional income did I have that yet I don't think I did that one yet additional income. So then I'm going to format this whole I'm going to select in the carrot up top right click and format it. And I'm going to make that currency brackets and negative numbers get rid of the dollar sign, no decimals. I'm going to scroll up a little bit. And I'm going to call it up top. Let's call it schedule one additional income income. And then let's make the whole thing bold it might make it a little bit easier not underline bold and and bold and it. It has been in bold and and then I'm just going to call it taxable refunds I'll just call it taxable refunds taxable re taxable. Hold on a second refunds and then I'm going to put that I'll just put that in the outer column because it should be a fairly straightforward number you might want a little bit more detail to do some more complex calculations if there's if it's something other than the amount on the 1099 but I'm just going to put one cell here for this point I'm going to make this I'm going to make this blue and then unblue this unblue that and then I'm going to total it out down here. This will be the total schedule one additional income and I'll sum up the outer column which just includes that but we'll add more to it it later check the spelling on it is it spelled okay. Okay, no schedule one I'll put it as CH as CH schedule change it and then I'm going to add that line to the first page I'm going to double click on the income line. I'm going to go all the way to the end they got this long descriptions because they're pulling in from another worksheet but plus I'm going to say the schedule one additional income that 5000. So there's the 105 the 1250 is the standard deduction we're at the 92450 so the 92450 if I go back on over to the first page first page and the 1040 1040 first page. There's the 92450 and then page two is the tax which is now at the 16250 so I can go back on over and say okay this is at the 16250 16250 on the tax so that would be the general idea so remember the overview of this would basically be. If you get the 1099 it's not taxable unless in the prior year they were itemizing and then if they were itemizing they probably got the state tax deduction and then the determination is how much of the state taxes do you need to include to get to that determination. I would suggest then taking the prior year tax return if it's a new client entering that into the prior year so the software can help you with it with the performing of it over to determine how much of the adjusted gross income is taxable if it's a more basic return and you don't have any itemized deductions then the general rule is it wouldn't be taxable because you wouldn't have not gotten the tax benefit from it in the prior year.