 Income tax 2022-2023, payments, tax software example. Let's do some wealth preservation with some tax preparation. Here we are in our example Form 1040 populated with LASERT tax software. You don't need tax software to follow along, but it's a great tool to run scenario. Scenario! Those with you can also get access to the Form 1040 related forms and schedules at the IRS website, irs.gov, irs.gov. Our starting point, single filer Mr. Anderson living in Beverly Hills 90210, 100,000 W-2 income this time. We've got the 12,950, that's going to be the standard deduction getting us to the 87,050 for the taxable income. We're mirroring that in our Excel worksheet over here, 100,000 income, 12,950 standard deduction getting us to the 87,050. We're going to rely on the software to do the tax calculation. Page 2, 14774, we withheld 15,000. We're going to start with to get to that 226 at the bottom line, which is mirrored over here on our income tax worksheet. So now we're going to be focused on the second half of the calculation. 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. That being the payment type of calculation. So remember the first page of the Form 1040 is in essence our income statement. And then the second page is going to be calculating the taxes, dealing with the credits and dealing with the payments. So on the first page, we have the format of income. In this case is going to be the W2 income. So when we have the W2 income, that reporting document will typically show the wages that were earned. That's going to be the amount that's going to be populated onto the first page and then the withholdings that will be made, which will be populated on the second page. So when we do the data input into our system, we'll see something like this. We've got the wages and then we've got the federal income tax withholdings as well as the social security and Medicare. We're focused on the federal income tax withholdings because we're looking at the federal income tax return, the Form 1040. So obviously the 100,000 populated on the first page, which will be used to calculate the taxable income, the bottom line in essence of our weird income statement. The tax being calculated on it on the second page in this example 14774. Then we're going to compare that to how much was with, which was withheld 15,000. Note that if this was a perfect world, this tax return, the Form 1040 would just be an informational return. It would just be saying like payroll taxes, for example, like the Form 941. Look, this is how much I actually owe in taxes. I already paid you in this case through withholdings and therefore there wouldn't be any refund or any amount due at that time. However, the tax code is way too complicated to be able to do that. That's why the withholdings are usually structured and we purposely structure them on our end to try to overshoot the amount of taxes that are going to be paid so that we can result in a refund, hopefully actually a small refund. If we have a big refund, that means we way overestimated and we could have gotten our money sooner by reducing the amount of withholdings. The only reason we want the refund at all is because we want to make sure that we're not getting hit with the penalties and interest. That's the general idea. If I can get the money sooner, that's typically better to have the money sooner, to have more money per paycheck as opposed to a big lump sum refund for the tax time. Now also note that the second half of the tax form you would think would be fairly straightforward. We calculate the tax and then we just see how much we actually paid. But as we have seen, there are going to be areas where this gets more complex because we've got the tax that we have to calculate and then we have to deal with the credits. We'll dive into credits later, but we've got these credits that could be refundable credits and we have the credits that would be non-refundable, which means that we have to kind of break them out separately on this page too. That muddies up the whole situation and we also note that there could be other taxes that we have to include as well. For example, if we had the self-employment tax, so if we had a Schedule C type of business as we saw in prior presentations, we might have self-employment tax that we would also have to add to the federal income tax because it's not being taken care of with the W-2. And then on the withholding side of things or on the payment side of things, we could have payments from the W-2, which is most common, particularly when people are in their working years, but we could have withholdings from 1099s as well. And that might be more common for people in retirement years, most common 1099 form being the 1099R. And then we could have estimated tax payments that we made into the system, which is quite common for businesses that have a Schedule C type of situation. If I mirror this in our worksheet over here, the payment that we made down here, I've made another worksheet for that so that we had the payments and there is our payment for the withholdings and that's going to be pulling into our worksheet on page one. All right, so let's think about a situation where someone is like retired and they're getting 1099 and you have a withholding from a 1099 kind of situation. So in that case, you might have like a 1099R that's coming from a pension plan or something like that. It would be a normal distribution if they were in retirement. So I'm going to say normal distribution here, although I'm not changing the age or anything. Just for an example, I'm going to say 50,000 distribution. It would generally be taxable because although it's coming out of their savings account, it's in a retirement plan and they got the deferral of the retirement plan, therefore they have to pay taxes on it and they have to think about how they're going to be making payments on that money because it's going to be income. They could do that possibly through withholdings or they can make estimated tax payments. And note when people are in retirement, this is often kind of a shocking kind of situation for a lot of people because all of their income has been withheld with regards to income taxes if they were a W-2 employee their entire lifetime and then in retirement, they're going to have to be a little bit more active possibly to think about what their withholdings should be from like a retirement account like a pension plan or something like that or make estimated tax payments which takes a little bit more planning than they may have had to do when they were taking their W-2 withholdings. But in any case, that is going to be, we're on page two again in the payments and it's similar. It's now it's on 25B. So we've made another payment situation. I didn't remove the last one. So we have now the added 10,000. So here's the total tax. Here's the payments that are added together both withholdings one and a W-2 the second on the form 1099 and then the difference between the two is going to be the 1028. So another situation that could come up that's not as common as you might have income from let's say that we have income from gambling. So someone got a W-2G because they had gambling winnings. Let's say it was a significant winnings of like 20,000 or something. In that case, they may be required by the casino or whoever they won from to withhold part of the money. Let's just say 2,500 and so that would then be another withholding type of form. So any kind of income form now being reported here, you want to make sure to check that withholding box to see if they're withholdings on it, but it's most likely you're going to see the withholdings on the W-2s, then the 1099R and then you would think possibly like gambling winnings if they were substantial that they might have a withholding situation there. Okay, so now let's think about a situation where we have a schedule C. So if I have a schedule C, then I don't have a withholding situation because no one else is going to be doing my withholding. I'm not going to be able to have my employer do the withholdings. We're going to have, in this case, we got our standard 100,000 and we saw all the other things that happened with the schedule C, self-employment tax being calculated. That's going to be populated up here on the form 1040 page number two. So now we've got the self-employment tax because we have to deal not only with the federal income tax, but the social security and Medicare because that hasn't been taken care of with the payroll taxes. And so that's going to be included. So that's included with the federal income tax given our tax calculation. And then our payment situation would have to be made with basically estimated tax payments. Now note, this is something oftentimes that new businesses overlook because if you go from a W-2 situation to a situation where you have a schedule C business, many people just aren't, they don't have the mindset. It's a mindset. Just think, oh, I have to make estimated tax payments as I earned the money because when they were a W-2 employee, it happened automatically. They didn't have a choice. They weren't actively participating in the process. They weren't writing the check. So because of that, I think a lot of people get behind on their business. So you got to make sure that we make the payments during the year. Otherwise you're going to end up of course with a substantial tax bill. And even if the business was successful, it's going to be a problem. Also, people tend to forget about the Social Security and Medicare, their self-employment tax, which is substantial. And even if they do factor it in, they may undershoot how high it's going to be because they're thinking of it as being similar to Social Security Medicare on their withholdings when they were a W-2 employee. And as we talked about, it's actually double that or close to double because they assume you are the employee or an employee. So you really want to make sure you're doing those projections. And if you're helping anybody with their business to make sure that they're on there, they're factoring in the tax payments. So the tax payments would be done with withholdings. So they'd have to make withholdings usually on a quarterly basis then. So if I think about the quarterly payments, let's go down here and just say that we made, I'll just say 10,000 each time, 10,000. Notice the due date for the first quarter, which is three months of the year. So January, February, March of 2022 is due by April, the following month. So let's say we made it 041522. And the second quarter payment, we'll say 10,000 again. We'll make it even and it's going to be on 061522. And then let's have through here, then 10,000 for the third quarter, which might have been on, we're going to say 091522. And then finally 10,000 for the fourth quarter. This is where it gets a little bit messy because the fourth quarter payment for 2022, fourth quarter ends in December, isn't due until January 15th of 2023. So you've got this crossover and they've got to make sure that when they're making their payments, it's being allocated to the proper year. Let's make sure this, let's say this was made on 011523. You also have to be careful on the state payments because if the state payments are deductible, if you have state income tax, if they're deductible on the federal side of things, the question is, is it deductible when I made the payment? Usually it's deductible when you made the payment, right? Even though it's not, it's on a cash basis, meaning not the fact that this last payment would be deductible possibly if it was a state tax payment on, for example, the form schedule A, but it wouldn't be until 2023, right? Even though it was made for the federal income, for the state income taxes for 2022, right? You have that cutoff problem is going to be an issue. So if I go back on over here, then we're going to say now I have the payments that were made, estimated tax payments are the 40,000 that are pulling over even though that last payment here was made for in 2023. We told the IRS to apply it to 2022 and so they properly did that. Note that usually the assumption for your income for the schedule C is that you earned the income like evenly over the years. Therefore, they want you to have an even number of payments, although that might not always be the case. And so you could look into exceptions if you're saying, hey, look, I earned all of the income or maybe I didn't even start my business until like December or something like that. Then you have an uneven earnings and so you would think it wouldn't be fair to make your payments evenly throughout the year. But the general assumption by the IRS is that you made your earnings evenly throughout the year and they want to be paid then basically even payments throughout the year. And oftentimes the way that's going to be structured is that you will base it on the prior year tax return and think about how much you think you're going to make in the future year based on that and then set up your estimated payment structure based on that is the general idea. Now also note you may have had in a prior year a refund of your 2021 taxes. If you had a refund of the 2021 taxes, you could have the IRS give you the refund and then maybe make a payment for the estimated taxes for 2022. Or you could just say, hey, take that refund and apply it to 2022. So you got to make sure you pick in that up. Notice that this amount is usually will be picked up by the tax software. If you're using the same same tax software from the prior year to the current year because it'll roll over and say, hey, look, you got a refund. And you told the software that I want you to take that refund and apply it to the to the payments in the following year. And so you'll be able to do that. But if there was a change saved by the IRS that said, hey, look, your refund was adjusted and you accept the change. They adjusted and say and say maybe they adjusted to like 2000 instead of 3000. If you don't adjust that in your software or you don't get the letter because the client doesn't give it to you, then that roll over can get messed up. So you want to make sure that you want to check that. And these days, more and more, they are people are using the accounts, the IRS accounts that you can look up your payments and you can look up notices and whatnot. So it's a good practice these days to have a client or yourself for your own tax return. You call this a tax return? To go onto the IRS website and look up and see if you got any notices or any changes in the tax or something like that. That would mess up any of those rollovers to make and look at your estimated payments. So to make sure you have it right on your side compared to what's on on their side, which again, that means that you've got the right cutoff date. You applied the payments to the right period and they've got the right cutoff dates. They got the payments applied to the right period. The rollover from the prior year is rolling over properly and they didn't change the prior year tax refund that got rolled over. Now note down below, you've got your overpayment here and this is the amount that's going to be refunded to you. And notice line 16, the amount of line 34 you want applied to your 2023 taxes. So this is where you would tell them if I was in 2023, apply overpayment to 2023. Let's just say it like 2000. And so now I want you to apply the 2000 over to the following year. So I can get the refund or I can say keep it and apply it to the next year. Now also note when you're making these estimated payments as a sole proprietorship that if you get backed up on the estimated payments, you can see how much of a mess this will be, right? If you didn't make any estimated tax payments, you're going to be owing the taxes for the whole year, plus federal income tax plus the estimated tax payments and you're going to have to be paying the quarterly tax payments for the next year. So by April 15th you're going to have this big tax bill. Not only do you have the big tax bill for 2022, but you've got the first quarter of 2023 that you need to make the estimated tax payments for. Now, usually the way you figure the estimated tax payments is you work with the software typically to take your prior year income and try to figure out if you project that forward what your estimated tax payments will be and you could generate the vouchers or have a schedule and pay them in whatever, pay them online or mail a check if you want to use a voucher kind of system. But you can use that at least as the baseline and you can think of possibly having some safe harbor rules based on your prior year income to avoid penalties and interest. In other words, you really don't know what your income is going to be next year. If your income is quite volatile on a new business in particular, your income could be much more or less. So what you want to do then is try to come up with an estimate based on the prior year as your baseline and also if there's any kind of safe harbor that you could say, hey, look, I made my estimated payments based on last year's income. If I made more, I didn't really know that. So maybe and so then that's so I can avoid basically penalties and interest. So in other words, if you can, if you get to a situation where your income was higher but you were still able to avoid the excess penalty and interest, that's still good because that's what our major goal is to not have to pay more taxes than we otherwise would have to pay is the general idea. So you can look at your prior year tax returns. You can use that as the baseline to figure your estimated tax payments, see if you can get a safe harbor kind of situation. So they're not going to hit you with added penalties and interest. And then if you go and then you could, if you're going to go over that amount of income, then you can make excess more payments or increase your estimated payments so that you don't end up with a big tax bill and also again to make sure that you're avoiding, you know, penalties and interest. So that's the general idea with that one. Now just a quick note, if they were, if you have a married couple type of situation, you can see how things get a little bit messy because now when you file the joint return, let's pick one up here, so now we have a married filing joint return and we have the one person, one spouse is earning income through the Schedule C and the other one is doing more work with the W-2. Now note that they have a, if you have a big substantial difference in the income levels, then it gets kind of messy to figure out what the estimated tax payments should be from one spouse to the other because note that obviously the spouse that's making the lesser income, in this case the W-2 income is going to be pushed into a higher tax bracket on the joint return than they otherwise would have due to the higher income when you combine basically the incomes together possibly. So then the question is what's the fair breakout of the withholdings from one to the other because if they were filing single, they would have a lower amount but and at the same time, of course, when we're talking about income taxes, we're only talking about work that is being taxable with regards to the internal revenue service and we're not talking about housework and that kind of stuff, so you got to take that into consideration when you're trying to figure out what would be appropriate for the withholding structure as well as what would be appropriate for the refund. So clearly when you're married filing joint, you're going to have a, if you have a refund situation or amount that is owed situation and you're trying to figure out who, you know, which partner should be paying more out of whichever, you know, paycheck versus the business in this case, it can get a little bit confusing because of the different income tax brackets when you have people that earn different amounts and because of, again, work that's not being included in the calculation of taxes when you get to taxable income, that's going to be because of, you know, other work like taking care of the home and that kind of stuff. But usually it comes up to a better, you're in a better spot by filing married filing jointly and then figuring out how best to to divvy up any refunds or how to deal with withholdings rather than filing married filing separate, because a lot of times when you file married filing separate, you're going to be, you could lose some capacities to take some credits and deductions, which we've talked about a little bit before. We might talk about a little bit more when we get into the credits.