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REG CPA Practice Questions: Deducting Real Estate, Personal Property, and Income Taxes
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May 3, 2024
In this video, we walk through 5 REG CPA exam practice questions on deducting real estate, personal property, and income taxes as itemized deductions. Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/reg-cpa-practice-questions-explained-how-to-deduct-real-estate-and-other-taxes/ See the other REG walkthrough videos here: https://www.superfastcpa.com/free-reg-cpa-practice-question-walkthroughs/ 00:00 Intro 00:43 Question 1: Real Estate Taxes 02:52 Question 2: Personal Property Taxes 04:59 Question 3: State and Local Income Taxes 06:59 Question 4: Federal Income Tax is Not Deductible 08:13 Question 5: Choosing Between Income and Sales Tax 09:46 Pillar Topics
View Video Transcript
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Welcome to another Reg Walkthrough video
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I'm Logan and in today's video we're going to be going over real estate, personal property
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and income taxes when it comes to itemized deductions. And we're going to be doing that the SuperfastCPA way, which is diving straight into questions
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to learn the material. If you haven't heard much about our strategies, make sure you go to superfastcpa.com and check
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out our free one-hour webinar training where we go over the six key ingredients to passing
0:25
the CPA exam. Again, it's only one hour long, it's free and you will save months and months of struggling
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with your process. Also, be sure to check out our SuperfastCPA app where we have five question mini quizzes
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that you can take throughout the day to continually be practicing and improving
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With all that said, let's dive straight into the questions. All right, here's question one
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Mark and Susan own a primary residence and a rental property. This year they paid the following taxes related to these properties
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$6,000 in property taxes for their primary residence, $2,500 in property taxes for their
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rental property, $800 in sewer and sidewalk taxes for their primary residence, which are
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not based on the property's assessed value, but on the property's frontage, which by the
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way frontage is stuff that's surrounding like a street or a road or something like that
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They also incurred $1,200 in special assessment fees for a local park improvement that will
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increase the value of their primary residence. Which of the following amounts can Mark and Susan claim as an itemized deduction for real
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estate taxes on their current year's tax return? All right, this is the first question
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We don't really know how this works yet. So let's go ahead and go straight into the answer to learn how this works
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Okay, so the answer is $6,000. So just the property taxes for the primary residence
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According to IRS rules, individuals can deduct real estate taxes if they are based on the
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assessed value of the property and levied uniformly across similar properties within
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the jurisdiction. However, sewer and sidewalk taxes that are assessed for benefits to the property, such
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as those based on frontage, again, such as a street or a road or something like that
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are not deductible. Additionally, special assessments for improvements that tend to increase the property value are
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not deductible as real estate taxes. Rental property taxes are also generally not deductible as an itemized deduction on schedule
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A, but they may be deductible on schedule E. Therefore, Mark and Susan can only claim
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the $6,000 paid in property taxes for their primary residence as an itemized deduction
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on their tax return. So what we learned there is generally real estate taxes, that is an itemized deduction
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Whereas property taxes for a rental are probably not going to be included on schedule A because
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instead that will be used on schedule E. So it's not going to be considered an itemized deduction
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And then taxes for things like sewer and sidewalk and things that don't have to do specifically
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with the person's property, but more with the things that surround it
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And also the same thing with these assessments to improve the value of the property are not
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going to be included in real estate taxes. Okay, so we learned a little bit there
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Let's go ahead and go to the next question. Here's question two. Jacob and Emma own two vehicles, a car they use for personal travel and a van exclusively
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for Jacob's catering business. This year they paid the following personal property taxes based on the value of the vehicles
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$450 for their personal car and $350 for the business van. They also paid a $200 flat registration fee for each vehicle, which is not based on the
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vehicle's value. Which of the following amounts can Jacob and Emma claim as an itemized deduction for personal
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property taxes on their current year's tax return? Okay, so we learned about real estate taxes in the previous question, but now we're learning
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about personal property taxes. Let's go ahead and go straight into the answer to learn how this works
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Okay, the answer is $450. So only for the personal car. Personal property taxes are deductible as itemized deductions on schedule A if they
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are based on the value of the personal property and assessed on an annual basis
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Since the van is used exclusively for business, the taxes on it are deductible on schedule
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C and not as an itemized deduction on schedule A. So very similar to what we saw before with
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the rental property, the rental property taxes, that goes to schedule E and taxes for business
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property such as this car, that would go to schedule C and not schedule A. The flat registration
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fees, which are considered taxes by the way, for both vehicles are not deductible because
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they are not based on the value of the cars. And again, that's because this is just a $200 flat registration fee, $200 for whatever car
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it is, it doesn't matter. However, if any portion of the registration fees was based off of the value of the vehicle
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that portion would be deductible. So if any part of this wasn't just a flat fee and was actually specifically based on
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the value of each vehicle, that portion would be deductible as personal property tax
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Therefore, they can only deduct the $450 paid for the personal car
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Okay, we learned how personal property tax works there. Again, essentially most of the time it is deductible except for if you're actually using
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it for your business instead. And any portion that is not based off of the value of the property will not be deductible
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Let's go to the next question. Okay, here's question three. Jordan is preparing her tax return and evaluating her itemized deductions
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She has paid the following amounts in taxes over the year. $6,000 in state income taxes, $3,000 in local property taxes for her residence, $1,200 in
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local income taxes, and $400 in personal property taxes for her car
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What amount can Jordan claim as an itemized deduction for tax on her current year's tax return
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So we've learned about property taxes and personal property taxes, but what about income taxes
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Are they not deductible if you itemize? Let's go ahead and go to the answer to learn more. Okay, so the answer is $10,000
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Now if you've noticed, these don't add up to $10,000. So why is it $10,000
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There is a $10,000 limit or $5,000 if married filing separately on the amount of state and
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local taxes, including income sales and property taxes that can be claimed as an itemized deduction
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on federal tax returns. This is referred to as the state and local tax or SALT deduction cap
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This limit was enacted as part of the Tax Cuts and Jobs Act in 2017
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Jordan can deduct the state and local taxes she paid up to the SALT deduction cap of $10,000
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This includes her state income taxes, local property taxes, and local income taxes, and
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personal property taxes are also considered part of the SALT deduction and are subject
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to the $10,000 cap as well. Therefore, the total deductible amount for state and local taxes is capped at $10,000
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Okay, we learned there that not only are these all included as part of the deduction, but
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there is a limit to how much taxes you can take as an itemized deduction
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And that again is the SALT cap. You've probably heard that if you work in taxes or maybe you've just heard it in passing
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in accounting, but basically that's it. State income, local income, property taxes, personal property, all those things are typically
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deductible, but there is a limit of $10,000. And one more thing that we learned from this is that income taxes again are deductible
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So let's go ahead and go to the next question to see what else we can learn. And here's question four
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Carla and Raj are preparing their joint tax return and are considering itemized deductions
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During the tax year, they made the following payments. $12,000 withheld from Raj's salary for state income taxes, $3,000 withheld from Carla's
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salary for local income taxes, and $4,000 paid for estimated federal income tax
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So what of those amounts can be included as the itemized deduction? Okay, so we learned about the limit
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We've learned that the income taxes can be included. So the question here is, will the federal income tax be a part of this deduction
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And also does that affect the $10,000 limit? Take a second, pause the video, see if you can figure out the correct answer
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And when you're ready, come back and we will look at the correct answer. Okay, so $10,000
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So the limit still applies. State and local income taxes that are withheld from wages are deductible as an itemized deduction
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However, federal income tax payments are not deductible as an itemized deduction
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And then of course, due to the salt cap, they can only claim up to $10,000
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But the main thing that we wanted to learn from this question is federal income tax is
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not deductible. Let me repeat that. Federal income tax is not deductible
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Okay, we only have one more question left. You've learned pretty much what you need to know
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So again, let's go to the last question to finish out. Okay. And here's question five
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Ava, a resident of a state that imposes both income and sales taxes, is in the process
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of itemizing her deductions for her tax return. She recorded $4,500 in state income taxes, and after meticulous tracking, calculated
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that she paid $3,800 in state sales taxes throughout the year. Additionally, Ava bought a new car, which resulted in $1,200 in state sales tax, bringing
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her total sales tax to $5,000 for the year. What is the total deductible amount
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Okay, this is the last question of the video. We haven't dealt with sales tax yet, but pause the video, see if you can get the correct
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calculation, and when you're ready, come back and we will look at the correct answer. Okay, so only $5,000
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So why only $5,000? According to IRS guidelines, taxpayers who itemize deductions can elect to deduct either
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the state and local income tax or the state and local sales tax, whichever is greater
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but not both. And so since her state sales tax is higher, that's what she takes, and that's the $5,000
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So that's the last rule I wanted to teach you in this video when it comes to specifically
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state or local income tax and state and local sales tax. For this itemized deduction, you have to choose between sales or income tax, and you probably
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are going to pick the greater of the two, right? But you can't take both
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So that's why there's only the $5,000. All right, we learned a lot about real estate taxes, personal property taxes, income taxes
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even about sales taxes. So let's go ahead and finish out the video doing one more part of the Superfast CPA Strategy
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which is something called pillar topics. Now the idea behind pillar topics is as you're going through the material or even after you
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go through the material, you take a second and think about the questions that you just
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went through, and you pull out the things that were obviously the most important and
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the things that you were supposed to learn. These are things that you saw three or four times throughout the questions, and you're
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like, okay, obviously I need to know that for the exam. Now this time, I actually did the pillar topics beforehand, so let's go ahead and just read
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through them. So the pillar topics that we learned from this video, state and local real estate, personal
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property, and income tax are deductible typically. There is a maximum amount of all these taxes that can be taken as a deduction, and that
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is the SALT cap, which is $10,000 or $5,000 if married filing separately
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And if an individual itemizes deductions, they can choose between income and sales tax
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to be used, whichever is greater. And then finally, something easy to remember, federal income tax is not deductible
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So those are the pillar topics that I was able to pull from this video. Maybe you thought of something different, but that's the general idea
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You go through questions as your main learning source, and as you go through, you're going to notice the things that are obviously important, and you make pillar topics out of those so
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that you remember them for later. With all that, that's the end of the video
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Thanks for watching. Just one more reminder, make sure you go to superfastcpa.com and check out our free one
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hour training webinar, where we go over the six key ingredients to passing the CPA exam
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Again, it's only one hour. It's going to save you so much time. Also, if you liked going through questions as your main learning material, make sure
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you check out our Superfast CPA app, where we not only have audio notes and review notes
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that you can easily access, but we also have five question mini quizzes that you can continually
11:24
access throughout the day to be practicing and learning all throughout your day
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Make sure to like this video and leave a comment. I hope this was all helpful, and I'll see you in the next video
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