 Income Tax 2021-2022 Software Example, Medical and Dental Expenses. Get ready to get refunds to the max diving into Income Tax 2021-2022. Lassert Tax Software, you don't need access to tax software to follow along but you might want to form 1040 which you can find on the IRS website at irs.gov, irs.gov, the starting point, single filer, Adam Smith, living in Beverly Hills, 90210, 100,000 W2 income, 12,550, the standard deduction, getting us to the 87,450 taxable income, mirroring that over here in our formula format, 100,000, 12,550 standard deduction, 87,450, relying on the tax software to calculate the tax on page 2, which is the 1515, and that's going to be here at the 1515. That's our starting point. Let's go back up to page 1. We're focused on line number 12, the standard or itemized deduction, currently taking the itemized deduction. I'm sorry, we're currently taking the standard deduction. The itemized deductions are on schedule A, not currently highlighted in our Lassert Tax Software because we're not using this worksheet because we're taking the standard itemized deductions up top. We're focused in on the medical and dental. Remember, when you're thinking about the itemized deductions, they have to be over the standard. The medical and dental are usually not the things that are going to push people over the standard deduction for multiple reasons. The things that will push people over are typically the interest, mortgage interest on the home, and then property taxes on the home in combination with the state taxes are things that often push people over. So, if they do not own a home, then it's less likely that the medical and dental are going to be able to do it alone to push people over due to one, the standard deduction, and two, we've got this floor taking place of the 7.5% of the AGI that's going to be in place. So, that's the first thing we want to keep in mind. If they have the home and they're already itemizing, much more likely, they'll be able to take other itemized deductions such as the medical and dental. However, this one's also a little bit funny in that sense and that you have this floor. So, usually, people itemize when they're more well off. They have more income because then they have more deductions, but as their income goes up, this floor also actually lowers the medical and dental. Now, note that said, it's possible that someone has a severe medical and dental situation possibly one time in their life or has some kind of condition where the medical and dental themselves could be significant enough to kind of push people over. So, let's just get a feel for how this looks. So, first, let's go back on over and let's say, let's add some medical and dental. I'm not going to get into too much detail on the different categories. You could get into kind of the weeds on what qualifies as a medical and dental and so on. Usually, it's fairly straightforward, but sometimes it can be confusing with regards to whether you deducted insurance premiums somewhere else or something like that. But for now, I'm just going to put it into the prescription drugs here and we're going to say, let's say 10,000, 10,000 and just total medical and dental. Pulling that over, that puts the medical and dental line one here on the medical and dental of the 10,000. Notice it now populated the 100,000 here. That comes from the form 1040 line 11, which if I go to the 1040 and look at line 11 is the adjusted gross income. So, note when we look at the phase outs or anything like that, a floor in this case, it's not calculated on the total income, but typically the adjusted gross income. And so, if we go back on over, multiplying that times 7.5% gives us the 7,500. So, of the 10,000, we only got then 2,500 if we were able to itemize. And obviously, that 2,500 is not going to be sufficient to push us over the threshold. Even if we add state taxes, it comes up to 3,375, 79, comparing that to the form 1040 shows that we're not over the threshold. So, we're still taking the 12,550, which is the standard deduction. So, even if I increased it up above that number, like the 12,550, if I go back on over and say, what if it was 15,000? 15,000, is that going to kick me over? Well, you still got that AGI threshold and this income for this individual is fairly high. So, it's not going to kick it over still. We're still at the 12,550. If I go to Schedule A and check this out, now we're at the 15,000 minus the 7,500. We're getting 7,500 of it. And that, if I add the state taxes, is up to the 8,379. 8,379. So, note that, if I go back to the 1040, I'm still not taking it because of that floor, the 7.5 floor. Now, this income is fairly high. So, you could say, well, what if I wasn't making 100,000 of income? If I bring this back down and go to my wages and say this was 50,000, and then we come back on over and say, what would happen? Let's bring it on down a little bit. Let's bring it to like 30,000, and then bring it back on over. So, now we're taking the itemized deductions because we don't have that 7.5. So, now you can see the Schedule A is highlighted over here. So, now we have the same deductions of the 15,000, but the floor is lower because we only have the 30,000. And 7.5% of it is 2,250. So, 15 minus the 2,250 is 12,750 plus the state taxes. And that then pushes us over. So, you can see this kind of interplay here between the fact that usually when people itemize, they have more income because that's when people have the homes and the bigger mortgages and the large home and then the property taxes are higher and state taxes are likely to be higher. Those are the things that push people over and those are the things that make it more likely to be able to itemize. However, if the income is too high, if they make a lot of income, then that medical and dental is a funny area because it actually then has that floor too that you got to consider to take into consideration. So, it's a little bit of a strange area. Now, if we were to go back on over and say, well, what if they were married here? So, if I have the same condition here and say they're married and I'm going to go back on over and say, client is now going to married, Adam and Eve are married, back to the forms. So, now we got married filing jointly and so now I'm keeping the income the same. And now, of course, they're not taking the itemized deductions because the standard deduction is significantly higher now after 25,100. So, if I go to the schedule A, you can see the same calculation here because I didn't change the income line item even though married at this point in time. And so, we still have the total down here of the 13,353 which would be higher than the standard deduction if single, but they're not single at this point. They are married at that point and therefore it's not the thing that's going to push them over. Now, normally, let's bring this back to 100,000. If I bring this up to 100,000 and I pull that back up. So, now we got married filing joint 100,000. So, I can go back on up here and say there we have it. So, we're not taking the deduction, but let's say they own a home. So, if they own a home going back on over and I'm going to say now they're probably going to have a significant amount of mortgage interest. This is the thing that usually pushes people over, let's say, 7,000 on the mortgage interest. And let's say that they got property taxes, property taxes of, let's say, 6,000. And now, if I go back on over, that's still open because they're married. Let's bring it up a little bit. Let's bring it up a little bit more. Let's say the interest is 12,000 and the property taxes are 7,500 and then pull it on over. So, now we're at the itemized deductions at the 27996. So, if I go back on over, the point I'm trying to make here is that the home is usually the thing that's pushing people over and the mortgage interest on it and then the property taxes and then the state taxes are things that could push people over. And once you've been pushed over, now that 7,500 on the medical expenses is more likely to be something that's going to contribute to the itemized deductions. So, now that those medical expenses are going to kick in because they're over and above the other deductions, the big ones. And so, now that's how that's combinations adds up to the 27996, which pulls over to the first page of the 1040. So, where we have right here. So, now if I was to mirror this on my formula over here, we could say, well, how can I mirror that over here? Let's say that we had the married couple, we'll try to say this, 2599 and then the itemized deductions. So, the itemized deductions, if I go on over, we've got the medical and dental. Now, there's a bit of a sub-calculation for the medical and dental. So, let's see if we can kind of replicate the sub-calculation. We're going to say that we have medical and dental expenses. Let's say dental expenses. And you could kind of list them out underneath there, but I'm just going to put them in one line item for now. And so, you could like have multiple line items that sub-categorize out. But let's say we put them in here and we said they were 15,000. And let's try to move this out a bit. I'm actually going to move this whole column over this column right here. I'm going to grab that and move it over here. So, I have a little bit more space to do my sub-calculation. So, let's say we took 7.5% of AGI. So, I'm going to say 7.5. Let's take the AGI first. AGI is coming from the first page here. There's the adjusted gross income, 100,000. And now I'm going to take 7.5% of AGI. 7.5% of AGI. Or let's just say 7.5%. Let's just do it this way. We'll just say .075. Make that a percent. And then I'm going to add some decimals. And then put an underline. Maybe I just need one decimal. And then that's going to give me the floor. The floor. And so that's going to be this times this. So there we have that. And so now we've got the medical and expenses. So deductible medical and dental is going to be equal to the 15 minus the 7.5. And that's going to be the 7.5 in this case. Did I do that right? Let's go back on over. And say we went to the schedule A. Scrolling up. Yeah, it's the 7.5. So that looks good. So then I might pull that out into the outer column. So let's pull this last calculation out here. This is going to be the 15 minus the 7.5 into the outer column. And maybe I shouldn't have pulled this stuff all over. I'll pull this back. Put it back to where it was. And let's sum it up again. Equals the sum of these items. So there we have it. So now the 7.5 is included. So I got the 15,000, the AGI. And then multiplying that out. And I probably could use another column, but I'll keep it there. There's the floor. And then the deductible part is going to be that 7,500. Now this gets a little bit tricky because you might say, well, what if this was zero at this point in time? It's going to give me a negative 7,500. So if I want to have this calculated automatically, I only want it to show a number if it's positive. So we can use a conditional formatting on this. I could say this is going to be equals if, and then I'm going to say the if then formula. If this, if this number, let's do it this way. Let's do it this way. We're going to say this is going to be this minus this. And then I'll pull it into the outer column here and say equals if brackets. If this number is greater than zero than comma, there's the condition. Then I want you to use this number. If it's not, which is a comma, what do you do if it's not? Then I want you to put a zero there. And so then we can do that. And so now if this was 15, so there's the zero. If it was 15, that would take us to the 7,500. So that can make it a little bit more automated for our worksheet. So there's the 7,500. And then we also said that the mortgage interest, we put in mortgage interest of over here. What did we put on the mortgage interest? 12,000, 12,000. And then we said the property taxes were like 7,500, I think. 7,500 on the property taxes. And then the state taxes are being calculated at the 996, which we'll talk about later. So 996, often we're dependent on the software to kind of help us out without depending on the state tax calculation. That's the 27996 totaled up now. So if I sum this up with the 27996, that pulls over to page one of the 1040s. So there's the 100,000. Now we're taking the itemized because they're larger. There's our conditional formatting than the standard. And that brings us to the taxable income of the 72,004. So back to page one, there's the 72,004. Page two calculating the tax at the 8,245. At the 8,245. So if I go back on over the tax calculated at the 8,245. So that's just an idea or a thought process on how you can enter this information into the system and possibly put some automation so you get a double check on some of that calculation and see how it's working with regards to the medical expenses. Now if I go back to schedule A here, just note some of the other categories that we have with the medical. Let's go back on to the data input and go to the medical. We have the prescription drugs, right? So it's going to give you some idea. Most data input software will have that. That'll give you some idea of what the deductible portions will be. Some software will give you like an interview process to help you. Doctors, hospital and nurses. And then we got the insurance premiums not entered elsewhere. So in other words, if you entered the insurance premium in some other place, possibly for example, if you had self-employed health insurance or something like that, we talked about how you possibly then could deduct it then on schedule one line number two and some schedule one page number two right here, self-employed health insurance deduction. So you can't take a schedule A deduction and another deduction for the same thing. So those are the things you got to be aware of, the long-term care items here and the lodging and transportation, which could have some other complications including possibly like a mileage method calculation, for example, if that was a factor that would be involved as well. So obviously some of those medical kind of things are areas where you can get those gray areas. But the general rule is that obviously these items that are listed out here are going to be generally more of a straightforward item. And of course, if you got reimbursed for the expenses in some way, then generally you would think that would not be a deduction at that point. And of course you can't double dip on the deductions. You can't take the deduction of something like premiums in two places getting two deductions for the same thing.