 Income Tax 2022-2023. Penalty on Early Withdrawal of Savings and Alimony Paid Software Example. Let's do some wealth preservation with some tax preparation. Support Accounting Instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. Here we are in our example Form 1040 populating it with LASERT tax software. You don't need tax software to follow along but it's a great tool to run scenarios with. You can also find the Form 1040 related forms and schedules on the IRS website irs.gov, irs.gov. Starting point like normal we got the single filer Mr. Anderson no dependence 100,000 on the income line. 12,950 standard deduction to get us down to the 87,050 on the taxable income. We're mirroring that over here in our income tax formula Excel worksheet 100,000, 12,950, 87,050 here. And page two of the tax software calculated the tax at the 14774 15,000 on the withholdings getting us to the 226 at the bottom line. Mirroring that over here as well. All right, so our focus now if I go on back to page one is to take a look at the schedule one. Let's open up the schedule one. We want to look at page two page number two and we're thinking about the penalty on early withdrawal of savings and then we'll move on to the alimony. Now the first one's pretty straightforward. Obviously, we would like to be advising ourselves and clients to not have a situation where they have to pull money out early and be subject to a penalty. Because for example, if you put money into like a savings account, you're not going to make much money on your checking account in terms of interest. But if you put it into like a CD or something like that, then you might make a little bit more money because you're telling the bank you're going to lock down that money. You're not going to pull it out, which means the bank has some more capacity to take that money and invest it on their end and so on. So if you pull the money out early when you told them you wouldn't, you might be subject to the penalty. So you want to have a sufficient amount of liquid savings that you can pull out in the event of like an emergency or something. But if this happens, it should be fairly straightforward. Hopefully you don't see it that much, but you'll have a 1099 INT and then you'll have the interest down here on the early withdrawal. And so if I'm doing my data input, it's pretty pretty straightforward. I can say we've got the income. Let's say we've got the interest income and let's say we had 100,000 or 100. Let's just say a thousand of interest, but then there was a hundred dollar penalty. So I'll just put the penalty down here, $100. And now if I go back to the forms, I'm going to say let's go to the 1040. There's the 100,000. There's the thousand dollars for the income for the interest. There's the $100 for the penalty, which is pulled in from Schedule 1. And there is, this is Page 2 of Schedule 1. There's the penalty. So there's the penalty summing up to the bottom, pulling up to Page 1 of the 1040 here. So fairly straightforward. Let's remove that one. I won't even do it on the Excel worksheet because hopefully we won't see that one too often and it's fairly straightforward. Example, let's take a look at the alimony. The alimony. Alimony. That divorce was like the alamo. And now we're dealing with the alimony. Okay. So now if we go down here, we've got the alimony stuff. Now we talked before, notice there's going to be symmetry, mainly with the tax code, usually. So if there's a payer that gets a deduction, then the recipient, the IRS, is usually going to force them to have income. So if this happened before the cutoff date, the divorce agreement, which I believe was December 31, 2018, then there was this issue as to whether the payment going from one spouse to the other is categorized as child support or alimony. If it was child support, then on the deduction side of things, the person paying, the spouse paying, doesn't get a benefit for child support. And the one that's receiving the money doesn't have to include it in income. So that would be a benefit for the recipient from a tax situation. And then if it was alimony, then the one that's paying it possibly could get a deduction at that time if it was before the cutoff date, which would be of course a benefit. And then they usually have to give the social security number of the spouse so that the IRS can collect the money on the income side. And so on the income side of things, you would have the alimony that would be received. That would be non-beneficial for the recipient. Obviously, the recipient would benefit from getting the money, but from a tax standpoint, they'd have to pay taxes on it. So they would like to get the money and not have to pay taxes on it. Now, after the cutoff date of December 31, 2018, they removed that rule so that the recipient wouldn't have to include it in income, whether alimony or child support. And the payer doesn't get the benefit of taking the deduction for alimony or child support for after the cutoff date, which you might think would be non-advantages for the payer. It's not fair to the payer. But again, my argument would be, well, obviously if you changed the tax code and everybody knew what the tax code was, I think the agreement would be different before, obviously, because you would say, well, there's tax consequences. We're going to take those into account, and that's going to adjust the amount of payments that are going to go from one to the other. And then if there's a divorce agreement that happened after the cutoff date, as long as it's not retroactively changing what happened before to the agreements that happened before, it makes sense that you would just change the divorce agreement. An agreement. And it should be more easily to do that without with the taxes. Just get out of the way taxes. Just stay out of it. Just stay out of it. Okay. Just stay out of it for crying out loud. I think that makes more sense, actually. But so let's say, let's imagine we had an agreement before the date. And we're going to say, so this is the alimony, the recipient name. I'm just going to say just whatever. I'll just say recipient's last name. Anderson recipient social security number, which we have to give the IRS to because they have to show it, get the income on their side. Let's say it was, let's say it was 15,000 or whatever. And the date we're going to say is on 010117 before the cutoff date of December 31st, 2018. I'm going to say, okay, roll on over, roll it on over. And there it is. So now we've got this deduction. We paid the alimony. It was agreed upon before you changed the law. And therefore I, this person gets to deduct Mr. Anderson, the 15,000. So the 15,000 is going to roll down to the bottom here. And then on the 1040, we're going to have the 100,000, the 15,000 deducted to get to the adjusted gross income, the AGI, the 85,000, 12,950 still the standard deduction getting us down to the 7250. On the recipient side, as we saw on the income presentation and section, they would have to include the alimony received in that situation. It has to be that symmetry. If someone gets the deduction, someone else has to have the income is the general rule you would think. Let's just put that into our Excel worksheet over here because, because why not? So we're going to say this is an adjustment to income. And let's add, I'll just add a line item for alimony, alimony. That's not spelled right. There's no way. There is no way that you spelled. Well, I did. Is that really it? Did I do it right? I still can't believe it. You're too stupid to be able to spell alimony. No, it's right. What are you talking about? I know what I'm talking about. Okay. So then we're going to say this is going to be, this is going to be this one. And let's just put it in the outside, assuming we only have one alimony payment. We're not paying multiple people alimony in our worksheet. Although you could set a worksheet without multiple alimony. So I'm sure that comes up. So we'll say 15,000. And then we'll sum that up and that'll pull into the page one of the form 1040. So we've got the 100,000 minus the 15,000 gets us to the 85,000, 12,950. And the standard deduction gets us down to the 72,050. And so if I pull that on over that mirror. Mirror, mirror, mirror on the wall. Here's what we have here. 72,050 page two calculation of the tax. 11474. 11474. 11474. And that gets us down 15,000 withheld to the 3526. 3526. There we go. So that's just an example of the alimony bottom line. It was more difficult before the cutoff date. If you haven't, if you have an agreement that happened before the cutoff date, you'll probably be able to see it from prior year tax returns. And you can just copy the same kind of process going forward. And if the divorce agreement happened after that time period and people ask you about child support versus alimony. What am I going to do? What are the tax consequences? I think they're trying to pull one over Romney with this complicated tax stuff. Hopefully it'll be an easier situation. And you can help them out to say it's actually the taxes are staying out of it. It should be easier hopefully going forward. But we never know what the tax code could change suddenly. You never know. But that's how it is now.