 Income tax 2023-2024. Income tax formula tax software example. Get ready and some coffee so we can avoid having to move into a shack from Income Tax 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 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 problems 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 forms schedules instructions at the IRS website irs.gov irs.gov simply searching for the form you're looking for form 1040 in this case. We're gonna start off as we normally do with our taxpayer Adam Taxman who's just trying to avoid a dang taxman or tax woman for that case the tax woman can be even more ruthless than the tax men I'll tell you what these days but in any case now we want to take a look at the formula and compare the income tax formula to the income tax return and get an idea of how we might visualize the formula and then link it or apply it to the form as well as to the software so remember our three tools that we're going to be using which are all interconnected which is what we want to focus in on this time is the formula which we will have in our head and later on we will we will create an excel worksheet for and then the forms which we're looking at now as being constructed from the software and then the software which of course helps us to populate the forms but also allows us to do that a whole lot easier to run different scenarios so looking at the software we can kind of see everything in one place at this point in time and get an idea of how these things are linked and how we might utilize these three kind of approaches to better understand and then perform income tax preparation so many softwares such as this have a tax summary tab and this is basically a formula look at the income taxes that's what it is to be a summary and this is the kind of thing that we often have visualized in our mind precisely because it's going to be an easier thing to basically visualize and you can see this basically looks like our our income tax formula that we discussed here in a prior presentation you've got your income then you have your deductions which we can break out into the above the line or adjustments to income and then the greater of either the standard or itemized deductions to get to the taxable income this first bit basically being like an income statement although a strange one and then we're going to apply the tax to get to the tax before credits and other taxes and then we have other credits that we have credits that we can apply and other taxes and then we have payments and we have this breakout between a refundable and non-refundable credits so you can see that basically in a formula format here will make a worksheet for this as well now you might say well why if lacerate has this nice neat little summary or most tax softwares have this nice neat summary would we make an excel worksheet the excel worksheet is usually for internal purposes allowing us to recalculate what should be included in income for example adjustments and the deductions to recalculate the taxable income so that because we don't have a double entry accounting system to double check our numbers to reduce the likelihood of data input error and mistakes we can basically input it two times and be able to visualize what is happening doing the calculations a bit more manually on the excel side allowing us a double check on at least this taxable income number and then if and then we'll let the software oftentimes calculate the tax and then the credits on the bottom half of the formula and whatnot again we can kind of try to mirror that on our end although the credits and the tax calculation other taxes get confusing because there are often phase outs that will happen as income rises so we'll have to purse those out one at a time you don't need to memorize all of that stuff the software will help you but you have to have a conceptual understanding of it so that when you see these phase outs taking place you're like okay I see what is happening conceptually and I can drill down on the details if I need to okay so note that when we apply this formula to a a tax return on the form 1040 you might say why is the form 1040 as complex as it is meaning if you were to build this tax return from scratch at this point in time how would you do it well if you've constructed like things in excel then you probably would say well I would have a full I would have a summary of the formula meaning I would have something that looks basically like this income tax formula and that would give me my summary numbers and then I would use schedules to expand on each of these line items when necessary so that more complex taxpayers would simply be including more schedules which isn't a problem these days given the fact that we we basically already have enough complexity even with the basic tax returns that you have to file these things basically electronically so the number of forms isn't as much of a problem however the tax code has not been constructed from this day going forward the tax code is a continuing work in progress and we can't just cut it and start scratch right we have to we have to keep on building on what has happened before what has happened before as you can imagine the first income tax system was actually designed so it would only be relevant to like wealthy people right and then when it when they expanded the taxes then then they tried to make it simple for normal people to file the tax return how do you do that before computers you make it fit on one card so it should be a very basic thing that you that you populate and and then the tax code got more and more complex and impacts more and more people in some way shape or form even people that don't actually owe taxes because now it's part of the safety net program or welfare kind of program so you still have to fill out the complicated tax return even if you owe no taxes oftentimes these days and the credits are also becoming somewhat complex so what they did then is is they went from like a form to having like a bunch of forms like a 1040 a 1040 easy so that they could try to at least keep it on one form even though the form was like at least two pages long at that point and then they finally said and I think it was a smart move that this is silly to have all these different forms when you don't need to go to the post office to fill out the tax return you could do it online so we could try to streamline it more so that we have a summary page like this like you would kind of build an excel and then all of the other forms related to that summary page and that's kind of what we have now although not totally so in other words these schedules schedule one two and three are relatively new and they give more detail about some of these line items which allows us to eliminate some of the confusion of having multiple different forms like a 1040 a 1040 easy in that kind of stuff so but we haven't completely done that at this point in time so you can see like when I look at each of these categories on the form 1040 it still includes a lot of bloat a lot of other stuff on the actual face of the form instead of being a summary so when we visualize the forms were usually visualizing in this format because this fits in our mind and then if there's a if there's a if there's a question about income we think is it included in this line item and what's going to be the rippling effect across the formula if it increases or decreases income if there's an item that's going to be on this line item and adjustments to income then what's going to be the impact on the adjusted gross income and what will be the rippling effect effect from that given the fact that many credits and stuff are linked to the adjusted gross income right if there's an if there's something that happens to the itemized deductions then are we itemizing or standardizing or not if it's a deduction line I'm going to visualize that line see if it impacts the tax return see if it increases the itemized deductions over the standard deductions for example and then think about what that impact will have as it ripples through you know the rest of of the return so that's the general idea now if I look at each of these line items let's look at this formula that we had over here so income up top so if I go under my tax form the income is this is in this line item it's not just one line item because they included all this stuff you've got the W2 income you've got the tips you've got the Medicare waiver taxable dependent care employer provided adoption and so on and so forth interest dividends IRA distributions pensions social security and so on all of this stuff you would think why didn't they put that on another schedule they kind of could but you know they they're just sticking to what they've had they did include some of the stuff on another schedule so if I go into the schedule one you can see we have the additional income and adjustments and so this then is kind of like how you might build it in Excel in a separate schedule which will then feed in to the parent schedule this is going to form 1040 line 8 so if I go back into the form 1040 line 8 then then you're gonna see it would feed in to here so that's how so that's how the so anything in this area if I had W2 income it's gonna be populating here if I have interest income I'm gonna visualize it happening on the income line item and I'm gonna say okay interest income let's say it was bank one was a thousand dollars so I'm gonna visualize it you know populating in income but it's in its own line item in this expanded format of income do I have to include interest income is the question if I do that's bad for taxes right and it's like yeah we have to include it in income and that's going to be increasing my top line item and then what's going to be the rippling effect of that across the rest of the of the of the tax return including things like having the the the the progressive tax rates and what not if you had dividend income similar thing if I went to income and I say we had dividend income let's say we had dividend income of 15,000 and let's say it was all qualified well then I'm gonna say okay that pulls into again the income line also another schedule is now created which feeds in so because we had to include the schedule because now the iris wants more detail this is a subschedule that like an excel worksheet a separate sheet that feeds into the summary sheet over here and then it feeds into income then I have to think about the rippling effect of that because it also has an impact on my adjusted gross income which is going to have an impact on phase out for deductions the fact that it's qualified will also have an impact on my tax calculation given that qualified dividends often have a different tax rate than ordinary income so you see how I'm kind of thinking of it I'm not thinking of it box by box in my mind I'm thinking what's happening here top lines being impacted income and then what's the rippling effect of that as I think about the rest of the accounting equation and then I can confirm that by actually running the scenarios in software and then looking at the impact on the actual tax forms to verify what I what I've been what I kind of thinking in my mind should be happening and then I can double check that with a formula using excel software so then the adjustments to income let's let's bring this back I'm going to go back to just normal income so let's get rid of this line delete that and you will be able to okay and then I'm going to go to do and so that's gone and then let's go back to interest and delete this one to do it okay and then if we had adjustments to income then we're going to say I see where that happens here in my formula and in my tax return so we've got we've got the adjustments to income line 10 that comes from schedule one so this makes sense so now because if I didn't have any adjustments to income many basic tax returns will not then I don't need a schedule one so it'll be a simplified return due due to the fact that I don't have like a 1040 easy but instead I don't have to add sub schedules to them because it's a simple return if I do have to add them then I'm going to go to schedule one this is page number two of schedule one and then we have our adjustments will go through each of these adjustments later one of the major ones might be contributing to an IRA for example so if I was to go to the IRA and I jump to the IRA let's say we have a maximum contribution then that would feed into this sub schedule so then I'd be thinking in my mind from a formula standpoint okay that's going to feed into the adjustments and above the line deduction in essence or adjustment to income in actuality in the software if I plug it in to confirm that yes it's in this schedule and then it sums up here then it pulls into the form 1040 our income is all this stuff that gets down to my total income and then we have the adjustment to income to get me to the adjust to income if we look at that from a from a tax soft like a just a formula incomes at 100,000 and then we have our above the line deduction or adjustment to income to get us to our adjusted gross income then we think about the rippling effect that that will have on the rest of the tax return including that it might have an impact on the phase outs of credits and deductions for example as well as basically the tax rates of course because it's going to have an impact on taxable income and therefore the tax brackets that will be involved in alright let's go back and take that one out and so then so then we have if I go back on up here so we've got then the next line is going to be the standard deduction or the itemized deduction so the standard deduction is the one that everyone gets and so if I look at the standard deduction so I'm going to say alright if that's going to be the adjusted gross income here's the standard deduction you've got this nice little table over here which gives you the basics of the standard deduction which are single 13 850 married filing joint you double it right which makes sense right 13 850 times two if there's two people you get a deduction of the 27 700 head of household then it's kind of in between those two we'll talk more about this later and then you could have differences on a specific circumstances which we'll talk about later but that's going to be that line item so if I see for example a change up top from status single to married filing joint or if there's a dependent and they were single I might think that that could indicate that they could be head of household my thought process is what's the impact that that's going to have on the standard deduction and then again how does that ripple through the rest of the return it's basically a deduction therefore it's going to decrease the taxable income which will decrease the total tax that's going to be paid it also might have an impact as to whether they're going to be taking an itemized deduction or not because if the standard deduction goes up if they get married then it's less likely they're going to take us an itemized deduction because the itemized deductions have to be higher than the standard deduction and if we go into the itemized deductions that's on a separate schedule so you would only have this separate schedule if you had a more complex return what are the things that usually push people into taking it it would be the how owning of a home which I don't suggest you own a home simply to pay interest so that you can basically itemize however if you're thinking about owning a home that's one of the things that could that could push you over the threshold because you have the mortgage interest here possibly and so we could say and with the interest rates going up these days it could be you know significant mortgage interest I'm just going to make up a number and then you could have taxes that you'll end up paying and note that there's there could be a cap on the number of taxes that you can deduct personal residence principal residence let's put let's put 6,000 for the taxes and so now if I look at that that's gonna that's gonna sum up over here 22205 if I now that is relevant if I jump back to the 1040 it's gonna pull over to the 1040 and now when I look at this standard deduction or itemized deductions I'm pulling in 22205 the itemized deduction not the standard deduction of 13850 if they got married then then I would get a standard deduction of 27700 and if nothing changed on my itemized schedule I would still want to be taking the standard deduction so note that that standard deduction is quite high so and unless you're paying a pretty substantial amount of interest and have other itemized deductions and having property taxes the the benefit that you get from buying a home just for tax deduction purposes is more complex than just well I get to deduct the whole thing versus I don't the question is how far away are you from being able to to itemize you know and what's going to be the actual impact on your taxes not just this year but for multiple years into the future if you if you then are able to itemize by buying a home for example but but then you have to pay the loan payments the interest you know is interest right it's basically rent that you're paying for the money that you purchased right so anyway so then we got so that's gonna let's make it back to here so we're back to here so I simplified it it back and we got rid of the of that one and there's gonna be our taxable income so that then the bottom part of page one is basically our income statement which I can double check and verify most easily with just my excel worksheet in a formula basis the tax calculation as we said was going to be more complex if I go to page two then the tax calculation happens here oftentimes we're not going to recalculate it we could in our excel worksheet just to kind of double check that the calculation makes sense to us but oftentimes we might allow the software to do that and just basically kind of see their calculation if it makes sense basically which again it'll be a lot more complex if I had other types of income that are not ordinary income such as qualified dividends capital gains for example so then if I close that out that's going to give us our tax calculation so we're say all right tax has been calculated but we wouldn't yet be done because we could have credits and other taxes now the the credits that come into play there's a wide variety of credits but some of the most common credits are the child tax credit and possibly like an earned income credit amongst many other credits and we'll get into those later but just note that there's going to be an above you know like a credits that are non-refundable those are the ones up top and credits that are going to be refundable that are going to be down here with the payments and the ones that the portion of the credits or the credits that are up top are ones that cannot bring your tax liability below zero the credits that are down below may bring them below zero so let's just add the most common credit let's add like a dependent over here so we'll say we got a dependent let's change the filing status because we're gonna say okay they're gonna be he's gonna be ahead of household now because oftentimes when you have a dependent it'll pull it up to the head of household and then we'll add a dependent and this is going to be Sam tax man and so we're gonna say born let's say oh one two oh two oh let's say hopefully that works and then they didn't they haven't died yet so okay which is a blessing we're happy for that even though mr. Sam tax man can be quite a burdensome try quite troublesome sometimes but that's okay we still love them and so there's that so then if I if I go on over here we could say okay so now Adam has moved up from single to head of household and now we've got Sam tax man and there's a child tax credit so what were the impacts well now we changed the filing status so now the standard deduction has moved up from 13 850 to the head of household twenty thousand eight seventy nine two hundred taxable income and then on page two we've got the child tax credit at the two thousand so you could see the two thousand you can go into here and take a look at the worksheet for it we'll focus in on that later and and that's an above notice it's above up here in part because the tax because because we still have taxes right we still have taxes that was owed so this didn't take our tax liability below zero but if I was to say what if tax man didn't earn as much money and I said what if you only earn twenty thousand dollars then if I go back on over you could see the income is now at twenty thousand and the deduction is twenty eight thousand that means taxable income is at zero because that can't go below zero so it's not a negative 800 it's zero and then over here there's no tax because he doesn't have any taxable income but we still have an earned income we'll talk about this later but these are the refundable portion I'm just trying to point out the difference between the refundable credits down here which still could impact and give you a quote refund which isn't really a refund because this is more of like a safety net program a welfare type of program right that's in the tax code because you're not actually paying taxes for the year 2023 if these are in play you are you are receiving benefits right you're in that case so that's it's part of the safety net program okay so that's going to be the taxes okay I mean that's going to be the credits let's bring it back let's bring it back let's get rid of the dependent get rid of the dependent you're out of here Sam get out we're had enough of you know we just he's he's he's no longer dependent he's on his own now he's married and gone for good riddance I'm just kidding let's see so then let's say let's say that we had wages back up to 100,000 and then okay so now we're back to the norm 100,000 single now he's head of household let's bring head of household back to single single and so now single 100,000 13 850 standard deduction taxable income 86 150 going to page 2 then we could have other taxes that that could apply here now one of the big ones on the other taxes would be the schedule C with self-employment tax for example and that's online 23 so let's just take a look at that one now this just note if your tax preparer look how much this complicates your return if you have to deal with self-employment tax so let's imagine that doesn't have W2 income it's gone but instead 100,000 from a schedule C so we're going to say now I have to deal with the schedule C which means you're going to have to deal with accounting because now I'm not going to populate the entire schedule C here I'm just going to give the general information but let's say that they they had income of 110,000 and then expenses I'm just going to put 10,000 so it nets out to 100,000 so first you have to deal with the accounting that's a problem because you know a lot of people aren't as good at just basically breaking out their books for their business but you so you have to deal with that and then if I go back on over you can say okay I know how to big deal I got a schedule C it's just an income statement so I'm not going to look at the whole thing I'm just giving just giving a quick look at okay 110,000 minus the 10,000 here that makes sense so that gives us 100,000 they earned 100,000 just like with the W2 income if I go into the to the 1040 and look at it I'm gonna say okay so there's the 100,000 that is being pulled in it's coming from schedule one so the schedule C pulled into the schedule one which flowed into here and that flowed down to here and that flowed into the form 1040 so there it is that's cool that makes sense but then what is this adjustment to income I didn't have any adjust I got rid of the adjustment to income well what happened if I go to schedule one and go to page number two now you got this deduction for part of the self-employment tax like well that's nice but what is this self-employment tax I don't like the looks of that and so we can go into the self-employment tax calculation and basically this is this is the IRS saying I know we have an income tax on the form 1040 however we also want to collect in essence payroll tax in other words social security and Medicare from you and we feel like even though even if you don't have any employees you are your own employee and therefore you need to be paying into social security and Medicare they'll try to say it's a good thing too because they're then you get to pay into the system and you're gonna get some benefits out of it but obviously you'd rather keep your money most likely because the social security system is pretty much bankrupt at this point and I don't have any faith in it but that's what they want and they want not only the employee portion but the employee and employee or portion in essence so this becomes a huge possible tax that you would have to pay of the 14129 you can see that pulls over to the 1040 page number two so there's that added tax so here's basically kind of like the income tax then kind of like your payroll taxes for self-employed businesses or whoever subject to self-employment tax which is kind of like the equivalent of payroll tax social security Medicare so then that will have a significant you know impact on the tax calculation as well as your projections now then what happened to this you get half of it over here that you get to what happened there why is that well if if they're trying to mirror as if you're your own employee even though you didn't give yourself a W2 income and you're the business owner and so on then normally what would happen is there would be an employee and employer portion of the payroll taxes for social security and Medicare for an employee so you have to pay kind of both of that but then normally the business if it was a schedule C business gets to deduct the employee or portion of the tax we'll talk more about that later and so you should get to deduct it to but you can't deduct it on the schedule C because you had to use the schedule C to figure out what the net income was to calculate the tax in the first place and that would create a circle reference so you have to deduct it somewhere else and so that's why it's an above-the-line deduction here on on the schedule one which pulls into the form 1040 so you see it having an impact there which reduces the adjusted gross income to 92935 and then then you have the standard deduction still applicable then you've got this whole business with the qualified business income deduction which is on another form which again we would only have that form feeding in here if it was applicable right and you can and that's a whole another worm can can of worms it's a can with worms in it and it's kind of so so we might touch on that later and then and then and then you basically get down to the taxable income and then you're on page number two and so on and so forth so I'm not so we'll get into the schedule C later I just want to point out that they there's significant impacts not just on terms of the bookkeeping but also in terms of the impacts on the actual form and then you do get into tax planning issues and so on with with even just a basic kind of sole proprietorship schedule C especially if they have employees and whatnot and you want to give like a retirement plan and and that kind of stuff so it actually expands the complexity a lot so again as a sole proprietor or as a tax preparer if you are a tax preparer you want to think how complex do I want to take on more complex businesses of a schedule C nature or possibly you work with other people and Sam I'm going to do the data input for the taxes I'm not going to do the bookkeeping I'm not going to do the schedule S's or the S corporations the partnerships the LLC's if there's another return I'll take the K1 and put it into the 1040 and then I'm going to focus my time on more basic individual income tax returns that might be one strategy or you might be quite competent with this kind of stuff that's your thing that's your wheel house you might be an accountant you like the bookkeeping well then you can do the bookkeeping out with it and and they and again get into certain areas that even in that case you might want to choose industries and see if you can kind of specialize by industry because oftentimes industries have particular needs indicates we'll talk more about that later and then you also have the taxes that are the payments that were made so now we have the payments down here so we're down here at the bottom of the formula so the payments have been made during the year the most basic payments being with the W2 if you had W2 income so let's go back to a basic return let's say okay let's get rid of the schedule C that's scary stuff right there I don't know we'll talk more about that later we're starting you're jumping into the deep end on that one and it's cold water I'd be okay with the deep end if if if you picked like warmer water but so then so let's go and say that we have a hundred thousand and then possibly you had payments that were made during the year let's say of twelve thousand and so then if I go back on over now we're back to if I go to page one the one hundred thousand thirteen eight fifty standard deduction eighty six one fifty for the taxable income page two tax calculated fourteen to sixty six and then we're saying that we paid twelve thousand with withholdings now again our goal is to pay enough so that we cover the taxes not because we just like refunds but because if we don't we get hit with penalties right so the system here is trying to calculate the possible penalties out that we would have and this is just an estimate right this of possible penalties that you can have that's what we're trying to avoid by paying equal to or over the tax that were owed or trying to be in line with some safe harbor regulations based on prior year tax returns to avoid paying taxes otherwise it would usually be the smart move to save up enough money to pay the taxes at tax time but not sooner so that you can hold on to your money longer right but they got the government doesn't want to do that they want to have your employer take the money from you before you even touch it because the government has lost all faith in and the taxpayer giving them giving them they're giving them their money that's how the voluntary tax system works it's an involuntary voluntary tax anyway so we got the twelve thousand I mean the 14266 minus the 12,000 and then we get to the amount you owe now if we had we could have withholdings from 1099s if it was a schedule C business then we might be making estimated tax payments so again this payments line item is a lot more complex than just one line because there's multiple different ways that payments can happen so that's the general concept and then the refund or the amount that is due if you owe money you have to you know you could think about a payment if you have a refund the question is do you want to apply that refund to the following year as an estimated payment or take the refund at this point in time so the general concept is we're visualizing something that's fairly basic here but you can see that each of these line items are expanded and there could be a lot of questions and details about each of those line items and then whenever a tax question comes up where we might think about the particular line item being impacted by the question think about the impact on that particular group that line item and then what the possible ripple effects are for the rest of the tax return if that line item changes based on the income tax formula