 Income tax 2023-2024, alimony and IRA deduction. Get ready and some coffee so we can recognize the code cracks when doing income tax preparation 2023-2024. Most of this information can be found in the Instructions for Schedule 1 section of the Form 1040 Instructions tax year 2023, which you can find on the IRS website at irs.gov, irs.gov, looking at the income tax formula. We're focused on line 2 adjustments to income, which you might hear called above the line deductions or Schedule 1 deductions. Remember in the first half of the income tax formula is basically a funny income statement. Typically income statements having income minus expenses resulting in net income. Here having income minus various deductions resulting in taxable income deductions being good for taxes. Therefore we're constantly looking for more of them noting the primary categories of deductions being the above the line deductions or adjustments to income. And the below the line deductions the greater of standard deductions or itemized deductions. Recognizing that with the above the line or adjustments to income deductions we don't have to clear a hurdle like the standard deduction hurdle before we can utilize the deductions in this category. So we're on the first page of the Form 1040 income section. We're looking at line number 10 adjustments to income from Schedule 1 line 26. This is a Schedule 1 part 2 adjustments to income. We're focused on line 19 alimony paid and 20 IRA deduction. Alright for tax years 2019 and onwards due to the Tax Cuts and Jobs Act the tax treatment of alimony payments has changed significantly. So we're back to this alimony which might sound familiar because you saw it before on the income side of things because we have this symmetry between the taxpayers that we often see. Remembering the general idea from the IRS is that if someone is going to get a benefit of a deduction then they have to rat out who they gave the money to. So the IRS can go after the person that received the money which we can see most clearly in an employee-employer situation where if the employee-er wants the deduction of wages paid to the employee they have to not only rat out the employee in that case with a W2 not just going to the employee but also to the IRS but also withhold the taxes and pay it to the government on the employee's behalf. Not all systems are that stringent because with a 1099 situation you don't have to do the withholdings but you're still telling the IRS the income that has been earned by someone else in order to facilitate the deduction. If you have a situation where two married couples that's what this alimony is going to be. We had a married couple. They break apart is the general idea or process that could happen in a divorce or something like that. And then there's going to be an agreement possibly payments going from one spouse to the other because when they were married as one entity the typical family structure would be that one of the spouses would be doing less work in earning and taking care of the home while the other one would be earning the idea then would be when they break up the person. 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 that's okay whatever because our merchandise is better than their stupid stuff anyways. Like our accounting rocks product line. If you're not crunching cords using Excel you're doing it wrong. A must-have product because the fact as everyone knows of accounting being one of the highest forms of artistic expression means accountants have a requirement the obligation a duty to share the tools necessary to properly channel the creative muse. And the muse she rarely speaks more clearly than through the beautiful symmetry of spreadsheets. So get the shirt because the creative muse she could use a new pair of shoes. If you would like a commercial free experience consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com That was not increasing their career during that time because they were sacrificing the time to take care of the home. Should be entitled to payments because they help build and support the career of the other person and therefore you should have alimony payments. Now they've classically have broken out payments between alimony payments and a child support payments which for taxes was a huge deal because the child support payments were considered non-taxable meaning they weren't deducted for the one paying it and they weren't taxable to the one receiving it whereas the alimony payments were deductible for the spouse paying it and therefore you had to include it in income for the one receiving it. So under the old structure you could make the argument that it was favorable to the payer of the alimony because they got to deduct the alimony and the recipient got to have to include the alimony as income which could possibly increase their income taxes. Now in reality I don't think the change is really favorable either way as long as they don't put it in place retroactively meaning change the deal on the contracts that have been made in the past because it's just going to simplify the negotiation. So you would think contracts in the future would not have to get into the weeds of taxes to try to split out the payments which are going to be child support or alimony and they can just reflect what was the tax benefit in the past and the new deal going forward. So I think it's possibly a good change but they couldn't make the change to the deals that had already been made because they already made the deals under the old law and so it's only going to go in a certain timeframe going forward. So the basic idea is in the current timeframe if it's a more recent divorce situation we don't have as much of a difference between alimony and child support and we just don't have to put it on the taxes which is good generally because we don't want to be combing through divorce agreements to try to figure out how they worded things to see if it's child support or alimony and then if it's prior to that date then we could still have the legacy agreements that were put in place before the changes to the law. Okay so if your divorce or separation agreement was executed after December 31st 2018 alimony payments are no longer deductible for the payer nor are they considered taxable income for the recipient. So this marks a significant shift from the previous tax law where alimony payments were deductible by the payer and taxable to the recipient. This change does not affect agreements executed before January 1st 2019 which means that for those earlier agreements the old rules still apply. So alimony payments remain deductible by the payer and taxable to the recipient. So if you're dealing with a client or yourself where the agreement has been in place for some time now then you're probably going to keep on going with what has happened in the past and not change the system that's how the law was set up but if it's a more recent agreement or if there was a change to the divorce settlement agreements in which case you changed it to be under the consideration of the new laws then it's going to be different. Then you won't have to deal with the deduction or the inclusion generally is the idea. So it's crucial for individuals paying or receiving alimony to understand how these changes affect their tax situation. For pre-2019 agreements alimony paid should be entered on form 1040 schedule one with the recipient's social security number included to avoid penalties. So notice how this works and this is a big problem when you have people that are separated especially if they're not really communicating well and they've got lawyers that are just putting a wedge in between them and making it impossible to communicate so they can profit on their misery. What will happen then is that if you put something that doesn't mirror properly the IRS is going to have an issue with it. So if the person that paid the alimony takes a deduction for it they're going to have to rat out the other person by putting the other spouse's social security on the return and say that they got income in a similar way as giving a W-2 or a 1099 kind of thing and if the spouse who received the money doesn't include it in income then you have this incongruity which will likely trigger some kind of audit which again will cause problems basically going forward. So the idea would be obviously we'd like the divorce agreements and what not to be as clear as possible so that you don't get into arguments with regards to the benefits and problems of taxes and part of that is to mirror kind of these payments. So recipients of alimony under these agreements must report the amount on their tax return along with the date of the original divorce or separation agreement. So lines 19A, 19B and 19C alimony paid. So let's just look at the line items, line 19A. If you made a payment to or for your spouse or former spouse under a divorce or separation agreement entered into on or before December 31, 2018, you may be able to take this deduction. So you can't take a deduction for alimony payments. You made two or four spouse if you entered into your divorce or separation agreement after December 31, 2018 or if you entered into the agreement on or before December 31, 2018 and the agreement was changed after December 31, 2018 to expressly provide that the alimony received is not included in your former spouse's income. So make sure that you understand the new laws whenever making updates to any kind of divorce agreement or any kind of or going into any current kind of divorce agreement. But it should be easier because it's it's not on the taxes, right? So it should be an easier thing to do. Hopefully. So line 19C, on line 19C, enter the month and year of your original divorce or separation agreement that relates to this deduction for alimony paid. Line 20. So now we have the IRA deduction. So if you made contributions to a traditional IRA for 2023, you may be able to take an IRA deduction, but you or your spouse of filing joint return must have had earned income to do so. So the IRA we've seen before the idea of a 401k plan and the idea of IRA as well in the terms of when you get the money out, when you're pulling the money out doesn't have to be included in income. So the general idea for these types of plans where you're going to get a benefit for using these tools by putting money into normal investments, typically mutual funds, but under the umbrella of a retirement structure such as a 401k plan or in this case an IRA. When you put the money in the question is do you get a tax benefit when you put the money in such as reducing your income or taking a deduction. And then when the money grows over time, hopefully it will grow in the form of dividends, interest, capital gains, do you have to pay taxes at that time. And then when you take the money out, is that a tax triggering event when you take the money out and or could it also trigger the penalties. Those are the questions that we have now we're looking at the point in time of these investment tools when we put the money into the account. And that of course is when we're asking the question, do we get to reduce income at the point in time that we put the money in. Now, notice that if it was a 401k plan or a 403b something through your employer, you would get a benefit of not having to include it in income and exclusion. But it would be reflected on the form W2. And therefore the employer will already have done it for you and you just have to enter the W2 information and everything should be correct because box one will be reduced properly, hopefully by that amount. And it might differ than what's on box five and box three, which are all income line items. If, on the other hand, you do an IRA deduction, that means it's not being taken out of your wages typically by an employer. Therefore, it's not going to be reflected in your W2 income has to be somewhere else, such as the adjustments to income. So for IRA purposes, earned income includes alimony and separate maintenance payments reported on schedule one line to a. If you were a member of the armed forces, earned income includes any non taxable combat pay you received. If you were self employed, earned income is generally your net earnings from self employment. If your personal savings were a material income producing factor. So for more details, you can see publication 590 a statement should be sent to you by May 31st 2024 that shows all the contributions to your traditional IRA for 2023. So we're going to use the IRA deduction worksheet to figure the amount if any of your IRA deduction, but read the following list before you fill in the worksheet. So you can figure that basically IRA deductions now with the IRA deductions, there's going to be a cap in terms of how much that you can put into an IRA. It's usually going to be significantly less than like a 401k plan or a 403 B plan. That's why it's usually way better off if you have the ability to put money into a 401k or 403 B. It's usually that's usually the first place to go because you can put more money in and you might get a matching kind of benefit with it as well. That's also why when people don't have access to a 401k or 403 B possibly because they're sole proprietors and they have a schedule C business, they might want to set up their own 401k or possibly a more simple plan that we talked about before like an IRA. I mean a simple which is a simple type of retirement plan or a Roth IRA. Those are going to give you more ability than just a normal individual IRA for a sole proprietor. We touched on that before as well. When we put money, also just note that when you put money into a normal IRA, it can be a little bit complex if someone does have access to a 401k plan such as you or say your spouse. Then the question is, well, can I still put money into an IRA? And that gets complex. It'll depend on different factors. Fortunately, however, it is something that can be done kind of as a last minute tax planning because with the IRA, oftentimes you don't have to actually put the money in the IRA in the tax year. So if we're talking about tax year 2023, for example, you can do the tax return and then possibly be able to do the last minute tax planning move of putting as much money as you can given your tax situation at that time into an IRA. So that's often the last kind of move that you can make for tax planning, which can happen actually after the year has ended. So that's something we want to keep in mind when doing tax preparation. We'd also like to have some cash on hand in order to take advantage of being able to do that when we file the tax return. Okay, so number one, you can't deduct contributions to a Roth IRA, but you may be able to take the retirement savings contributions credit, savers credit, see the instructions for schedule three, line four. Now the Roth IRA is kind of the inverse of a normal IRA. So the idea of an IRA would be, I want to take the deduction now. So this would typically be ideal in a situation where you have the max amount of money that you think you're going to make in your lifetime. So if I'm making more money than I'm spending right now, I'm probably in a higher tax bracket than I will be in the future. When I retire, because when I retire, I'm only going to be taxed on the money I take out of the retirement account is generally the idea. So if everything remains the same, I'll be at higher tax brackets now than when I take the money out. And therefore I want the deduction at this point in time to defer the taxes. Typically that's the way you want to do things, defer the taxes. But what if you think that the government is overspending and they're going to just bankrupt the government and at some point they're just going to have to tax, really tax everyone. Well, then you might think, or if you don't have much money right now in earnings, then you might think, hey, I just rather pay the taxes now. And then when I take the money out, that's when I don't pay the taxes. And in that case, you'd have a Roth IRA, in which case the growth of the money might be a tax-free situation, but it's not going to be taxable when you take the money out. So that means that you're not getting a tax benefit when you put the money into a Roth IRA because that's the point of a Roth IRA, it's inverted. Number two, if you're filing a joint return and you or your spouse made contributions to both a traditional IRA and a Roth IRA for 2023, don't use the IRA deduction worksheet and these instructions instead see publication 598 to figure the amount. So obviously it's a little bit more complex, different worksheet to use. Tax software is of course greatly helpful for these types of calculations. Number three, you can't deduct elective deferrals to a 401k plan, 403b plan, section 457 plan, simple plan or the federal thrift savings plan. These amounts aren't included as income in box one. So in other words, you might say, well, isn't the IRA the same thing as like a 401k plan or a 403b plan or a simple or something like that? And the general idea is like, well, yeah, it's the same idea. But if you had W2 income and a 401k plan, it would be reflected by the employer in the W2. They would have already lowered box one and therefore your taxable income would be lowered when you just input the W2. So it's already basically taken care of. You can see that because you'll see it in box 12, I believe. And box one will typically be different than box three and box five because it will possibly be a reduction for federal income taxes, but possibly not for Medicare and Social Security in terms of income. Number four, so if you made contributions to your IRA in 2023 that you deducted for 2022, don't include them in the worksheet. Number five, if you received income from a non-qualified deferred compensation plan or a non-governmental section 457 plan that is included in box one of your form W2 or in box one, a form 1099NEC, don't include that income on line eight of the worksheet. Similar scenario we talked about before. The income should be shown in A, box 11 of your W2. B, box 12 of your form W2 with code Z or C, box 15 of form 1099 miscellaneous. So similar type of scenario it should be reflected in those cases on the W2 form and therefore you shouldn't get a deduction because it will already be reduced in line one of your 1040 box one of W2. So if it isn't contact your employer, okay, six. So you must file a joint return to deduct contributions to your spouse's IRA into the total IRA deduction for you and your spouse online 20. So note that if you're married, you have to file joint or separate. If you file separate, the IRS is going to be skeptical on many kinds of deductions because it's likely that you might be trying to manipulate. If they weren't, then people would manipulate the system between joint and separate in ways that would not be good. So seven, don't include rollover contributions in figuring your deduction. Instead, see the instructions for form 1040 or 1040 SR line 4A and 4B. So rollovers are basically when you're taking money out of one account that's under the umbrella of a retirement and putting it into basically another one. Possibly, for example, if you had to move from a 401k plan to like an IRA because you quit your job or something like that. And so you take the money out of the 401k plan and you try to roll it into like an IRA which has similar restrictions. The goal there being that you don't want to count it as a distribution in which case it might be subject to taxes. Now, you might also try to say, people might try to say, well, it's a contribution and I should get a deduction for the contribution. Well, no, it's not a contribution. It's a rollover. It was already under the umbrella of a retirement type of account so you don't really get a deduction for it. One of the problems, of course, with this incentive program or process to put money into these accounts to get a deduction is they actually favor more affluent people. These are more wealthy individuals are the ones that really drive the increase in these deduction amounts that they can put into a 401k plan in IRAs and whatnot because they have the money to put the money in there. If you don't have the money to put the money into those accounts, you're not going to get a benefit. But of course, the argument is going to be that they're trying to incentivize people to save for retirement. That's the argument. But when you get into these high amounts of dollar amounts, most people don't have thousands of dollars, like tens of thousands of dollars to put into a retirement account. So you have to have the funds to put into the account in order to get a benefit for them. Anyways, number eight, don't include trustees fees that were billed separately and paid by you for your IRA. Number nine, don't include any repayments of qualified reservists distributions. You can't deduct them for information on how to report these repayments. You could see qualified reservist repayments in Publication 590A. Number 10, if the total of your IRA deduction on line 20 plus any non-deductible contributions to your traditional IRAs shown on form 8606 is less than your total traditional IRA contributions for 2023, you can see Publication 590A for special rules. So where you cover by a retirement plan? So here comes the other complexity. If someone doesn't have access to a 401K plan with work, then it's fairly straightforward that you would qualify to be putting money into an IRA. But what if you or possibly your spouse did have access to like a 401K plan or a 403B plan? Then could you still put money into an IRA? That's the question. So if you were covered by a retirement plan, qualified pension, profit sharing including 401K, annuity, a SEP, simple, etc. at work or through self-employment, your IRA deduction may be reduced or eliminated. All right. So because that makes sense, right? Because the IRA is there. This is kind of like the health insurance where traditionally the 401K was set up for people that spent their whole life working at one company. And basically they would save for retirement through the 401K plan. But of course these days people are working in different areas and changing jobs all the time and having self-employment and so on and so forth. So you would think they want an ability to have an IRA in case you don't have access to a 401K plan. But it would be cheating if you could max out the 401K plan and max out the IRA. Again, that would be kind of excessive for people that have a lot of cash flow to be able to do that, right? But if you still make contributions to an IRA even if you can't deduct them. But you can still make contributions to an IRA even if you can't deduct them. In other words, you put money into an IRA even though you can't deduct it. You might ask, why would I do that? Because I'm putting money into a retirement account which is going to restrict my capacity to take the money out. Why would I do it if I can't deduct it? Well, you still might get a tax benefit because the growth of the money in there might still be beneficial. Meaning dividend interest capital gains, the accumulation of the value of the stock that are going up might not be taxable or could be deferred. In other words, until you pull it out. So in any case that the income earned on your IRA contributions isn't taxed until it is paid to you. So the quote retirement plan, end quote box inform in box 13 of your form W2 should be checked if you were covered by a plan at work. Even if you weren't vested in the plan. In other words, when you look at the W2 form, there's going to be a checkbox for the retirement plan, which will show you that you had access at least to the plan even if you were not yet vested in it. And so that will help you determine and that's crucial to check off in software to help you to properly determine whether or not you can put money into an IRA. So you are also covered by a plan if you were self employed and had a set simple or qualified retirement plan. So if you're not covered by a plan in work through your employer reflected on a W2, but you have a schedule C, then you might try to put money into an individual IRA, but you might try to get more of a benefit putting money into like a SEP plan or a simple plan. In which case, again, you would think you can't max out the SEP and the simple as well as get an individual IRA that would be kind of doubling up. So if you were covered by a retirement plan and you file form 2555, I believe that's for foreign earned income or foreign income or 8815, or you exclude employer provided adoption benefits, see publication 598 to figure the amount if any of your IRA deduction, married persons filing separately. So if you weren't covered by a retirement plan, but your spouse was you are considered covered by a plan unless you lived apart from your spouse for all of 2023. So if you're married, then married is usually the best way to file. But if you file married filing separately, it's not like going back to head of household or single the IRS might restrict some of the deductibility of certain things because again, they're skeptical of people game in the system bouncing back and forth between married and married filing separate. So deduction worksheet. So before you begin, be sure you have read the instructions figure any right in adjustments. And if you are married filing separately, da, da, da, line one, a were you covered by a retirement plan. So you've got your IRA and your spouse's IRA. So B if married filing jointly was your spouse covered by a retirement plan. So next, if you check no online one a and no online one B if married filing jointly, skip line two through six, enter the applicable amount below on line seven a and line seven B if applicable and go to line eight. So 6500 if under the age of 50. So that's going to be like the max contribution in general if you don't have any of these restrictions and 7500 if they age 50 or older at the end of 2023. So otherwise go to line two. So line two, enter the amount shown below that applies to you. So you have a single head of household or married filing separately and you lived apart from your spouse for all of 2023 83,000 qualified surviving spouse enter 136,000 married filing jointly 136 married filing separately and you lived with your spouse to do that. So that's a 10,000. Line three, enter the amount from form 1040 or 1040 SR line nine. And that's the total income line. Line four, enter the total the total of the amounts from schedule one line 11 through 19 plus 23 and 25. Line five, subtract line four from line three if married filing jointly enter the result in both columns. And six is the amount on line five less than the amount online to if no stop if yes, subtract and so on. I won't go through the whole thing from here going forward but just know to get some it can get somewhat complex right. So what you want to do from a general data input standpoint is get the basically the general rules. Can you deduct an IRA? Generally if you have access to a 401k plan or something else that's what you want to maximize first. And then in some cases you might still be able to deduct some but it gets complicated. So that's going to be the last minute tax planning. If you don't have access to a 401k plan or something through work and your spouse doesn't have access and you have earned income and you don't have any other kind of retirement plan like a simple or something like that. Then you have maximum contributions of the individual IRA of six thousand five hundred and seven thousand five hundred. But the best way to go about it is to to at least not cap off these amounts but rather wait till you do the taxes so that you can do that last minute tax planning to see the maximum amount that you might still be able to put into an IRA, which you can typically do as long as you're not basically on extension, meaning you have up until the time of you file the return, not including extensions typically.