 Income tax 2022-2023, methods and tools for learning tax law. Let's do some wealth preservation with tax preparation. Tax law can be overwhelming for many reasons, including just the sheer volume, the sheer size of the tax law, and because tax law will change as time passes. Therefore, we want to have tools, we want to have resources, we want to have techniques in order to learn the tax law and to be able to be flexible as the tax law changes going into the future. So note when you're looking at just the sheer size of the tax law, that would typically mean that we might want to focus our time on a specific area within it. So if you're starting a business, 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. Then oftentimes people start a little bit too broad. You might want to focus on particular areas so you can scale your business within those areas. For example, you might focus on low income side of tax preparation, which means your profit margins are less and you want to crank out more returns typically, or you could be focusing in on higher income tax returns, in which case you're usually having a bigger profit margin, but doing less returns due to those returns being more complex. You might focus on individual income tax returns or focus more on the business side of things. If you're focusing on business tax returns, you might specialize by industry and or by the type of industry or entity. The industry would then be things like construction, things like real estate and so on. The type of entity would be things like a sole proprietorship versus a partnership versus a corporation, a C corporation, an S corporation, an LLC and so on. Many times when you're looking at a particular industry, they will tend towards due to the law of related to that industry type of entity. So many times those two specializations will kind of line up together. So we're going to have kind of a broad focus here on the individual income tax returns. So a good approach is going to be important of course in order to understand the tax law, as well as to kind of help you out with the income tax preparation as well. If you've worked on the business side of things, if you've done accounting, then you've you know about like internal controls. The double entry accounting system itself is a form of internal control. But when we move into the realm of taxes, sometimes we don't have as many internal controls built into the system like a double entry accounting system. And therefore we want to have our own internal controls that we can put into place to make sure that we're doing our data input properly as well. So the three perspectives that we will take here in this course is one, we can think of the tax code by formula to we can think of it by forms and three, we can think about it by software. So we're going to take all of these approaches when we start to look at different topics with regards to the income taxes. We'll think about it in theory that being the formula and that's the best way to conceptualize things because usually when you're conceptualizing things, you're breaking it down into more simplistic areas and you're trying to associate it with things that you know so you can better memorize it. When we're looking at the forms, then we're looking at the actual data input forms, the actual 1040. You might say the 1040 is structured in the format of a formula. It is, but it's often a much more complex formula. If you think about the formula in your mind, you're probably going to simplify it down so that you can start thinking through the process. The tax forms because of all the little nuances in the tax law will generally be more complex. So you're not going to be able to visualize oftentimes the every box on the form 1040 and all their related schedules and so on, but it's worthwhile to actually look at the forms and read through it as well. So we'll look at that method and then software note that you don't have to have software in order to follow along with the course, but realize that software is one of those very important internal controls. If you're actually doing your own taxes or doing taxes as a business, obviously you're going to want software because that is going to be one of those internal controls that helps reduce the problems of data input problems and that kind of thing as well. So once again, the formula. So when you're visualizing the formula, this is the kind of structure that you might have in your head. You can see that it fits basically on one page here. If I was to look at the actual tax form, the form 1040 itself, it would take like two pages and then you've got the related schedules that would take multiple pages as well. And then the related like schedules to that are going to take many, many pages. So what we want to do conceptually is visualize it not in the format of box one, box five, box 10. Some people can do that to some degree, but to really kind of understand what's happening. If you're looking through scenarios and doing projections, you want to visualize a general kind of formula, which looks something like this. We'll go into it in more detail in the future, but just note that the income tax is tax on income. And therefore we would expect the top part of the formula at least to be an income statement. So that's what we basically have here. We're going to have the income line item. Remember there's going to be a lot of stuff involved in the income line item because then we have further questions in terms of what is included in income and we'll get into that in a lot more detail in future presentations. We'll basically break this formula down as best we can and try to analyze one component at a time as best we can, although there are relationships between them. So it's not always a perfect kind of structure, but that's the general strategy. Then we've got adjustments to income, which you can think of as basically a format of deductions. I see they're above the line deductions. They're going to say adjustments to income. You can also think of it as like a contra income account. So it's reducing the income like a sales returns type of account. If you're looking at a business tax or an income statement, adjusted gross income. That's going to be another subtotal on the way down. You might compare this to like a multi-step income statement for a business. It's getting down to the net income, in our case taxable income, and then the greater of the standard deduction or itemized deductions. We're going to dive into those kind of deductions in a lot more detail, of course, in future presentations, gets us to the taxable income, which you can compare to like net income for a business. And then we apply a tax rate, which is really a tax table, progressive kind of tax system or structure to get the tax. And you would think that would be the major kind of stopping point, and then you would just compare that to how much you paid. But we have the added kind of problems of credits being different than deductions that we have to deal with. And other taxes, such as self-employment taxes, is a big one. They can also be down here, which is piled on top of the income tax that we'll have to dig into. So there will be a lot of action even after we get down to basically calculating the tax because of the credits and other taxes. And then other tax credits, and that'll give us the total tax. And then we're going to have our payments, which include the withholdings for the W-2 withholdings and the estimated payments. And the refundable credits. We got to break out our credits between those that are refundable and not refundable. We'll talk about that in the future. And that gets us to our tax refund or tax due. Now, this kind of looks like a complex formula. If you look at this, you're like, wow, that's kind of a lot going on. But if you look at it over time and you kind of put it into practice, we'll actually work through it in an Excel worksheet. Then you'll be able to visualize this a lot more easily than you would be able to visualize, say, the boxes on a Form 1040. And if someone was then to ask you a question about a credit, about a refundable credit, about an income line item, this formula allows you to visualize it and say, okay, I can kind of get a gist of what that is going to do. I can start to answer questions and think about what's going to happen by working this formula in my mind. Now, note that if you adjust some of these line items like income, that's going to have an impact on the adjusted gross income and net income. But it's also possibly going to have impacts on phase outs and things like that for credits. So you're going to start to visualize if there's an impact on one of these major components, what in general might happen to some other areas like standard deduction phase outs and credit phase outs. So we'll talk more about that as we go through. We're going to be doing this in Excel, so we'll have this formula. We'll actually build it, that formula in Excel so we can kind of construct it on more of a conceptual formulaic basis. And then, of course, we have the actual tax form. Now, the tax form is applying the income tax formula within it, but the number of boxes on the tax form are going to be more numerous. So nobody, unless there's some kind of genius that can visualize the entire tax form as a formula and be able to manipulate every line visually in your mind, no one, no normal person does that because the tax return gets too complicated and you're not visualizing every line item and able to read or see what the tax return is doing because you're going to have to simplify it for that in your mind. But obviously, the tax return going through it and knowing where things are located on the tax return and then being able to read through the tax return is quite a useful tool and, of course, the tax return is the end product. Now, in order to go from like your forms to the tax return, the easiest way to do that is with software. So the software oftentimes will allow us to run projections, allow us to practice a lot more easily. Now note, we're going to be using software for that example in our practice problem, but you don't necessarily have to have software, although if you could get access to software and get like a free sample version to run practice problems, it is a great tool because then you can do the data input and you can jump right to the end result, which is the form 1040 and get a quick look what happens if I change any of these line items? What if I change income? What if I change some of these adjustments? What if I change the standard deduction? There's no better way to really, for most people, to understand things than just to run different scenarios and see what the impact will be on the end result, the form 1040. Visualize what your thing is going to happen and then do it in the actual tax form. The easiest way to populate it in the tax form is not by writing it out in hand, but of course by using some kind of tax software in order to populate it. But if you don't have the software, we'll still be showing the forms, so you can actually look at the forms and find those on the IRS website at irs.gov and we'll construct an Excel worksheet, which will show this formula which will kind of mimic what is happening on a software kind of formula as well. Now when we get into the software, we'll dive into this in a little bit more detail in future presentations, but the question of which software should I use gets quite complex as well because we have a whole lot of other kinds of softwares that you might say you might look into, and that will be a whole topic in and of itself because it's dependent upon what you're using the software for. So there's two general categories of when you're going to use software. Are you buying the software just for your own individual income tax return? In which case, I'm looking at the softwares provided by Intuit, the owner of QuickBooks, which also has softwares, and they have multiple tax softwares as well. I'm not trying to advertise Intuit, I'm not affiliated with them in any way at this time, but they're a big accounting provider and software provider. There's a bunch of other softwares out there, but the TurboTax that they have is more of an individual tax return that you would buy to do one individual tax return, and it has more of like an interview type of process. That interview process is quite helpful to avoid making errors, although it can be quite tedious if you do a lot of tax returns because it takes longer to do the data input that way. And then if you're a tax professional, the software I'm most familiar with is called LISERT, which has now owned by Intuit, it's been owned by Intuit for some time. It wasn't when I first started using LISERT, but they've been keeping LISERT up to date, and I think it's one of the top softwares, in my opinion, on the tax software as well, and it helps with the data input, but it's a little bit easier to do the data input and jump back and forth from the data input to the Form 1040 because it doesn't force you to go through like the interview process kind of system. It's more of a direct data input type of software allowing you to do the tax returns a little bit faster. So we might dive into these options a little bit more in the future. Obviously, LISERT is going to be a much more expensive software if you're buying it for tax preparation, although you might be able to get access to it for a free trial version. And I think that would be quite useful if you're kind of just practicing with the software to look into the free trial version, so we might dive into that more in future presentation.