 Income tax 2023-2024 Certain business expenses of reservists performing artists and feed basis government officials tax software example Get ready and some coffee because tax preparation is like a choose-your-own-adventure novel Except every choice leads to more paperwork 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 crunchy numbers is my cardio product line Now I'm not saying that subscribing to this channel crunchy numbers with us will make you thin fit and healthy or anything However, it does seem like it works for her Just saying So, you know subscribe hit the bell thing and buy some merchandise So you can make the world a better place by sharing your accounting instruction exercise routine If you would like a commercial free experience consider subscribing to our website at accounting instruction Instruction comm or accounting instruction dot think of it comm here We are in our form 1040 example problem using lister 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 iris website iris dot gov iris dot gov Starting with our standard starting point our taxpayer Adam tax man just trying to avoid a dang tax man Living in Beverly Hills 90210 single filer no dependence starting with our w-2 income the nice round 100,000 to start off with standard deduction at the 13 850 that gives us taxable income 86 150 which we can mirror over here on our income tax formula 100,000 13 850 86 150 the tax being calculated by the software is currently at the 14 266 Which we can see on page two of the form 1040 let's go back to page number one our focus here is on what I would call the above the line deductions otherwise known as the adjustments to income and you can also possibly call them these days the schedule one deductions not to be confused with the below the line deductions or the Standard or itemized deductions Standard or itemized deductions being more commonly known than most of the items in the adjustments to income But the adjustments to income are very important even if people are taking a standard deduction because if you qualify for them You can still get a tax benefit even though you don't have itemized deductions over the standard deduction So let's go to that schedule one. This is where they are located We're on this is the additional income and adjustments to income We want the adjustments to income therefore page two is going to give us part to the adjustments to income We're focused on line 12 certain business expenses of reservists performing artists and fee-based government officials attached form 2106 now let me give you a quick kind of history of this to try to see if I can Solidify the concept of this a little bit more in our minds because the use of 2106 form Has changed a little bit over the years and people will probably have questions About their remnants people often have old remnants of tax laws that have been around before You know and then they confuse that with the current laws and they changed So let's give a little bit of of of detail here if I go to the schedule C You will recall that the schedule C is For a sole prior to proprietor business typically it's in essence an income statement having income minus expenses Expenses being basically business deductions So note that this is the easiest way to kind of conceptualize What the income tax system will typically or should look like in other words if we have an income tax system It doesn't make sense for us to tax the top line if they made a hundred thousand of income We wouldn't tax the one hundred thousand of income if they had to expend Let's say the eighty thousand in order to generate the one hundred thousand of income They wouldn't even have the money to pay the taxes if you tax them at gross income instead of net income So any expenses that we had to actually spend in order to generate the income you would think those would be ordinary Necessary expenses allowed as deductions so that the net income is the thing subject to tax We can see that most clearly on the form 1040. What about if you're a w2 income? Can conceptually it's the same kind of thing. We would think from an income tax system Whatever you had to extend in order to generate this one hundred thousand w2 income would be deductible But we would think in this case that the that the employer Provided those things and that's why you don't typically get a deductions For business expenses if you're a w2 income That's the assumption that is made and the other assumption is that if you did have your own expenses Well, maybe that can be included as part of this big lump sum kind of a standard deduction Now in some industries the employer does provide all of the expenses and whatnot and you're like, okay That's fair, but in other industries you might be like hey wait a second I totally do a lot of my own expenses that I pay out of pocket and their business expenses So it seems kind of unfair in other cases, right? So you have this problem with the income taxes with this kind of w2 type of situation now it used to be that if you had w2 expenses you might get some benefit from them with the use of Of that form 2106 right and it would feed into then the schedule a which was not above the line But an itemized deduction so it could have flowing into here and Then you had you had miscellaneous deductions that might be able to be pulled through or more likely to be pulled through a few years ago They really reduced the use of that and the ability to do that And I think this was in part to simplify the tax code They increased the standard deduction possibly to help Compensate for that kind of situation and also the people that were really utilizing that were usually people that are already itemizing which are usually well off more well off individuals at least people that have Ownership of a home that's fairly high in value with a mortgage that has mortgage interest and Property taxes on it because those are the things that would push people over from the standard deduction to itemized deduction So you can kind of see why they they changed that possibly because again, it's confusing. It's also kind of It's hard to see if they actually would be Qualified on one person's w2 income versus another person's w2 income and it was probably more beneficial to more well off Individuals so they basically removed that and they left just some remnants of it Which is what we have now so if I go back then to the schedule one page number two That's why it's limited here to Expenses for reservists performing artists and fee-based government officials So most likely the question you'll get in practice is well I used to deduct all the stuff for my w2 income as an itemized deduction or I know someone that did it 10 years ago Or you know, whatever five, you know And they use this 2106 and had an itemized deduction and you're gonna have to note that there's a change in the rules But if you have reservists performing artists and fee-based government officials that fall specifically into that exception category Then you might have this above the line deduction. That's kind of the compromise that we saw So if I jump into this then you could see I'm gonna jump to it. We have the reservists performing artists So if I jump here It's gonna go boom So here if I go into the performing artists, it's gonna go here and then the fee-based Government officials. So let's go to the reservists first. So we're gonna go reservists and If you have someone in like the military or reservists our situation oftentimes, there's differences basically in the tax code so if they if if they had Items for That needed to be reimbursed. It's they might have the about the ability to take the deduction for them now there's always kind of an issue between things like meals and entertainment whether it's fully deductible or local transportation Whether it be something that's going to be deductible as transportation in which case is it 50% limited or it's fully deductible I'm not going to get into the details of that now, but let's let's say that we had transportation just to add this of 100 let's put let's put like like a thousand Okay, that's a nice round number. Let's go to the back to the forms and Hold on a sec. I'm gonna mark that it's all Something that could be an included net unreimbursed travel expenses. So we're gonna say that they were not reimbursed I find that oftentimes in this kind of military situation. They might have been Reimbursed so obviously if we talked about that in a prior presentation But if they were reimbursed for it then you may not get a deduction for it because you got reimbursed for it So there was so there's the 1,000 line 12 that's gonna sum up down below that's gonna pull into the first page of The form 1040 so now we've got the 100,000 minus the adjustment to income gives us the 99,000 and then the standard deduction 13 850 brings us to the 85 150 now we could add that over here and add the form 2106 but I think that's a fairly rare one So I don't think I'm gonna adjust it this time We might take a look at it at a future point and adjust to our worksheet at a future point But your options would be to add another schedule for that form 2106 or Possibly included in just the adjustments to income worksheet for those line items So I'm gonna go back on over and let's just look at the other examples So that of course changed the tax on page 2 1446 let's go back to page 1. Let's go back to the schedule and then let's go to page 2 Jump to that one. So I'm just gonna say it to do reservists Did it let's delete this boom boom and let's go to The performing artist so the performing artist. I'm gonna say that this is gonna go to the form 2106 and we're gonna say it's for a qualified performing artist So I'll say okay number one qualified performing artist and again, I'll put the same Travel down here to do do travel overnight 1000 okay, let's pull that back on over so now once again certain business expenses reservists Performing artist fee based government official same kind of thing. It's pulling in here from the form 2106 Let's look at the form 2106. That's the employee business expense So we've got column number a travel expenses while away from home overnight including lodging airfare and so on There's our total expenses Reimbursements into the reimbursements. We're not gonna have any reimbursements We're gonna say figure the expenses to deduct and at the end of this we're getting that 1,000 which is pulling into the schedule one So here we have it on the schedule one page number two and that pulls into the first page of the form 1040 All right, let's do it again. I'm back on schedule one page number two I'm gonna jump to this one again and say did to do so now I'm gonna say Let's say we get rid of this one Delete delete and then I'm gonna jump again And just see the last bit up and now it deleted my I can't get to the form page number two But boom jump jump 21 Jump Street Okay Why why? Okay, so now we're looking at The the qualified performing artist handicap fee-based so this would be the third fee-based Government official and then again, we could do the same thing 1,000 down here and Going back to the forms and so there's the 1,000 pulling in from form 2106 so here's 2106 To do to do and this occupation is kind of wrong It should be you know related to armed forces qualified performing artists or fee-based state or local government official That's the data input you put for their occupation, which you would think would line up With this deduction and so on and so forth that pulls in to the schedule one page number two There's the 1,000 which is going to pull into the form 1040 page number one adjustment to income there So that's the general idea so in Overview just note that these kind of w2 income you're often going to get the question of well I expended my own money on this that and the other thing don't I get a deduction for it? It's not fair that my friend over here gets a deduction just because they're a sole proprietor and they're basically doing The same thing and it's like well Yeah, you used to be able to possibly get itemized deductions before but you would have had to itemize and they changed the rules For that and restricted it greatly there are pros and cons to being a w2 employee Versus a sole proprietor one of the benefits of a w2 employee is that you it's usually a little bit more Less risk that you're taking on and so on and so forth But you don't typically get to take on deductions that you spend because the assumption is that the employer spent them the sole proprietor is taking on more risk and They the benefit is they get to make the deductions which are business deductions, they also have that issue with the self-employment tax being both the employer and employee portion Taxed so we talked more about that in a prior presentation, but if you're in this very restricted area Then you might still be able to get those deductions if they qualify Which is is not often the case But if you find that reservists performing artists and fee-based government officials you want to be quite aware of those categories of Income because they have the benefit of still possibly being able to use the form 2106 pulling it into not itemized deductions But adjustments to income meaning that you could get a tax benefit for them even if they're not itemizing the thing that pushes people over to itemized being typically the ownership of a fairly well Expensive home because you would need the interest of the mortgage to push you over as well as the property tax Typically, but you don't need that for the adjustments to income. So that's that