 Income tax 2023-2024, dividend income tax software example. Get ready and some coffee so we can do some income tax interpretation with income tax preparation 2023-2024. 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 trust me, I'm an accountant product line. Yeah, it's paramount that you let people know that you're an accountant because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep complex and nuanced questions. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. Here we are in our Form 1040 example problem using LASERT tax software. You don't need tax software to follow along but if you have access to tax software, it's a great tool to run scenarios with. You can also get access to the forms, schedules, instructions at the IRS website, irs.gov, irs.gov. Starting with Adam Taxman just trying to avoid the denning tax man living in 90210 Beverly Hills. Back to a single filer to start off with starting with 100,000 W2 income standard deduction 13850 to get us to the taxable income 86150. Marrying that in our income tax formula within Excel 100,000 income 13850 standard deduction taxable income 86150. Letting the software LASERT calculate the tax starting at 14266 which we can see on page two of LASERT. Here it is. Now we're going to be looking at dividend income this time which is part of of course the income line item. But we also have to keep in mind the other impact of it breaking out qualified dividends and non-qualified dividends. Because that can have an impact on the tax calculation which is something we don't often see when we're double checking because we're kind of reliant on the software to do that calculation. But if we want to understand the difference between qualified dividends and normal or ordinary dividends, we've got to dig into the tax calculation. So you can see before we add the dividends we have our normal progressive rates. So the taxable income within these thresholds as we've discussed before are being taxed at these rates. Now with the dividends if they want to incentivize investments say in United States companies they might try to give a favorable tax rate. Well how can they give a favorable tax rate if some people are taxed at higher rates than other people's? Well that means they're going to have to come up with a whole other progressive tax system which will basically always result in the dividend income for qualified dividend being lower than what it would be under ordinary income tax rates. And so it gets a little messy once again in this tax calculation area. That said let's go back to page one. We're looking at the dividend income so that's going to be on line three A and B where we have the qualified dividends and the ordinary dividends. Note the structure here that the dividends that are going to go here on 3B will include the qualified dividends. In other words the ordinary dividends if the ordinary dividends is $1,000 and the qualified dividends is $800 then it's not like we have $1,800 of dividends. It's that $800 of the thousand are qualified dividends. Why would it be structured that way? Well that makes it so that this outer column we can add up and still add up to taxable income whether the dividends be ordinary dividends or qualified dividends because they're going to be taxed either way. The problem is that we then have to break up this number 86-150 between the qualified dividends and the other income. In other words the income tax at ordinary income rates and the income taxed at the qualified rates and then apply the appropriate tax on the table which again is something the software will typically do. All right so usually you'll get a form. It might not look exactly like this because you're going to get it from financial institutions but the name of the or the numbering of the cells will be the same. The primary two cells we will look at is 1A and 1B where we have the total ordinary dividends and the qualified dividends. Let's go back on over and let's say that we go to this trustee drop down and we go to dividends and I'm just going to say this comes from let's just say like e-trade or something so we're going to imagine that's the institution that we're the financial institution we're investing with. They give us a 1099 summarizing the dividends. Let's say that the ordinary dividends is in box one $1,000. Let's just use that example qualified dividends was $800. All right so what happens we pull it over then to our form 1040 and we can see that it populates in the qualified dividends 800 but the total is 1,000. It's not 1,800. It's just the 1,000 and 800 of that 1,000 is qualified. We can see here that they give us a nice little worksheet as well. Then I can see that there's nothing included in terms of Schedule B yet. Schedule B will be imported if certain conditions are met such as for example you have over 1,500. So notice that both qualified and unqualified the 1,000 is being included in the 1,100 for the adjusted gross income. If I mirror that in our software on this side we can say okay and let's first put my actual tax. Here's my tax calculation right now 14266 and now let's make the change. I'm going to go here and let's say last time I added interest let's add another section to my general income tab for dividends. So I'm going to move the total down. I'm just going to say let's move this down and let's say this is going to be dividend income and we'll make that black and white. We'll go to the home tab font group making it black and white. I'm going to make this then blue and so we're going to go to do making it blue and bordered. And then I'll move this down one more space here and I'm going to say total dividend income and let's make this pull this out. So I'm going to say this has come from E trade and we said the total is 1,000 and I'll put the qualified over here like we did with the interest. So I'm just going to put the qualified was 800 just so I can note that in my data input. So let's just put that there and then I'll sum this up equals the sum. Actually I need to put this in the outer column. Let's put this over here equals the sum. So I'm not including this 800 here because the 1000 includes the 800. And then my total income is now the 100 W2 the interest income nothing's in it down to the dividend income. So now we have another 1100 that pulls into page one. There's the 1100 in our formula. We still have the 13 850 standard deduction gets us the taxable income 87 150. If I go back on over here, we can see that we have the 87 150. If I then go to page two, then we now have the tax at the 14 430 calculated by the software 14430. And so I can look at the difference between that to those two and say, okay, what's the difference between the tax? It's 164 dollars. What what did I change? Well, I put another thousand dollars. So I put another thousand dollars in. So the tax rate that I had is this divided by this on that thousand dollars, right? If that thousand dollars got taxed at the 15% or 16% basically and so and what really happened is 800 of it, right? We had 800 got taxed at the fat favorable rate, which I believe is going to be 15%. And then and then the rest of it, the 200 got taxed at ordinary income, right? So I can say, okay, let's make this a percent home tab number percent 15%. That's 800 times 15. And then the 200 if I go back on over and look at my my summary, my marginal tax rate, the highest tax rate is the 22%. So 22.22. This is this times this. And so this plus this is going to be my 164. See, so normally I don't recalculate that to show that, you know, because I'm just doing the data input. But when we're discussing with a taxpayer, what does it mean to be a qualified versus non qualified? You get a you get a this favorable tax bracket situation. And if you got taxed at ordinary income, the added amount of tax of income you had would be taxed at the highest bracket 22%. But the qualified dividends will typically have a favorable tax in this case at the 15%. Now, here's your tables that will help you to kind of determine that. But the general idea would be whatever your highest tax bracket is, if it's going to be a qualified dividend, you'll typically get a benefit for it. So if here's the filing statuses, if your income is below these thresholds for the filing statuses, they're going to have to drop it down to basically zero. So you don't get taxed on them because your your marginal tax rate is fairly low. Then if you go to these income thresholds, then you have a tax rate over 15%. And therefore to give you a beneficial tax bracket, they're going to have to drop it down to 15%. Instead of your ordinary income, marginal or highest tax rate, that's going to be the general idea. But of course, internally the software basically does that for us. So if I go back on over, we can see on page number two, then now the calculation of the tax is a bit more complex, right? Because now they're going to have to break out. You can see this 800. I won't go through the whole thing. But they basically are breaking out the 800 so they can apply the tax at the 120, 15%. You can see that they're populating here and it gets to be a big long, ugly mess. So there is that. Now if we bring the dividends up above the 15,000, we'll have to add the schedule B. So let's just do another one and say let's say we had another one for, I don't know, B of A. Let's say this was 16,000 and let's say 15,000 of it was qualified. So if I go back on over, now we have the qualified dividends up to the 15,800. The total dividends are at 17,000 and we now have the schedule B that has now been populated. Part one, as we saw before, is interest. Part two, ordinary dividends. The IRS wanting to know who you got the money from. Note that although the dividends could still be fairly low in dollar amount because you need to do this over 1,500, they are dividends, which is kind of like interest. It's the earnings that are being distributed to you. And therefore, even if you have a fairly low amount of dividends, that means you probably are holding on to a significant amount of stock because usually they might put the money back into the business. A lot of companies don't give high dividends because they might be reinvesting it. So having dividends and interest, even a fairly low dollar amounts means that you've got significant investments generally, right? So in any case, that pulls in over to the first page. If we were to mirror that in our worksheet over here, we'd say, okay, here's another B of A. And we said this was dividends. We said 16,000 and 15,000. Is that what we did? Or is that too high? I went too high there, didn't I? So 17. That's what I did. That's what I did. So that comes out to 17. Go into page 1, 117,000. 117,000 minus the 13,850 gets us to the 103,150. Page 2, calculating the tax now at the 16,900. So now we have the 16,900. Now note that you could have some of these other boxes sometimes come into play like total capital gain, unrecap 150, section 12, ordinary dividends under section so on, non-dividend distributions. So you can, and then the foreign taxes sometimes comes into play as well, depending on your investments. So usually the data input is fairly straightforward in software for that. And the most common one is probably going to have this, if I say, let's make another one for like Vanguard, Vanguard and say we had 2,000, all of it's here. And then we had capital gain. Capital gain distribution is a common one. And that's going to be generally the idea is that possibly you have a mutual fund, for example, and the mutual fund actually sold some of your stocks because they're managing the mutual fund. You didn't sell the mutual fund, but the mutual fund is holding on to stocks and bonds. And within the fund, they sold something and they had a capital gain, which now they're distributing to people that becomes taxable. So now we have to say, okay, what if like 500 was in there? Then I can go back and notice you down here, most software actually has the line items. So this is 2B, 2A, 2B, 2C that line up to the boxes so that at least you can plug that information into the software and then work backwards to try to understand and make sure the software is doing the data input correctly. So software is quite useful with that, but oftentimes you're going to have to explain what's going on to two people and you want to double check the software. And so if I go back on over and say, okay, now the tricky thing with that is that now I had to put it in place here, it's actually creating a schedule D or it's pulling in or it's coming into the capital gains. So now I've got basically capital gain distribution, which oftentimes is reported on the schedule D if you needed the worksheet. We'll talk about that later. The reason that becomes an issue with data input though is because oftentimes you try to organize all of your worksheets and you're trying to organize when you're double checking your numbers, the dividend worksheets from the interest worksheets from the capital gains distributions and so on. And it's difficult to do that when you have capital gains on the 1099 div because when you're trying to double check your capital gains, then you have to take into account, oh wait, there's this added thing that's on the dividend which was a gain distribution on the dividend when you're trying to double check your numbers, possibly populate in that information into Excel to double check your numbers. So remember that the 1099 div, the 1099 interest and the capital gain distributions often are done by the same financial institutions because people have their investments in cash in the checking account where they might have interest, bonds and stocks also possibly with the same financial institution and the interest represents income from bonds and money and holding CD savings accounts, the dividend represents income from capital gains. You might have one statement that basically has all that stuff included within it. Also, if you have flow through entities like a partnership or an S corporation, then even if you don't do the partnership or S corporation, you might just say, I will input the K1s or something like that if someone else does the partnership or S corporation. We have courses on partnership or S corp if you want to look at that in more detail, but it's a whole thing in and of itself. We will touch on some of the stuff for a sole proprietorship with the Schedule C. But if you have a K1, then again, entering the K1 is usually fairly straightforward because all the boxes line up pretty nicely, but then you again could have income related to dividends or capital gains and whatnot that are flowing through from a different source other than the normal 1099 div. So that's the general scenario with the dividends.