 Income tax 2023-2024, methods and tools for learning tax law. Get ready and some coffee because we're setting our refund to the max with income tax preparation 2023-2024. Learning income tax law can be daunting, can be overwhelming in part because there's a whole lot of income tax law, because the income tax law is often written in confusing legalese type language, which can be confusing to understand at first and because the income tax law is constantly changing. The tax law being a human construction that adopts over time in a similar way as a living organism adopts to the environment. So in other words, we're not learning something like in physics where we have a particular formula that we have discovered, which will remain constant through all of time. We're working with something that's going to be changing as time changes and we can think of that as a bad thing, but it can also be a good thing because once we understand the fundamental workings and conditions of the tax law, we can adopt with it and if we can keep up to date with the tax law once we have a grasp of it, then that's going to give us a little bit more job security and it can actually be an interesting thing to track over time. So what we need then of course is a strategy and approach to learning the income tax law and then of course a strategy and approach to be staying on top of the tax law as the tax law changes over time. One of those strategies as we touched on in a prior presentation is specialization. In other words, because the tax code is so large, what we want to do is pick an area where we want to specialize in and possibly grow from that area over time. Sometimes this happens just naturally by your work experience. In other words, you go work at a CPA firm or a tax firm and they start having you work on a particular type of tax return and that becomes your specialty. Sometimes you're more mindful about what that specialty will be. Oftentimes if you're trying to start your own business, this can be quite difficult because people try to basically take on too many things rather than specializing in a particular area and they don't have that corporate structure which kind of forces them to specialize in a particular area. So you want to know what you know, you also want to know 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 this CPA thinking cap for example. CPA thinking, CAP, you see what we did with like with the letters and this CPA thinking cap is not just for CPAs either. 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What you don't know, you want to know which clients are good fits that you can pick up and which clients you really need to be able to say no to and have the rationale as to why you're saying no to those particular clients, which for many of us is actually one of the most difficult types of things to do because you just want to be able to pick up all the clients. Just do all the tax returns. Just do them for free. It'll be great. But no, you don't want to do that. That's not the way to go. So we talked about some of the ways that you can specialize if you're doing tax preparation would be are you doing a whole lot of more basic type of tax returns in which case your profit margins will typically be lower. However, you're going to do more tax returns because hopefully they will be easier. Or do you focus in on higher income tax returns in which case you're going to have higher profit margins but do less returns and possibly make more money with tax advice type of things, tax planning type of work. Again, you can also specialize in business taxes versus individual taxes. This course is going to be focused more on the individual taxes to form 1040 but will touch on some of the business components such as having a schedule C for example and schedule E, which is going to be a sole proprietorship and the real estate. But you can also specialize in flow through entities as corporations, partnerships, for example, or corporations and have that as your focus. If you're more accounting oriented then those might be more of a natural fit because they have more of the accounting system kind of incorporated within it. When you're talking about individual income tax returns data input into say the form 1040 oftentimes we don't have that double entry accounting system and therefore we need to come up with our own systems internally to double check that we don't have data input errors because if you have an accounting background we know that if you put stuff into a software we usually feel more comfortable with it. If your accounting came from QuickBooks and they reconciled the bank accounts then at least they're using a double entry accounting system. I have a little bit more confidence over it. But with taxes, even if you're doing a business tax return we might just be entering in essence the income statement. So we don't have that double check of the double entry accounting system and we don't have the double check of the bank reconciliations so we want to put in our own like internal controls to make sure that we're inputting the tax return properly. So in order to envision the whole process of learning the tax return how can we give advice about taxes and answer questions and so on and then how do we get to the actual data input of the tax returns I would suggest that we approach learning tax law with three fundamental tools. The first is going to be formulas. In other words when we envision the tax return we're probably we do not want to unless you have some strange skill that you can just visualize every line item on the tax return that's not typically what you want to do because the line items on the tax return often are more detailed than you really need to be to get a general idea of what is going on. You're not going to memorize while I add line one to line two and then I subtract line five from line four you're not going to memorize the lines. What you're going to memorize is a general formula that you have in your head which will basically be a type of income statement because it's an income tax and then if you're answering questions that are just broadly people are asking that's the type of thing that you kind of want in your head. They're asking you a question like okay what's that going to impact? Is it going to impact income? Is that going to impact a deduction? What's that going to do to the bottom line and so on? That's thinking usually in terms of a formula. We will create formulas mainly in Excel so we can practice that and then you want to basically put that in your mind. We can also use the formula to kind of double check our data input. Then we have the actual forms. Now the forms of course have the formula in it but the forms are going to be a lot more extended versions of the formula and put out in a much more formal way. Meaning it's going to say stuff like add box one and box three and blah blah blah but you're not really looking at it as an elegant formula that you can understand. You're just basically going through and adding the boxes. So it's important to note the form to be able to visualize the form but it's probably not the thing that you're holding in your mind if you were trying to answer some quick questions about possible scenarios that could happen under different circumstances. Then we have the software. There's a whole lot of different kinds of tax software but because the tax law has become so complex the software is vitally important. So when you're discussing with people of course you can discuss and say well this is basically what I think is going to happen. This is the gist of what will happen in this scenario or that scenario but it's going to be the software when you actually plug it into the software that you would like to have to basically double check because the software similar to the double entry accounting system in accounting helps to give us a double check. It's not perfect because it's still just a data input. You don't have a double entry accounting system in the software but it helps you to have a double check that the software is doing some of the calculations and can give you diagnostics and stuff if stuff is off. So for us these two are going to coincide with each other a bit because we're going to use the software to then create the forms but you can think about these things differently. You don't have access to any software and you want to just look at the forms you can look up the forms on the IRS website and you can follow along with just the forms. We're going to create the forms with the software if you have access to software that is great. It's a great tool to work with because then you can run scenarios really easily and you can let the software do the calculations and then double check the calculations with the formula to kind of go back and forth and try to understand what is happening and then plug it into the software and see what is happening. So this is a formula that will actually create a whole worksheet in Excel a worksheet that we can use to learn but it's also a great worksheet that I used in practice so that I double check my numbers. I still use it when I double check tax returns meaning if you're doing the data input into tax software for example because there's no double entry accounting system you might want to have a worksheet that's also in a formula format and do the data input into that as well so that you have and maybe even if you have a firm have two different people do the data input one into the software, one into the tax into the formula in Excel and that way if those two things reconcile you can say okay I feel pretty comfortable about that or you can look at the differences and it'll start to drill down on why they're different and you'll get into these phase outs and stuff like that as to what the differences are which you can then understand a little bit better and you want to understand things better because the software might be able to do the calculations but you as the tax preparer still have to explain it to people so even if you can do the data input without understanding which I wouldn't really recommend because then you can't tell if something is wrong but even if you were able to do that it's going to come up that the client's going to say well why is that the case or something like that and you can't just say well because the software that's what the software did I mean you could but that doesn't sound doesn't give a whole ring with a whole lot of confidence when you're the client and the approach that we will take is we'll try to look at break down this income tax formula and then concentrate on each line of it because each line of this formula has a lot of things included within it so for example income, question what's included in income, what isn't included in income so that's a whole section in and of itself but when we visualize the formula that's the question we're asking if someone's saying I found $100 on the ground what is that, well that's a question about the income line and what will that do now in a broad sense this formula you can think of it as basically a funny income statement so we'll go over it multiple times but we have an income tax so we have an income statement and you would think it would just be income minus expenses would get you down here to taxable income so this is basically the income statement format that would get you to taxable income that would be the general idea you'd think you'd be basically done there then you just multiply it times the tax rate but it actually gets a lot confusing even after you get to the taxable income why, because we don't have a flat tax we've got a progressive tax so the tax rate's confusing and then we don't just have an income statement we have deductions which are kind of like expenses and then we also have credits that we deal with which is a whole other thing a whole other kind of animal which is now below the tax calculation and then we also have to deal with the payments because the government wants their money as the time passes therefore we have to deal with the payments and how the payments were made were they withheld from W-2 forms, 1099 forms did they make estimated tax payments now it's a little bit more complicated than that because you have income the income statement's not just minus expenses the expenses are in the form of adjustments to income or above the line deductions that gets you to the adjusted gross income and then you can take the greater of either the standard deduction or the itemized deduction so these are kind of like the expenses would get you to that income and then you have the credits and whatnot so this formula can look a little bit confusing at first but after we break it down section by section then I think we'll be able to visualize basically this formula in general and then we'll work with it in Excel once you can visualize it in a formula you can predict what's going to happen in the software and then use the software to create the forms to see if what you think should happen did happen so here's the form 1040 now you can get the forms on the IRS website irs.gov irs.gov and you can just look up form 1040 all the forms are there the instructions are there so you have all of that if you have the software then you can generate forms with the data input on the software as well so whichever way you want to work with as we go through the practice problems that would be fine notice that with the forms there's a whole lot more detail so you're probably not visualizing the form you have some weird photographic memory if you talk to most tax people they're not just visualizing the form often times when they're trying to calculate a scenario they're probably visualizing more of a formula in their mind and approximating what the form is doing so again we'll touch in on that as we go through the practice problems but looking at the forms is of course important because then once you have the formula idea you can go into the more detailed forms and then start looking at them line by line and seeing what is actually happening going back from your Excel sheet to the tax return to get a better grasp of what's happening in the more detailed format and then we have software now the software there's two major softwares there's software types I would say there's software that is for professionals and softwares that is for individuals so the software for tax professionals will typically be a little bit different in the data input the data input will not be in an interview format but just in a quick you have quick fields that you can go to to do the data input a little bit faster with the individual software then that type of style of software will typically have like an interview process with the data input it's going to ask you questions to try to understand what is happening in a similar way as though you might be in an office with a tax preparer asking you questions to try to get the information necessary to pick up the return whereas with the professional software the assumption is that the professional is doing that and therefore you want to just do what is possible you don't want to have to redo the interview to do the data input I just want to do the data input I don't want to go through a half hour interview step by step screen by screen when I'm trying to do the data input so the professional software is really good for practice problems because it's really easy to go back and forth from the data input to the forms and see the results but both softwares I would highly recommend using a software at least whenever doing tax preparation because you want the internal control I'm going to use LASERT primarily here because that's the software I've used most it was bought by QuickBooks Intuit the owner of QuickBooks a while back long time back I guess now but it's a good software but there's other softwares that you can use as well the concept will be similar but just note that you can kind of categorize your softwares in these two major types of software if you don't have LASERT you might be able to try a free trial which we might touch on a little bit more in a later video and that would be a great tool to be able to practice with or you can try other softwares as well which should have a similar functionality so we can practice the data input screens will not be exactly the same but you can use them and when we do the practice problems if you don't have any software you can just simply download the forms from the internal revenue website with the PDF forms and follow along with the tax forms on your end that way which can be a useful tool as well so we'll touch in a little bit more on the different softwares and I'll finish your presentations I believe