 Income tax 2023-2024, other income part number two tax software example. Get ready and some coffee because we're going to provide some inspiration about income tax preparation 2023-2024. First, a word from our sponsor. 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 our trust me, I'm an accountant product line. It's paramount that you let people know that you're an accountant because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep complex and nuanced questions. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. Here we are in our Form 1040 example problem using LASERT 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 the forms, schedules, instructions at the IRS website, irs.gov, irs.gov, starting at our normal starting point. Our taxpayer, Adam Taxman, just trying to avoid a dang tax man living in 90210's Beverly Hills starting out with a single filer, no dependence. We have the 100,000 W2 income at the starting point, 13,850 for the itemized deduction taxable income at 86-150, mirroring that in our income tax equation in Excel 100,013-850 gives us the taxable income 86-150, the tax being calculated by the software 14266, which we can see on page 2, 14266. Okay, let's go back to page 1. We're still focusing in on our other income line items which will be populating on page 1, line number 8. It's going to flow through to here. That's coming from schedule 1. So let's take a look at the schedule 1. And we're looking at the additional income and adjustments. Part 1, additional income. We're looking at those more strange or less usual items, the ones that are under other income line number 8. And we left off last time. We're now on 8N. So let's go down. We're going down here to 8N. So here we have right there, boom. So then we have the section 951 inclusion. So this is one that's a little bit more unusual to which you'll probably only see in more well-off individuals or possibly people that have a lot of foreign income. So that's the one that has section 951 general requires that a U.S. shareholder of a controlled foreign corporation include an income. It's pro-rata share of the corporation's subpart F income and its amount determined under section 956. So again, that's possibly something that most normal taxpayers might not have because they're not generally going to have a controlled foreign corporation usually. Most people that are investing are investing in stocks and bonds and don't have a controlling interest. And they're often investing in stocks that are traded on a stock exchange and oftentimes investing in actual mutual funds and whatnot and ETFs and often even under umbrellas like an IRA or 401K plan. Similarly, the next line, line 80, section 951 generally requires that U.S. shareholders of once again a controlled foreign corporation include an income. It's global intangible low tax income. So those two items, you can do more research if they apply. We won't put a lot of detail looking into them here, but that's where the line items go. And then we've got the section 461, excess business loss adjustment. Now we talked about losses a little bit when we looked at up top the net operating loss. And we saw that if there's a loss, we might be able to take it against other income. And then if there's an excess loss, we might be able to carry it forward to future periods, which is what we did here when we're looking at the net operating loss, which is why it's in brackets even though it's in the income item because it would be reducing it. So here we're going to be thinking of a loss situation. Let's just think about that in a little bit more detail. So let's go to the schedule and let's imagine that we had schedule C income and we're going to say schedule C business income. And let's say that we had income of 50,000 and then we had an expenses of just 10,000. So that would be income. So if I go to the forms, we can see a schedule C has been included. Basically an income statement, 50,000 minus the deduction or expense of the 10,000 gets us to 40,000. That pulls into the schedule one as income, which pulls into the form 1040. So now it's going to be included in the part of the form 1040 also has other impacts we talked about before. But on page two, one of those impacts being self-employment tax calculated as we can see here. So that's like Medicare, Social Security and Medicare. But what if we have a loss? So if I have a loss, then I'm going to say, well, let's say that we had 50,000 but expenses were at 70,000. Well, now if I go back to the form, the schedule will see I have 50,000 income, 70,000 of loss. I lost money. That means that typically I'm not going to have self-employment tax because that's based on net income. And I didn't have any net income. They're not going to pay us for the self-employment tax generally. And if I had other income, I might be able to take that against the W2 income in this case. So now I had 100,000 W2 income minus the loss. That's why the IRS is skeptical of the losses because they think that people might try to take advantage of the losses taking it against the W2 income. Now, if I didn't have any W2 income, then, of course, I couldn't take it against the W2 income. So if this was zero, then I have this 20,000 of loss that I can't take anywhere else. And that's where you might result in this NOL situation because you would think, well, then maybe I can take the loss and take it in the next year possibly or something like that as I have income in a future year because I had to expend that money to generate revenue, which hopefully I'll generate next year. All right, so now let's imagine a situation where I had income that's quite significant. W2 income, let's say, was 500,000. And then, of course, I have income to be taking that loss. Let's imagine that the loss was quite significant. So I'm going to go back on over to my Schedule C and say, well, now let's say the loss was, let's bring this up to like 400,000. So now we have a very large loss, 350,000 loss on the Schedule C. So now you can see here, 350,000 large loss. And so now if I go back on up to the Schedule 1, you can see we have the business loss, which is showing a loss here. But then down here, we also have the Part P, which is a Section 461I excess business loss adjustment. So I don't want to go into it in a lot more detail here. But again, that would obviously only generally be involved if you had a high income, basically, individual situation. They had a large amount of loss that possibly they couldn't, that, you know, they actually have income that they could take it against because they also have a large amount of income elsewhere that you would think they would take the loss against. And the IRS is skeptical of taking that large loss in one year. And then, of course, the question is, if they disallow the loss, what's the capacity or ability to take the loss in future years? So that's always going to be the question, right? If there's a loss, can I take the tax advantage of the loss in the current year, matching it out against other income? And if not, what's the capacity or is there a capacity to possibly carry the loss forward or backwards so that I can match it up against future or past income? So that's the general idea. We're back on the Schedule 1. And let's take a look at the next one. So now we've got the ABLE. So I'm going to uncheck this one. Let's go back to our normal scenario going back on over here. I'm going to get rid of the Schedule C. So let's just delete the Schedule C, pull in income back to our 100,000 as our baseline scenario 100,000. And then I'm going to go do it. Okay, so there's our 100,000 baseline scenario, Schedule Number 1. And now we are on the next one, which is a distribution from an ABLE. Now you'll recall like these are these types of accounts that are kind of similar to the concept of an IRA or a 401K plan. The question being, what are the tax consequences when you put money into something like an ABLE? And then what are the tax consequences on the earnings from it? And then what are the tax consequences when you take the money out of such an account? Why would the iris have these types of accounts to try to basically give certain incentives on how we're going to be using the money? So we have the tax benefit for the ABLE and the general idea here being taxable distributions from an ABLE account, distributions from this type of account may be taxable if they are more than the designated beneficiaries' qualified disability expenses. And so a little bit more idea of the ABLE. ABLE accounts are tax-advantaged savings accounts for individuals with disabilities that allow them to save and invest money without jeopardizing eligibility for certain means-tested government benefits. So we have the ability to get a tax benefit, putting the money into the ABLE and then possibly allowing it to grow without taxes. And then our question here for the income line item is, when I take the money out, is it going to have to be included in income? And that's where we have this item here where it says taxable distributions. If the money's coming out now, does it have to be included in income? Distributions from this type of account may be taxable if, A, they are more than the designated beneficiaries' qualified disability expenses, because that's what you're supposed to use the money for. B, they were not included in the qualified rollover. So you have a rollover situation if the money was taken out, but then you kind of rolled it over in a similar situation as we saw with iris or a 401k type plan. So if I go to the data input, we're going to say gross distribution. So let's put the old 10,000 and then we have our questions, the earnings, the basis, and then the program to program transfer. So if it was a transfer ABLE account terminated, recipient is not designated beneficiary and then this is the qualified expenses paid. So if there were 10,000, if they was all paid for qualified expenses, you would think there would be nothing included here. So we have a worksheet now showing the total distribution, total qualified expenses, total amount of ABLE account distributions. But if I was then to say that this qualified disability expenses is not there, then you would think that we didn't use them properly according to what the iris wants and it could be subject then or included in income. Hold on a second. Let me do that again. So if it was a gross distribution and I'm saying it was earnings of the 10,000, then I'm going to say if they were all qualified disabilities paid, then it would be subject to tax, but it's not being included here because it was paid for qualified expenses. And then I'm going to say that it was earnings once again, but that I didn't pay for qualified amounts. And then if I go back on over, I have the 10,000. Here's our worksheet for it. And that 10,000, of course, now being included in line 10, pulls over to the form 1040. And then on the form 1040, it's included here. We could see the adjusted gross income, 110, same, 13, 8, 50 standard deduction, 96, 150 for the taxable income. Page number two, calculating the tax. And we have this other taxes because there could be a penalty related to it coming from Schedule 2. So we go to Schedule 2 and there we have that. So we might go into the ABLE in a little bit more detail in future presentations. We're just looking at when it might be included in income in this scenario. The general idea is you're going to get a tax benefit when you put money into it because the IRS is giving an incentive to use the money in a certain way. And then if you pull the money out and you don't use it in the proper way, then you could be subject to tax. Our focus here is at the point in time that we pull the money out and whether or not it would be subject to tax. So obviously the idea would be that if you start the ABLE, you want to try to do it in such a way that you are in compliance with the rules. And so you can maximize your tax benefit, part of the tax benefit being that hopefully you don't have to include it in income when you pull it out and certainly try to avoid the possible penalties related to pull it out in a similar fashion as we try to do with a 401k plan or an IRA. Alright, let's go back to the Schedule 1 and let's see the next one here. We're going to say, okay, so now my scrolling button isn't working anymore. So let's scroll down here. We're going to say that let's go and go to the scholarships now. So I'm going to right click on this one and jump back on over and let's go back to our starting point. I'll delete this, delete this, and then go back to our form. And so then I'm going to go back into my Schedule 1 and so there it is, scrolling is working again. Okay, so now we're on the scholarship and fellowship. Now normally when you have a scholarship and fellowship situation, the IRS is trying to incentivize higher education. So you would think that the money has been received and there might hopefully be an exception so that you don't have to include it in income. But there could be certain scenarios in which you would have to include it in income possibly once again. If you use the money in such a way that was it wasn't intended for is not the right purpose under the code. And that comes down to and we'll talk more about this later when we get into education benefits. But the general ideas would be that if you didn't use it for like tuition or qualified education expenses, then it might be a taxable type of item, right? So then we would have to include the taxable portion here, which I'm just going to show how it would pull in. And then of course this is where it would be included. So we'll talk more about education credits specifically because that's mainly one of the main benefits in future presentations. And obviously the IRS tries to incentivize the education through various things such as possibly not including or having exemptions of income that would have to be included. And things like tax credits for the expenses for education. It can get confusing, however, because some of these things kind of overlap with multiple credits and then money coming in from things like the scholarships and grants and whatnot. So but the general idea if you had to include it in income, then this is the place it would go for there. And then you will of course want to do your research as to whether or not it would be something that would be included in income or not. And try to set up the situation where if you're getting if you're getting income for scholarship and fellowship, the general idea would be I would like to have it be exempt and try to follow the rules to make it be exempt. But if it has to be included in income, there's where it goes. That's going to feed into the to the form 1040. Once again, pulling through to line number eight, increasing the income 110,000 same standard deduction brings us to the 96150. All right, let's go back on over. And we're going to say, OK, next one. It's going to be non non taxable amount of medical waiver payments included on form 1040. So non taxable amount of medical waiver. So that's fairly unusual. But if that's a situation that comes up, you can do more research on that one. I'm going to skip down to this one here is the next one I have notes on pension or annuity from a non qualified deferred pension plan or a non government section four five seven plan. So again, this is more of an unusual type of one. Usually happens for more higher income individuals because they might have like a plan that is not not conforming to the normal kind of plans, which is usually like a 401k plan or something like that. So so you might have a situation in those cases where you'd have to do more research to see whether or not you'd have to record income in that situation. Again, that's somewhat unusual, possibly something that happens on unlike I say more higher income tax planning situation situations. I'm going to delete the 10,000 on this one and let's go back on over back to our. OK, so then the next one is going to be wages earned while incarcerated, meaning, you know, people are in jail, a penal institution or something. And so and so, you know, most of the time when people are incarcerated, they don't have earnings because of course they can't really so much work in there would be the general idea. But if you do have earnings, then you're still going to be subject to taxes on the earnings. And the question could be, well, where do you put? How do you file the tax return in that particular situation? And this is one area you might have that wages earned while incarcerated. So obviously that would typically be more of an unusual type of situation, but that could come up from time to time. And then we have the most general area down here, other income. And we listed some of these in our prior presentation that could be included in here. So we have reimbursement of other amounts received for items deducted in the earlier year. This is similar to what we saw with the state taxes in that sometimes state taxes are deductible, but we do them on a cashed based system. So in other words, if you itemized your deductions, you'll recall that under the taxes here, you might be able to deduct state and local taxes. But if you deduct the amount that you paid in state and local taxes, in this case, let's say 2023, and you deduct $10,000 and then the state gives you back $5,000 of the $10,000 in the following year, you didn't really pay $10,000. You only paid $5,000 because they refunded it. What do you do then in that case in the following year? Would you have to go back and amend the tax return because you didn't really pay that amount because they got refunded? Or the easy thing to do would be to fix it in the current year by including it in income. So we saw that for the income line item for state taxes has its own line. It's actually the first one here. But you can imagine a similar situation for other things that you deducted, but then they gave you a refund in the following year. Like, okay, I took a deduction for this, but now we got a refund. What do I do? Do I have to amend the prior tax return? Possibly not. Possibly the easy thing to do would be to include it in income in the current year. And maybe you can put it down here in the other line item listing basically the description of it. Noting that you want to be careful when you include things that it's not going to be subject to self-employment tax or that's the question. Is there something subject to self-employment tax? So if I just put something, a generic amount in other income, I'm just going to say reimbursement or something, 10,000 in other words. And I go back on over. You can see it's in this line. We get to put the reporting requirements here so we can see it here. And if I go to the form 1040, it's been included. On page two, we don't see any other tax. In other words, we don't have self-employment tax that was calculated. So that's something to make sure to keep in mind when you have more unusual income items. Are they subject to self-employment tax or not? Am I putting them in the right place to be either subject or not subject to self-employment tax? So then we've got the re-employment, trade, adjustment, assistance, payments, loss on certain corrective distributions, excess deferral, dividends on insurance policies, recapture of charitable contributions. So this is another one where you might have said, I got a charitable contribution before, but then the charity did something funny that messed up the deduction. And so now maybe I have to include it in the current year instead of adjusting last year. Recapture of charitable contributions, taxable part of disaster relief, and then taxable distributions from a covered all savings account, an ESA. That's another one of these accounts that we might be putting money into to get a similar kind of tax benefit as like with an IRA, in which case we're questioning as to whether we can use this tool to get a benefit when we put the money in, possibly get in a tax benefit, to get a benefit when the money grows under this umbrella of this tool that's being used. And then do we have a tax consequence when we take the money out, which is our focus here, meaning when I take the money out, is it something that I have to include in income? If it is, then this other area might be somewhere where it would be included. This is something that usually happens for more well-off individuals who have the money to put it into different kind of savings accounts after possibly trying to put it into retirement accounts. Like the first thing you would use is an IRA or a 401K plan or a 403B and then you might try to put more money into other tax advantage tools if they're basically available to you. All right. And so then we have non-taxable income. So these are the list of things that were non-taxable. And then we have this form 1099K loss reporting. So if you sold personal item at a loss, either report the loss on form 8449 or report it on line 8Z. So if I go down here, form 8449, which is the sale of other dispositions of capital assets. So we're recording the sale of a capital asset. When you think capital gains, you typically think of like selling stocks. And so it might be something that is reported here. But you might also say if it's reported as a loss that you're going to report it on the other income area. So that's when you could possibly have it in line Z down here where they're saying that amount of sale approaches on 1099K. So that means that you have to report the income somewhere even though you had a loss. So in other words, you might be thinking, okay, I have a loss. I shouldn't have to record it in income because I bought it for more than I sold it for. And it was just like, so, but I got a 1099 for it. So I have to report the 1099 or else the IRS is going to see that and think that I didn't report something somewhere. So for example, you bought a couch for 1000 and sold it through a third party vendor for 700, which was reported on form 1099. Enter in the entry space next to line 8 Z. You would write form 1099K personal items sold at a loss $700. So again, you can you could see why you might need to do that here. So you can tell the IRS what you sold it for and they can see and match it out to the 1099K. And then we have one more similar scenario with this 1099. If you received a form 1099K that shows payments you didn't receive or is otherwise incorrect and you can't get it corrected. You got a 1099K can't fix it. Then you might want to report it here. So you can tell once again the IRS that I have this income that's been reported but it's wrong and the entry space next to line 8 Z write incorrect form 1099K and also enter enter the amount that was that was incorrectly reported. So for example, if you receive a form 1099K that was incorrectly shown 800 of payments to you you would enter 800 online 8 Z. And in the entry space next to line 8 Z you would you would write incorrect form 1099 800 next to it. So again, you're given the IRS information about the fact that it was an incorrect amount.