Itemized Deductions Taxes You Paid Example 5054 Income Tax 2025 26

United States income tax software, tax forms, tax formula example doing the data input for itemized deductions reported on the schedule A section taxes you paid. So get ready and some coffee because we're looking to get the tax man off our back with good income tax preparation. Here we are in our form 1040 example using Laser tax software. You don't need tax software to follow along, but if you have access to it, it's a great tool to tinker with. Tinkering being a great method to learn from. Standard starting point John Smith living in Beverly Hills 90210 single filer, no dependents. We have the income at the W-2 100,000, no adjustments to income to start with. Therefore, the AGI is also 100,000. Page number two, we have the standard deduction to start with 15,750 bringing us to the taxable income 84,250. Tax calculated by the system 13,455 using a progressive rate within the worksheet three tiers. Top tier marginal rate 22%. Closing that out, if we look at Excel similar format with the Excel formula income 100,000 no adjustments to income therefore AGI 100,000. Greater of the itemized or standard deduction will be the standard deduction at this point 15,750. So we have the taxable income 84,250 and the tax calculated by Laser 13,455 backing into the average rate 16%. Now we're going to do the itemized deductions again focusing on line 12E standard deduction or itemized deduction currently taking the standard 15,750 which is the lowest tier of the standard because that's for a single filer. Doubling that if married 31,500 and then head of household, 23,625. So, we're now going to look at itemized deductions. One of the main categories being taxes. Now, first we have to think about uh what kind of taxes are we talking about? We have two main tiers of taxes uh within the United States, the federal level and the state level. On the federal level, the main tax is the income tax. That's what we're calculating here. Although, we also have social security and Medicare payroll taxes. Those are also done or on the W-2 form. Uh but, usually, hopefully, they're kind of taken care of unless they're not, right? Unless they don't have a W-2, in which case we pick up the self-employment tax and have to to deal with that. But, the main tax we have here is uh the federal income tax. That's what we're calculating. So, when we have this question of, "Can you deduct taxes?" Well, we just calculated the tax here of 13,455. Can I deduct that? Uh no. Why not? Because if I deduct that, how would that even work? I'm going to deduct the 13,455 up top, which would reduce the taxable income, which would reduce the tax. You end up with a circle reference. So, obviously, when we're talking about the deductibility of taxes, we're not generally talking about the federal income tax, which is our main point of focus here. We're usually talking about other taxes, such as at the state and local level. So, we're saying, "Can we deduct the state and local taxes?" Now, we also want to note that when we're thinking about the federal income tax, some states mirror the federal income tax system, but they're not required to mirror the federal income tax system. So, in other words, the tax code was kind of set up in the past to try to think of the the most rigid system. And remember, this is the pro and con of regulation. The regulation wants to be set up so that everybody does the same rigid thing. And it's hopeful it's usually set up because they thought that is the best thing, and therefore why wouldn't everybody do that? In other words, why wouldn't all the states just do an income tax? And then whenever you have a state tax, we already did the calculation for the taxable income on the federal level, you could just take that taxable income and adjust it for whatever state tax deductions you want, and then apply the state progressive tax rates or whatever to it, and then all the states can just build off of that. Why wouldn't they do that? But many states are going that's not the best system for the state level. They might say, I don't I don't want an income tax because it actually works better for us not to have an income tax and possibly use some other method for paying for what we need, like the streets, the school, the fire department, all that's on the state level, right? So maybe they do a consumption tax, like a sales tax. So and so now they've broken out of the mold when they do that because the income tax is something that was deductible or possibly could be deductible on the federal income taxes. So now we have this thing where you're paying state taxes but not in the same way as the Fed. So that functionally works better, at least that's in the mind of the people in those states, but it's not in the same structure that the tax system would like to be in from the federal level, right? That's the push and pull of of regulation versus innovation. The innovators would like to do something that might work better, but they get trapped by the regulation, right? State So So you would think that the fix for this would be don't deduct state taxes on the federal level because if you do that, the federal level is tinkering, it's getting involved on the states, and the states should be allowed to be independent. So, in other words, if you allow state taxes to be deductible for the Fed, it's going to reduce the the the taxable income. Uh uh but but the the state tax is going up, which kind of acts like a subsidy to the states. So, that's one of the one of the problems that that end up happening. Now, let's just think about what happens on the federal income taxes, so we can mirror that to the state. On the federal income taxes, uh we we tried it we tried to figure out what the taxable income will be on the year, and then we make payments during the year to to to match that. Meaning, I have to pay during the year. That's how the tax system works. Usually, it comes out of my my W-2 wages if we have W-2 uh wages. But, I can't just say, "Look, I I made $100. Therefore, I'm going to, you know, apply out some rate for $100." We could try like 16% on the 100, but until I can annualize the $100, I I don't know what rate should apply to it. In other words, i- if I made $2,000 in a week or something, I can't say what rate should I apply to that $2,000. It's not a flat tax. I don't know. I have to annualize the the amount, so that I know that I'm making 100,000 in this case, and then use something like the average rate, because I'm actually being taxed on a progressive rate. And what's our goal? We use tax tables to do that. Our goal is to overshoot the taxes, so that we get a refund. Not because we necessarily want a refund. I'd like it to just be even and get more money per paycheck, but because I don't want to get hit with the penalties and interest I would get hit with if I underpay the taxes. That's the strategy. Therefore, I'm likely going to get a refund if I do it correctly, and the refund for federal income taxes is also not deductible and not typically included in income because I didn't get a deduction for it, right? I just overpaid. If I overpaid, I get a refund. We're done. We're done with it. But on the state level, the question, of course, is I'm going to do the same thing in some states. And if I overpay, I might have got a deduction on the schedule A. So, what happens when I get a refund for the overpayment? Now, I got a deduction for something that I didn't really pay cuz I was on a cash base system and I got the money back. That's why you might have to include it in income in the following year, which we saw in a prior section when we looked at the schedule one uh deduction. Okay. So, let's go over to the itemized deductions and we'll take a look at this. And so, now we're on the schedule A itemized deductions. So, we have the taxes paid and the interest. These are the two main categories that usually push people over possibly to being able to itemize, which means they have to clear the standard deduction hurdle, which has the lowest amount for single filer of the 15 750. So, the tax state taxes themselves may not be enough to do that. Uh usually, it's a combination of owning a home, often times in a high cost of living area, therefore having a loan on the home, the mortgage interest then being something that could be deductible here, then that home also lends itself to property taxes, which will be possibly up here, and you then could then have the state taxes that you're paying depending on the state that you're in. So, it's far more likely that somebody in a high cost of living area like California and New York who owns a home are going to are going to clear the hurdle of of itemizing uh due to the high cost of living most likely meaning they're going to need an higher income to live there and they're going to need uh higher property taxes and they're probably going to have a higher mortgage on the home all of which are are things that could like push you over uh the limit. So, we're on we're on the taxes we paid then uh we could call these like SALT taxes so once we add up all the taxes there's a cap and that cap is currently at I believe uh the 40,000. So, if you're at California and New York that's a substantial I mean you you could clear that cap pretty easily. But that cap you'll notice is higher than than even the um the the standard deduction. Standard deduction for the single filer as we saw here was uh was 15,750 and for married double that 31,500. So, we could clear the hurdle just with uh with the the the the the the taxes of 40,000. Note that that 40,000 is the same whether single or uh married filing joint which is an interesting kind of thing. Okay. So, first let's say we own a home. Typically if we own a home what's going to happen we're going to say that uh if we own a home we'll go into the itemized deductions. We're usually going to get a 1098 so I'm going to go into the interest category and the 1098 uh will have the amount of interest we paid let's say it was let's just bring it over 20 thousand of the interest not 200,000 so we have a substantial loan out if the interest was at at you know 20,000 and then we have uh the taxes that are going to happen in terms of the real estate tax deductions. So, the principal residence, we're going to imagine the mortgage is on our principal residence real estate taxes, let's say is 6,000. Now, if that's all I put in, it will also open the door to the state taxes, which depending on the state we're in, will usually have either a state income tax or a uh uh a sales tax or both, in which case you have to take one or the other, right? So, if I go back on over here, now we're going to be over the the the the the limit because we have the 20,000 interest, another 6,000 for the property taxes, and notice that this bit, what happened here, the system is going to be calculating the the taxes uh using tables, using a worksheet to calculate uh the the the assumed sales tax because it's assumed that you're not taking the uh uh the the the the the tax the state income tax because you didn't input anything for the income tax, but instead taking a sales tax. Now, what if we had an income tax? Well, then that would be over here, and it would have been on the if we had a W-2 employee, then the federal income taxes are here, right? So, So, what if I had What if I paid, uh you know, 25,000 of uh federal income tax, that's the federal income tax, and then the state income tax, let's say was 15,000. So, we paid 15,000 state income tax, 25,000 on uh the federal income tax. We also paid another 6,200, that's the social security taxes, but although that's reported on the W-2, I don't normally have to worry about it unless I didn't pay the social security or for some reason we went over the cap, which we'll talk about later. For example, if I had two W-2's and they didn't know the cap was hit, you know. And then the Medicare is 1,450 similar situation. So, these two for a normal W-2 employee usually aren't aren't going to be a problem. Those have already been taken care of. They're just informational stuff on the W-2 and these two are going to be there. The federal income tax isn't going to be deductible, but it's going to be on on the return for taxes that we already paid. The state income taxes will be on the state tax return in our case if it was like California, but it will also show up as possibly deductible on the schedule A. Notice that if it was withheld, this 15,000 has already been paid by you taken out of your W-2 wages. So, it was paid on a cash basis already. So, if I go back on over, now that 15 now we have 15,000 here for the state taxes that were paid. And so, plus the 20,000 that gets up to to the to the 54,500. So, we're going to go back to the 1040. So, now we have the 100,000 here, page number two. We have 54,500 substantially over in this case the the 15,750. So, that brings our taxable income to the 45,500. Tax now calculated at 5,225. Now, the 25,000 here, that's the the state income tax that was paid with the W-2 that I put in there. The state income tax, I mean I'm sorry, this is the federal income tax. The state income tax would be on a California return in this case if we were in California and it was included on the schedule A. Okay? So, if I if I if I put that over here on on this format just so we can see it. If I go to the schedule A, I say taxes, let's I'm going to insert a couple more insert And let's say that we have Let's say that within the taxes we have, uh, state with the W-2. Let's say just say W-2. We had with the W-2, what did I say? 20 or 15 15,000 with the W-2. And then we had real estate. Real estate or property taxes uh, of of We said 6,000. And so that comes out Let's put it over here. 15,000 6,000. And so that came out to 21,000. Now notice that this formula over here is kind of a problem because if I put medical expenses up top, I did this last time, and I put like 20,000, then this is, uh, here let's put 20,000. Then this is positive. Let's make this, uh, not like this color. Okay. So then this is positive, but if nothing is in here, I get a negative amount. So what I'm going to do is I'm going to do an if formula. If it's greater than zero, put something here. If not, don't put anything, uh, here. So I'm going to say, uh, let's just do a little if equals if tab. I'm going to copy this. If that plus that is greater than, uh, zero, then, {comma} do that plus that. If not, {comma} do do If not, then put a zero there. Okay. It's got two ifs. Okay, so there it is. And it shows 20 If I put 20 So positive, do something. If it's not positive, put a zero. Okay, good. Okay, and then down here we've got 21,000. So 21,000 uh, here 21,000. Okay. That looks good. And then I have to take out the medical expenses. No medical expenses. So, let's go back on over here. What's the deal with the medical expenses? Get that out. Boom. Okay, so I'm going to go back on over. That was too high. I messed up before. So, let's take a look at it now that I've This is why you double-check the data input. The medical expenses were messing it up. So, I'm at 41. Uh because I had and I had Okay, so I now have to add interest. So, let's go down here and add another category. It's not in the same order. Interest. Uh black and white. I'll say do do I'll go Uh here. Let's make this bordered and blue. Blue and bordered and uh home interest I said was What did I say? 25,000? And so, let's bring this down and say total interest is going to be in the outer column. Sum that up and then this is going to be the total for everything. Copying this down here. So, now I'm at 46,000. That's not quite right. So, it was 15,020 I put 20,000 in for the interest, 20,000. So, that comes out to 41,000. Okay, so 41,000. Okay. Going back to the Form 1040, page number two, 41,000. So, so let's bring that over. That comes over here now. So, now I've got the 100 minus The greater of these two now is now the itemized. 41,000 cleared the threshold of the 15,750. And so now we have taxable income 59,000. 59,000 tax calculated at 7,900. 79. So there we have that. And then uh so there we have that. Now I now I have the federal income taxes that we paid. So taxes uh uh that we paid uh here payments. See if I can go over to the payments. And go okay. We paid 25,000. And so do do do do do do do do do do do do do do So that comes out to a 17 uh 171. Right? Of a refund. Okay. And then I then I could do a similar worksheet for the state taxes. I usually just kind of calculate the the payments that were made to the state for the state side of things, but I won't do that here. Okay. So that's going to be it. So that you know, that's the the the the the state taxes. So let's go back on over to the schedule A. Now let's say I'm in a state that doesn't have a state income tax. What if I don't have a state income tax? Well, then you're not going to have any withholdings on the W-2, right? If I go back on over, you're in a state I think like Texas doesn't have a state income tax. They just have sales tax. So then you'd have nothing here. Okay. So so that means that if I go back on over uh now what happened? They They added 963. Why did they add 963? Because they're going to use a table to assume based on location that we're going to give you the sales tax, right? The the sales tax calculation on average. So now we've got the sales tax calculation. So if I let the system calculate that then I'd have to go over here and say, uh uh the tax is just sales tax now, which I'm letting the which is by table is 963. So, now we're at 963 by table and that gets me to the 26963 and uh 26963. Now, if you purchase something large, uh then you might say, "Well, I don't want to let the table do the calculation. I want to do my own calculation for uh the sales tax." So, then you'd have to go in here and actually enter the payments for the sales tax. So, you might say, "I'm going to add up my state and local sales taxes because I bought a I bought a house or so I mean I not I bought like a a yacht or something like that. Bought something large." So, then I'm going to say, "Okay, if that was like So, now I'm going to say I bought something big. So, I'm going to I'm going to calculate my own sales tax." Now, obviously if you calculate your own sales tax, then then the government might question that because if it's out of sync to the normal table, then you know, they might they might uh question that. So, the those are your options. So, obviously it depends on So, from a practical standpoint, if you're in a state that usually has an income tax like California, for example, then almost all the time it's going to be an income tax situation. It's usually going to be higher than the sales tax unless they buy something very expensive like a yacht or something. It would be an unusual situation where you would think that the sales tax would be greater than the income tax and you'd have to actually calculate that. If you're in a state that doesn't have an income tax, then it's more likely that you're going to come up with this question all the time of should I just take the sales tax or should I calculate the actual sales tax, in which case you have to actually get the receipts and do the whole thing to figure out the sales tax, which again happens more often if you have a a purchase of some kind. Okay, so other thing to note on on the state and local taxes, uh it's possible to group your your your payments together a little bit, although you you have to be careful not to have a massive prepayment. So, in other words, you you you you if you if you think that your income was higher this year, you might say, "Hm, it would be nice maybe if I can pay next year's property taxes." So, and and if I'm on a cash basis method, all I have to do is pay this before uh uh uh before the end of the year, and then that would be two payments, another 6,000. Right? Because property taxes is usually happen every 6 months or something. And that And now you've doubled your payment. Now, next year it's going to even it's going to go back down again, cuz you're only going to have one payment next year. But, you might say, "Hey, look, this year my income is higher than next year. Therefore, my my uh my my tax rates my marginal rate is higher. If I'm going to have a higher marginal rate this year than next year, if I can do something to add a deduction that I could have taken next year into this year, it might be beneficial. If my income is going to be higher next year than this year, if I can delay a payment to next year, it might be beneficial. How do you do that? Well, if you're on a cash base system, it happens when you pay it. So, but you have to be careful with that because again the IRS is going to come up with exceptions on on excessive prepayments, right? You can't pay like 5 years of sales tax this year or something like that like massive amount of prepayments or something. But, you might be able to do some nudging over the line because we're on a cash base system, and so that's one thing to kind of keep in mind with the taxes. That's similar thing to keep in mind, like if you make a big purchase, right? If you make a big purchase, you also want to kind of uh keep in mind when when that purchase might happen if you're going to be calculating the sales tax on the purchase. So, if you make a really big purchase and the sales tax is going to push you over, then then you might want to make sure that you make the payment within a one particular year, so it doesn't go over 2 years. Okay, in any case, the other thing that becomes a problem to people is estimated tax payments. So, so what if what if what if what if I have a I don't have a W-2 business? Now, uh I have a Schedule C business, right? So, now it's like, "Okay, I don't have this anymore. I have a Schedule C income, right? I have a Schedule C income. And so, now my 100,000 is coming from here, let's say, 120,000, and then my advertising is 20,000 for a net of 100,000. So, now I go back on over, and it's like, "Okay. So, so now my Form 1040, I've got 100,000, but then I get to deduct the the half of the the the the self-employment tax, because now I have to deal with self-employment tax, because that's the equivalent of in essence payroll taxes. That gets me to 92,935, page two. Now, I have uh the standard I'm I'm still taking the the itemized deduction, 32,915, uh brings me and then we have the qualified business income, 12,004, and so on. But, the problem is the state taxes were not taken out of my W-2. I have to pay my taxes. So, again, if I'm in like a California that has state income taxes, now I have to make federal estimated taxes and state estimated taxes, and I have to do it quarterly, even though I don't know what I'm going to make, and I have to make it based on annualized income, basically, uh you know, like 100,000 for the year. I can't because otherwise I don't know what the rate is. So, the the problem with that is that is that on on the on is that you have this weird cutoff thing because if I make things on a quarterly basis, that means for tax year 2025, I I I can make it after the first three quarters, the payment happens the month after, and the last quarter is going to be paid in 2026. Right? So, now I'm going to have a payment for tax year 2025 that was paid in 2026 if I made normal quarterly payments. So, for itemized deduction purposes then, do I get to include that 2026 payment in 2025? No. But, it seems like she Well, but it's applied to 2025. Yeah, but that would be on an accrual basis, and we're taking this deduction on a tax on a on a cash basis. So, we only included three of the 2025 payments this year. That last quarterly payment happened in 2026. You're going to get the deduction for it next year is going to be the general. Well, what about 2004? In 2004, you had that last payment that was probably made in 2025. So, now you've got a payment that was made in January of 2025 that was really applied to 2024. So, it was applied to 2024 taxes, but you paid it in 2025. Therefore, you would think that payment would be a deduction in 2025, and then you have the last payment that was applied to 2025 but wasn't made until 2026, which means that it's applied to the payment of 2025 taxes, but you don't get the deduction for the state tax side of it until you actually paid it in 2026. Okay? So, if I go back on over So, if I look at like estimated tax payments for example, uh, for the state. I'm I'm I'm really just focusing in on the state. You would have both, right? So, the So, the So, the first payment that she that she that you would have, let's say, was was uh 2,000 uh uh and that was on January, February, March, and you made it on April 15th, uh '25. And then, you made another payment of 2,000, and you made that on January, February, March, April, May, June, you made it on July 15th, '25. And then, you made another 2,000, and you made that on uh it it the quarter ends in October, so it would be November 15th, '25. And the last payment, 2,000, you didn't make until after the end of the year, which would be January 15th, '26. So, therefore, although these all got applied to payments for 2025, this one here wasn't actually paid until 2026. So, when I go back on over to the to the to the payments here, you only have 6,000, 2 4 6. That last 2,000 was applied to tax year 2025, but you don't get the deduction for it for federal income tax purposes until 2026 because it's on a cash-based system. Now, you also probably could have had, however, a payment for 2024 that was made uh in 2025, which means So, so, basically, if you make quarterly tax payments, it's going to be the three quarters of 2025, not including the last quarter, and then the last quarter of last year, which was which was made in 2025. Okay. So, that's the general thing. Uh that's the general outline most of the kind of problems uh with the taxes. Now, the state tax, it's just one more thing. Uh a lot of times people uh aren't as good at their bookkeeping on the state taxes, so you could possibly go to the government, the federal tax uh board or or whatever for whatever state, and possibly the IRS to double-check their taxes if they have set up things properly and they have an account, but again, just make sure that you're tying out you want to tie out two things when you look at the taxes. One, did they make the payments properly that are being tied out to tax year 2025, so that they have paid the taxes properly, and two, uh when did they actually make the payments so that I can see if they're going to get a deduction, which would be on a cash-based system. Okay, that's the general layout.