 Income tax 2023-2024, itemized deduction overview, tax software example, get ready and some coffee because tax season is a time we get to test out our math skills and question our life choices. 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 our crunchy numbers is my cardio product line now I'm not saying that subscribing to this channel crunching numbers with us will make you thin fit and healthy or anything however it does seem like it worked for her just saying so yeah subscribe hit the bell thing and buy some merchandise so you can make the world a better place by sharing your accounting instruction exercise routine if you would like a commercial free experience consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com here we are in our form 1040 example problem using lecerte tax software you don't need tax software to follow along but if you have tax software it's a great tool to run scenarios with you can also get access to forms schedules instructions at the iris website irs.gov irs.gov our standard starting point taxpayer adam tax man just trying to avoid a dang tax man living in beaverly hails 90210 single file or no dependence we have the w2 income to start with at the 100,000 13,850 of the standard deduction given us taxable income 86150 mirroring that in our excel worksheet we've got the 100,000 the 13,850 the 86150 taxable income the tax calculated at 14266 which is on the second page of the form 1040 the 14266 let's go back to the first page this time our focus is on line number 12 but not really on the standard deduction we're focused more on the itemized deductions which we can see are going to be coming from the schedule a however the trick with the itemized deductions is of course that we would only be taking the itemized deductions generally if they come out to a deduction greater than the standard deduction so therefore in practice the idea would be do we have people that are close to the itemized deductions if they are close to the itemized deductions then we want to dig down deeper and think about all the different categories of itemized deductions the next question typically comes up then will be what are the things that are going to push people over from going from the standard deduction to itemized deductions that's usually going to be the purchase of say a home because possibly you get the loan of the home interest mortgage interest deduction which can be quite significant as well as state taxes which could include the property taxes so the general idea would often be if you're doing taxes would be did we itemize last year or take the standard deduction last year and then are things the same last year as the current year if we did not itemize last year it's likely we're not going to itemize this year unless there's a substantial change and again that big change that could push us over to itemizing would be something like the purchase of a home then we also have to have a general idea of the standard deduction to know whether or not we would be itemizing so we can see on the left hand side we've got the standard deduction at the 13850 for the single filer it's tied to the to the filing status generally married filing joint double that to 277 and then the head of household in between the 20800 now people are over the age limit of 65 and or blind then you could see those standard deductions on the 1040 sr page four where you could see if single and they had either over the age limit or blind then the standard deduction if one of the two 157 and then up to 175 50 if married you can have two people who could be over the age limit or blind so you have four different increases in the standard deduction then we have the qualifying surviving spouse the head of household and so on clearly software will help us with these categories but in practice the idea would be are they close to their standard deduction and therefore how much effort do we want to be putting in to be tracking all the information for the itemized deductions so that we can make sure that we're maximizing our tax benefit by taking the greater of the itemized or standard deductions now remember that the itemized deductions has changed a few years ago when they tried to simplify the code basically increasing the standard deduction which would reduce the amount of people taking the itemized deductions which probably is beneficial to more lower income individuals because the itemized deductions tend to be things that higher income individuals might have more access to in general so it might be simplifying the code in that way but you have somewhat of a significant change a few a few years ago let's take a look at the schedule a just to get an idea of the general categories of itemized deductions so we have the itemized deductions medical and dental expenses we'll talk about each of these categories shortly this is another one where people might really track the information with medical and dental which can get quite extensive because you might not have all of the receipts and the question comes into what do you do about the premiums that you're paying for insurance for example what happens if somebody is also getting a credit for premiums for insurance and so on however this category is also highly limited both on the low income side and the high income side because if someone is a low income taxpayer they might not be itemizing at all because they probably don't have that big mortgage loan interest which would be you know a substantial amount of interest and on the high income side you have to clear a floor of the 7.5 percent before it becomes benefit of the agi so if you have a really high income then you have a restriction on on the floor side of things so we'll talk more about that later but then we have the taxes that you paid now the taxes we have state taxes that could be an income tax or it could be a sales tax that becomes complicated we have other things that could be basically taxes like fees and whatnot and we also have property taxes and that could be property taxes basically on the on the home are often the big one which you can call real estate taxes that could push people over there's also a cap on the taxes that went into play a couple years ago which was a big a big deal but taxes with regards to real estate taxes are often one of the significant factors that can push people over people that have higher income will of course generally have higher state taxes as well whether that be states that have an income tax or they'll be purchasing things so more likely they're going to have a higher sales tax as well and then the interest now the interest is the big one because the primary interest we think of as deductible is the home mortgage so and even that and this is the one that gets tricky because a lot of times people think that they should purchase a home simply to be able to get the mortgage because that's going to allow you to deduct the interest and maybe that made a like more sense when the when the standard deduction was lower but it doesn't always make sense here clearly because you might have a big gap between the standard deduction and your itemized deduction so we have to kind of get into the weeds in terms of you know would it be beneficial to do things to move from a standard deduction to itemizing such as purchasing a home in terms of the actual tax benefits so we'll talk more about that later but this is where the the big category would be if you had a home and the mortgage interest then we've got gifts to charity for the itemized deductions and so and then we have and then again notice the gifts to charity really only have a tax benefit for the higher income individuals also note that many of these categories are actually personal in nature medical and dental personal expense so why is it deducted for income taxes in which case for normal income taxes you would expect you would only be able to deduct the things that helped you to generate income that's natural to an income tax so just to be able to understand and kind of memorize the code a little bit you want to be able to take those two things what would be taxable in a pure income tax if the government was just trying to collect enough revenue as they needed to do what they're supposed to do protect us the military that's what the federal government is designed to do and then stay out of our business right if that if they were doing that they would only deduct those kinds of things that you needed to expand to generate the revenue which we can most clearly see on like a schedule see where you have an income statement instead of taxing the top line we take all the expenses that you needed to expand in order to generate the revenue those are normal and natural expenses or deductions for an income tax so that you're taxed on the net income after what you have to expend in order to generate the income when you have a w2 income then we don't have all those deductions because the idea is that the employer is providing all that stuff and possibly the argument would be that the standard deduction is high enough to hopefully compensate for those types of expenses because the majority would be covered by the employer but then on the schedule a most of these you have to give some other argument such as we want to nudge people to be able to spend more time on preventative care we want to tell them how to how to take care of themselves therefore it would make sense for us to have a medical and dental expense because they're too dumb to do it on themselves so we have to nudge them with the tax code or something like that or you can argue if there's a catastrophe that we should have an attacks benefit or some those could be convincing arguments i'm just saying it's not like what you would naturally expect if they were just trying to generate revenue and stay out of our business right and then the taxes then why would you be able to deduct you know state taxes on the federal side of things you would think that the fed would stay out of the state's uh business because again the state should be sovereign to do what they want to do and you would think there what's happening is kind of like the fed has now through the tax code stepped into regulating or having control over what the state does by having deductibility of a certain you know state taxes and so on and so forth which could lead to subsidizations of certain states that have might you know so you can see how that could affect how states are taxing with the interest again why would you be able to deduct interest on your home if it's personal it makes sense to deduct interest on an office like a loan that you took out for an office building or possibly the part of the home that you use as an office because then it would be a business expense on schedule c you would think or something like that but for your personal home it's personal so again what you have to go into other arguments like well the government feels that uh that it's it's it's the american dream is to own a home and therefore we're going to subsidize the home ownership by deducting the interest and so on and from a cynical view you might say well it's all the people that are in the real estate industry that lobbied for it because it again it subsidizes of course everybody in the real estate industry which increases which i would argue in the long run really just increases the the complexity and the cost of housing doesn't actually make it more affordable in the long run it might in the short run but that's going to be the you know the argument there and then the same with the gifts why why would you be able to deduct gifts it has nothing to do in their state well because they the government needs to nudge us to give money because we weren't we weren't a charitable country before before the government forced us to be charitable it's like i think it's exactly the opposite actually but that's kind you can see where the argument comes in comes in there and then we have the casualty and theft losses which has been restricted greatly other itemized deductions and then the total itemized deductions all right so we'll get into more of those categories later but you can see this total itemized deductions if it's smaller than what is on the form 1040 here then we're going to take the standard deduction if it's greater we take the itemized so what's going to be the thing that pushes people over typically the home let me give you a quick example of that if we go back on over and we see deductions and we go into the itemized deductions and we go into say the interest so we let's see here's the taxes so let's say we had the principal residence 6000 of taxes and then we had the interest home mortgage interest and points on the form let's say that that was 14 000 let's say let's go back on over and so now we have the 21 205 that amount is coming from the schedule a because it's greater than the 13 850 so we can see on the schedule a we have then the taxes that have added up the 6000 plus we have these state taxes we'll talk more about that later but that comes out the 7205 the mortgage interest at the 14 total itemized deductions 21 205 because that is greater than the standard deduction for a single filer which is the 13 850 we take the itemized deductions which are bringing the taxable income to the 78 790 let's imagine that they were married so now we're going to say the tax man tax men are getting married tax man their last name is tax man but there's two of them tax man the tax man the tax man couple the how do you do the plural on the anyway we're going to say they get married and if I go back on over so now we've got adam and jane tax men they're living in married Beverly Hills so we got the 100 000 still but now we're back to taking the standard deduction 27 700 because the itemized deduction which is now great out is now less than the standard deduction because they're married and the standard deduction basically got doubled so that's going to be that's the general idea that we have to basically keep in mind so in practice we're saying okay did they itemize last year if not were they even close to itemizing if if not was there anything this year that would put them substantially closer to itemizing such as possibly owning a home or possibly they had a real catastrophe for medical expenses or something like that and if not then it might not be worthwhile to track everything like every expense that you expended on medicine and so on and so forth because you might not be close to itemizing or tracking all your charitable deductions and all that kind of stuff or gambling losses or what it might not be worthwhile because you might be nowhere near being able to itemize but if you're getting close to itemizing or if they did itemize last year then of course it's likely that they're going to be itemizing again this year and the big thing that pushes people over is that mortgage interest on the home noting however that just being able to itemize is not is not the goal the goal is to lower taxes so if you have a huge gap between between the standard deduction and itemizing and then you do something like purchasing a home that barely pushes you over to being able to item it like let's say let's say that you were nowhere close to itemizing and then you purchased a home and you're paying 20 000 of interest but you only get you're only cleared the 27 700 hurdle by like you know a hundred dollars well then you're only getting a hundred dollars of extra tax extra deductions right because you were because because you still had a lot that you could take in the itemized deductions so we'll talk more about that about that later but i want to just point that out and be careful of that because the problem with the iris nudging us with these kind of incentives is that they're trying to they kind of are trying to basically make it so that they we make the right choice in their mind of what we should do without thinking because we're just responding to the incentives and rather than basically thinking it through and what ends up happening a lot of the time is they make things more complicated and in the long run uh things things basically get to the same point from an economic standpoint but they're more complicated right in other words in the long run when they incentivize housing the the the fact is that the interest being deductible is going to work out in in that people will respond to it the market will respond to it by having fluctuations in the home prices so now from an economic standpoint we might not be in any better situation more able to afford a house but it's way more complicated to think figure out right whereas if they just stayed out of it the housing prices would probably be lower because because they wouldn't be subsidized and we'd still have to buy the same amount of house but it would but it would be but we wouldn't get the tax benefit but it would be easy to calculate same with you can see it in education as well right if they if the government subsidizes education well in the long run the price of education goes up and it's way more complicated to see if it's worthwhile to get the education given the fact that you have to do all these calculations to figure out if they just stayed out of subsidizing education the cost of education would be a lot cheaper uh and and then you'd have the same value possibly but it would be a lot easier to calculate right that seems to be to me from a cynical kind of perspective and not liking to be nudged by the government what comes out in my mind from an economic standpoint but given that let's go back to the let's go back to the single filer and uh let's say let's just add this to our our uh schedule over here so if I look at my worksheet now we need basically a schedule a so we had the adjustments to income so let's make another tab here and I'm going to double click on it and call it schedule a and then I'll select the whole worksheet right click and let's format the entire thing currency negative numbers bracketed no dollar sign no no decimals okay I'm going to zoom in so this is going to be our schedule a and then we could put in you know the categories I could just generally put in the categories now so let's go to our schedule a here we've got the medical and dental probably spell these wrong so medical and dental I'm going to select the whole thing hometown font group bold it and then I'll make this black and white let's make it black and white and I'll put some blue underneath it like maybe that much space and we'll get into that more later and then let's border it border it do and then I'm going to say this is total medical and dental summon it up in the outer columns sum it up little darling and then we're going to say the next category taxes you paid taxes you paid and let's make that black and white home tab font group we'll make it black white we'll get some space down here make it bordered blue and then total taxes you paid boop boop boop outside equals the sum of that category and in this case we had real estate taxes real estate taxes and I'll just put this maybe in the outer category of 6000 and we also had state tax that the system calculated at the 1205 so I'll let it calculate that for now 1205 and then next category we have interest you paid interest you paid interest you paid I paid some interest so I'm going to say we're going to go to do uh black white and then we're going to say do do okay and then we could say mortgage interest and that's going to be 14000 14000 and then we'll go total interest you paid outside equals the sum do do do do all right next category oh what happened we have then gifts to charity gifts gifts to charity and we're going to say as long as it's not going to be burnt on the altar of the government bonfire then we'll give the dollars to the charity gifts to charity so this will be total total gifts to charity equals the sum and boom and then we're going to say then casualty and theft losses which are severely limited casualty and theft losses and we'll make that black and white black and white and we don't we don't usually get those anymore you get your store looted and they just say it's your own dang fault build it again and make make more stuff free for the looters or something casualty and theft theft losses summing that up okay and then we're gonna say okay other itemized deductions so one more one more round other itemized deductions so if it was a business you probably might get some losses i'm just saying this is the this is the personal stuff so that wasn't quite fair of a comment that you might not you might be able to write off the loss or something but this anyway so this is going to be other this will be total total other other itemized deductions deductions let's make this a little well i'll put this in the outside i don't need to do that sum it up and then we'll put the total down below total itemized deductions equals the sum of all these outer column ones and then that 21205 needs to pull over into our income tax formula i need to put it right there the greater of the two so i'm going to put it right here this is now going to be pulling in from equals this schedule a that total boom and now this number is taking the greater of the two so we can see here in our worksheet the standard deduction single filers coming from there itemized deductions pulling from here taking the greater of the two then this case is the standard which gives us to the taxable income 78795 so we go back on the page one is that what we have here 78795 yes indeed it is page 212638 so 12638 and so there we have it so that's the general overview of the itemized deductions quick note though that if you're dealing with a new client uh that's itemizing or you're itemizing yourself then there could be a more complex return you probably have a more complex return which could have things like carryovers and or more likely to and therefore i would highly recommend that instead of just entering it into your current software that you think about entering the prior tax return if you only have a paper copy of it into the prior software so that you can mirror what's on the paper copy to what's in the software as close as possible so that then you can perform a or roll in or roll forward the prior year to the current year so that the current year has all the information in a rollover format and it might make it the data input a little bit easier in the current year by pulling in the rollovers if there are any and giving you kind of this tax summary which will give you like the prior year compared to the current year which is a great tool to double check your numbers to see if you're inconsistency with last year and to to present and explain things to both yourself as well as say a client or something like that