State, Local Tax, and Interest Deductions
Learn the decision pattern the exam can test, then apply it to a realistic taxpayer fact pattern.
What changes the answer?
Mortgage payments mix principal and interest; escrow deposits are not automatically taxes paid.
A tax-practice scenario
A homeowner refinances and uses part of the proceeds for personal spending. Trace debt use before treating all interest alike.
Identify the taxpayer, entity, transaction, and tax period first. Write the controlling tests in order, apply only the relevant facts, and keep the reporting result separate from any planning recommendation.
Do not take this shortcut.
Deducting amounts from lender statements without classifying principal, points, interest, and escrow payments.
Turn the rule into recall.
Build a use-of-proceeds trail for debt and a paid-versus-deposited reconciliation for property taxes.
- ExplainState the governing distinction without notes.
- ApplyChange one fact in the scenario and predict the new result.
- RetrieveAnswer an unseen question, then review every option.
Official source and scope
This lesson follows the current PSI content outline and uses the IRS reference below for the underlying tax or practice framework. Always confirm current forms, instructions, thresholds, and effective dates before advising a taxpayer.