 Income tax 2023-2024, HSA health savings account, moving expenses, deductible part of self-employment tax, and self-employed SEP, simple and qualified plans. Get ready and some coffee so that you don't find income tax preparation to be too taxing. Most of this information can be found in the Instructions for Schedule 1 section of the Form 1040 Instructions Tax Year 2023, which you can find on the IRS website at iris.gov, iris.gov. Looking at the income tax formula, we're focused online to adjustments to income, which you might hear called above the line deductions or Schedule 1 deductions. Remember in the first half of the income tax formula is basically a funny income statement. Most income statements having income minus expenses resulting in net income. Here we have income minus various deductions resulting in taxable income. Deductions being good for taxes, therefore we're constantly looking to increase our deductions, also keeping in mind the distinction between above the line deductions, the adjustments to income, and what I would call the below the line deductions, which are the greater of either the standard deduction or itemized deduction. If someone qualifies for the adjustments to income or the above the line deductions, they typically do not have to clear a threshold such as that standard deduction limit in order to take those deductions. Looking at the first page of the form 1040, we're on line number 10, the adjustments to income from Schedule 1. If we go to Schedule 1, part number 2, that's where we have the adjustments to income. We're looking at these line items 13, which is the health savings account deduction, which is an attached form of 8889. Move it expenses for members of the armed forces that has form 3903. First, a word from our sponsor. 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And yes, I know six pack isn't spelled right, but three letters is more efficient than four, so I trimmed it down a bit. Okay, it's an improvement. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. Deductible part of self-employment tax, which has a schedule SE. And then we have this self-employed SEP, simple and qualified plans that will just touch on some of these items. And then, of course, you could dig into each of them in more detail. So contributions to a health savings account and HSA offer significant tax benefits and deductions. Now we talked about in prior presentations on the income side when possibly a distribution from an HSA might be taxable. So now we're going to be touching on it from the contribution side of things. It's easiest to compare something like an HSA as a similar tool to like an IRA where the IRS is basically trying to incentivize and nudge our behavior through tax incentives. So if we put something under the umbrella of, say, an IRA, for example, that means that we're going to get a tax benefit possibly when we put the money into the IRA. And we might get a tax benefit when the money grows to not have to recognize it as revenue, and then there's a tax consequent possibly when we take the money out. Similarly here, we have the same kind of questions. If we qualify for a health savings accounts, the tax implications we would think of is one, when we put money into this instrument, do we get a tax benefit? And then two, when that money possibly grows within the account, do we get a tax benefit of not having to record it in income, excluding it from income such as dividend and interest? And then three, when we take the money out, is that a taxable event or not a taxable event? Those are the kind of questions when you see these types of tax tools. So if you meet the eligibility criteria such as being covered under a high deductible health plan and HDHP, so note that then you have to get into the questions of what is a high deductible health plan. Now note that if you're working as an employee, then you might have the capacity for healthcare that's linked basically to your employment. And again, the determination would be, is it a high deductible health plan? Typically, the high deductible health plans might be thought of as not the best health plans because you've got this high deductible that you're going to be dealing with, meaning you have to pay the deductible that is higher for the actual services, but usually the health plans are cheaper. And then you can think that the IRS wanted to kind of subsidize people that might have more of the high deductible plans and part of that happens with this health savings account. So if people have very good health plans, they might not be using a high deductible health plan and therefore may not qualify for the health savings account. Or people might couple the high deductible plan with the health savings benefits as part of their health saving strategy in terms of paying for their healthcare. So in any case, you have to have a high deductible health plan without other health coverage not being enrolled in Medicare and not being claimed as a dependent on someone else's tax return. You can take advantage of these benefits. So the maximum contribution limits for HSAs in 2023 are $3,850 for individuals with self only HDHP coverage and $7,750 for those with family HDHP coverage. So now when you think of the coverage, the question is, is it for an individual or is it for a family? So if you are 55 or older by the end of the tax year, you are eligible for an additional catch-up contribution of $1,000. Contributions to your HSA can be deducted on your tax return even if you don't itemize deductions. So that of course is a big benefit. Notice when they tried to simplify the tax code a few years ago, they removed a lot of the itemized deductions because you would think those would benefit more wealthy individuals who are more likely to be taking the itemized deductions. But that also reduced a lot of the things, a lot of the power that the government had to nudge our behavior through tax incentives. So it's likely that you're going to see other things leak out into other parts of the tax return as the IRS tries to again flex their influence over our behavior with the primary tool that they have at their disposal, the tax code. So these contributions can either be made by you directly or through employer contributions. Importantly employer contributions are excluded from your gross income, thereby reducing your taxable income. So in other words, it's similar to an IRA or a 401K situation. If you have a 401K and your employer is taking care of the contribution to the 401K, it will be reported on your W2 by not being included in box one already, and it will already be taken care of for tax data input. But if it's not handled through the employer and you have a high deductible plan, then it's similar to an IRA situation where you have this above the line deduction or adjustment to income where you have to manually reduce it because it's not going to be already taken out of income with the W2 form by the employer. So to report HSA contributions and calculate the HSA deduction form 889 is used. This form also addresses any excess contributions and distributions related to HSAs. It's critical to accurately report all contributions, including those made by employers and any after tax contributions you made to avoid any tax complications. IRS Publication 969 and the instructions for form 8889 are comprehensive resources for understanding HSAs and their tax implications, which you can find on the IRS website. Alright, let's take a look at line 13, the line by line instructions, health savings account HSA deduction. You may be able to take this deduction if contributions other than employer contributions, rollovers and qualified HSA funding distributions from an IRA are made to your HSA for 2023. So you can see form 8889 for more detailed information if you want to dive into some more research. Alright, for tax year 2023, the deduction for moving expenses is generally no longer available to most taxpayers due to changes enacted by the Tax Cuts and Job Act. So you're probably going to get questions about this because this is one of those things that people have in their mind and has more recently been changed. That being, if I'm going from one job to another job, do I get a tax benefit for the move? It used to be the case that you might get a tax benefit, but they basically almost entirely remove that having an exception possibly like for the military. So that's probably could come up if someone's changing jobs or thinking about changing jobs and they still have that in their mind. So however, if you are a member of the armed forces and active duty and you move because of a permanent change of station, you may still be eligible for deduct certain moving expenses. So remember that the military is often having exemptions. So you want to make sure that when you're dealing with people in the military, it might be a more place to specialize because there's a lot of differences in the code related to it. Eligible moving expenses for qualified armed forces members include shipping and storage costs for household goods and personal effects as well as travel, lodging, excluding meals and gas costs associated with the move. These expenses can be reported using form 3903. So it's important to note that reimbursements from your employer for any moving expenses are reported on this form as well. And if the reimbursement exceeds your out of pocket expenses, the excess must be claimed as taxable income. In other words, oftentimes I think the military is pretty good at basically reimbursing or paying in some way for some of these costs, in which case you would think you wouldn't get a deduction for it because they have been reimbursed or basically paid for. So when calculating your moving expenses, you can deduct the reasonable unreimbursed expenses of moving you and members of your household. So deductible expenses include costs related to moving household goods and personal effects as well as traveling, including lodging but not meals to your new home. Alright, line 14, looking at the line instructions, moving expenses. You can deduct moving expenses if you are a member of the armed forces on active duty and due to military order, you move because of permanent change of station. So pretty restrictive, you know, item there. So use tax topic 455 or C form 3903 for more detail. So the general idea is that most of the questions that come up, people will not qualify for things that they're thinking they might have qualified because of changes to the tax code and never remember in the old rule. Alright, line 15, deductible part of self-employment tax. So if you were self-employed and owe self-employment tax, fill in schedule SE to figure the amount of your deduction. The deductible part of your self-employment tax is on line 13 of schedule SE. Now we talked about this a little bit already. We'll go into it in a lot more detail when we get into a sole proprietor schedule C type of business. But just remember, whenever you have a schedule C business, it's going to increase the complexity of your return a lot. The question is, do you want to take on those type of businesses or do you want to specialize somewhere and not take on those types of businesses? One of the issues you have to deal with with a schedule C business is the fact that they're not paying payroll taxes and they're not being pulled out by the employer payroll taxes being or including social security and Medicare. The IRS wants the self-employed individual to pay social security and Medicare like they would if they were an employee, not only like they were if they were an employee but the employee and employer portion. That means that in essence your net income on the schedule C will be subject not only to federal income taxes but also the equivalent of payroll taxes, social security and Medicare. Now the funny thing is that if you were an employee, what happens is you pay social security and Medicare and then the employer pays social security and Medicare or matches because they tried to mirror it to make it look kind of like a 401K situation even though it's different in a lot of ways but that's how it looks. So that means that on our side with your sole proprietor they're going to try to tax you as both the employer and the employee. You are the employee of your own business. But usually if you were a company you would get to deduct half of that as payroll taxes so then you would think that you would get to deduct half of it here so it's the same. So you're not abusing the sole proprietor and having them in a worse tax situation. So you should get to deduct half of the payroll taxes but you can't deduct them on the schedule C because that would create a circle of reference because you use the net income to calculate the taxes. Therefore half of the self-employment taxes need to be deducted somewhere else and it's on line 15 the deductible part of self-employment tax on schedule one. Alright we'll take a look at an example of that in a future presentation just to get an idea of it but we'll also look at it in detail when we get to the schedule C. So for self-employed individuals including small business owners and partners there are specific retirement plans that offer tax advantages such as an SEP, simplified employer pension plans, simple savings incentive match plan for employees and IRAs and qualified plans like solo 401Ks. So this is another issue that often comes up for sole proprietors. So if you're doing taxes for a sole proprietor typically you have to deal with more complex returns but there's also tax planning issues that could come up a lot more readily especially as that sole proprietor becomes a taxpayer's major source of income because if it's just like gig work they're doing a little bit of work on the side but their primary income is W2 income then you might not have as much as this tax planning stuff. But if it's their full source of income then questions like this come up and that they're saying hey look at when I was a W2 employee I could put money into a 401K plan that was far greater than I can put into an IRA and I had matching with it and what not and as a sole proprietor if I just use a normal IRA I have much less of a tax benefit I'm restricted on how much I can put in there. Well then the typical question is could I set up a 401K plan for my sole proprietor business so I can put more money into my account and also possibly help employees but that's too complicated often times for a sole proprietor so these simple and the simple are types of plans that could increase your ability to put money into a plan more similar giving benefits more similar to a 401K but that are easier to administrate than a 401K so that's a whole other topic in and of itself that you can kind of dive into what's the difference between a SEP, a simple, a 401K or a solo for a 1K and when would those be best for like a sole proprietor type of business. So these plans but if you have those plans set up then instead of just having an IRA deduction you might be able to deduct the SEP and the simple rather than on the Schedule C you put in it on the Schedule 1 but in order to qualify for those plans you typically have something like a Schedule C type of business a sole proprietor so these plans allow you to save for retirement while potentially reducing your tax income through contributions alright a SEP plans so what are they these allow contributions of up to 25% of your net earnings from self employment with a maximum of 66,000 for 2023 that is far higher than of course the maximum you can put in if you're just going to say alright I'll just put money into an IRA because I don't have access to a 401K plan because I'm not an employee right so that's a huge benefit SEP plans are relatively easy to set up with a simple one page form or through an IRS approved quote prototype SEP plan from financial institution so they're pretty easy to do that's the point they're easier than a 401K plan you just want to make sure that you're following the rules properly so that you're in compliance then you have the simple IRA plans so for 2023 you can contribute all your net earnings from self employment up to 15,500 so you can see some differences between the limits here of the two plus an additional 3,500 if you're 50 or older and you have the option of either a 2% fixed contribution or a 3% matching contribution so you can go into the differences between a simple and a SEP one of the other benefits by the way is that you might be able to think about your SEP contributions after you actually do your taxes meaning how would I know that I'm going to put in 25% until I actually do my taxes which is going to happen after the tax year for 2023 tax year I'm going to do my taxes in 2024 it would be nice if I can do my taxes and then figure out how much or top off at least the amount that I'm going to put into the SEP because now I know how much I could put into it right that's another thing to take into consideration when you're comparing these plans are you allowed to put money into it after the tax year so that you can figure out the best amount to put into it so then we have the solo 401K plan so these plans allow annual salary deferrals up to 22,500 in 2023 plus an additional 7,500 if you're 50 or older on a pre-tax basis or as designated Roth contribution so you can also contribute up to an additional 25% of your net earnings from self-employment for total contributions of up to 66,000 for 2023 including salary deferrals so this one usually gives the highest amount of benefits of 401K plan but also is the most complex to set up and takes the most administrative work so the contributions you make to these plans can be deducted on your tax return specifically on form 1040 schedule one under the line for self-employed SEP simple and qualified plans it's important to ensure these contributions are not mistakenly deducted on schedule C this is where the schedule C once again gets a little confusing because now you're like well wouldn't that deduction be on the schedule C well no it's on the schedule one so you have to know that so as this could require an amendment if you do it wrong so to navigate the specifics now you might ask why is it on schedule one by the way because the schedule C notice if you put it on the schedule C it would reduce your bottom line on the schedule C and would have an impact on the self-employment tax right by putting it on schedule one then it's going to reduce your federal income taxes but possibly not have an impact you're still going to be paying self-employment tax on those earnings right okay so to navigate and this is similar to the difference on the W2 between like box one and box three for the federal income tax wages versus box three social security wages and box five Medicare okay so to navigate the specifics of each plan and to determine which is most suitable for your circumstances as well as understand contribution limits and tax implications you can refer to the iris publication 560 on the iris website quick look at the line instruction self line 16 self-employed simple and qualified plans if you were self-employed or a partner you may be able to take this deduction you can see publication 560 or if you were a minister publication 517