 Income tax 2022-2023. Income line 1 including W-2 wages and tip income. Let's do some wealth preservation with some tax preparation. Most of this information comes from the Form 1040 Instructions Tax Year 2022 line instructions you can find at the IRS website irs.gov irs.gov. When looking at the income tax formula we're focused on line 1 that being income. Remembering that this single line might be comprised of many different types of income and may be coming from different forms and schedules feeding into this income line item. We're going to be focused here on some of the major forms of income or types of income including the good old 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. W-2 employment income reported with the form W-2 when looking at the form 1040 this is the first page of the form 1040 where much of the income lines are represented on that first page even as possibly they might be being pulled from other schedules as well this is a schedule one which has additional income and adjustments to it we could have of course many other schedules that might eventually feed into the first page of the form 1040 the income line such as the schedule D, schedule C, schedule E and so on which will dive into in more depth in future presentations. For the most common type of income the first thing that comes to most people's mind is employment income if we're working as an employee our employer is responsible for not only telling the IRS how much we have earned but also doing the actual withholdings from us reporting those withholdings as well as our income with the use of the W-2 form not only to us but also to the IRS so this is a W-2 form 2022 and you've got your boxes up top box one two three four five six seven eight on on down to like 12 a or 20 for example let's just go through these boxes fairly quickly here to get an idea of what the W-2 looks like the box one wages tips other compensation is going to be the wages that are subject to federal income tax now a lot of times when we look at the W-2 we might think about that first box as basically our overall compensation or income line in other words if someone was to ask you how much you have earned in the year you might first think to look at that box one but that box one might be different than box three and five which are also other forms of basically income lines meaning box two is the actual federal tax that's going to be withheld that the employer actually took out of your paycheck and that then is going to be reflected on the tax return on the second page as withholdings box three is another income line it might be the same number as in box one but it might be a different number for example if if you had some some items that were subject to not being included as taxable income in box one but might be subject to taxable income you do keep financial records don't you invoices revenue reports taxable in i'm sorry social security tax so that's one reason you might have a difference also the social security wages might go and hit the cap so if you have high income earners it's possible that the social security got capped and so the wages box might be higher than the social security box and then the medicare and then box four is the social security that is paid now remember that when you're filling out your income taxes the main thing we're thinking about are these first two boxes the wages subject to federal income tax and the federal income tax withheld these will actually be reflected all the time on the forms 1040 whereas box three and four are payroll taxes which if they've been withheld properly and we don't have any running any cap in uh problems will not be reported on the form w2 because they've already been dealt with and this is just showing that information here although there are some cases where you might have something related to the social security tax for example if you had multiple w2s which resulted in someone paying more than their cap in social security you would have to adjust for that and then you have the medicare which is also a payroll tax off the payroll you so the medicare doesn't have a cap on it like social security so the medicare is probably the most accurate box to actually look at when you're thinking about someone's actual compensation because box one might have been decreased by something like a 401k plan whereas box five typically will not be so you when you want to think about someone's overall compensation it might be more accurate to look at box five and then you've got the medicare tax that was withheld again something that usually you don't have to deal with too much when you're doing the federal income tax form 1040 because it's already been taken care of with the payroll taxes but we have it for that informational kind of purposes and then box 12 is another kind of important box where you might have a item here which is going to give you more information about what's actually being included and you might have something like a retirement plan a 401k and box 12 that would also be reflected as a reduction in taxable income in box one we also have the retirement box right here that would be checked off if that was the case so if this was checked off you would expect possibly to see something in box 12 and then on the bottom you've got the state taxes which is similar to box you know one and two up top but on the state side if you have someone that is subject to state taxes so just a quick look this is a mok w2 that was just generated i generated in excel for example and you might imagine a situation where say box one three and five are the same that's because those are our wages and there's no we didn't hit the social security cap and there's no basically a reduction in the wages for federal income tax from like a 401k therefore three these three numbers are the same and then the federal income taxes here and the social security and the medicare are are here you can also imagine a situation where for example box one is higher than box three now this is like an old cap actually this isn't actually the social security cap but this is just to give you an idea that this could you might see something like this because the social security is going to hit a cap which goes up uh each year and so if you're talking about high income earners then you might have a lower box three than box one and five and then you might see a situation like this where box one is lower than box five for example because someone has a retirement plan which is quite common like a 401k which means that the income that they got of 150 000 a 10 000 of it is non-taxable income because they put it into a qualifying retirement plan instead of reporting that on the form 1040 like you would in like an ira situation it's just reduced on the w2 so it's useful to know what is going on if you're just doing data input into the tax return you'll be able to just enter this into the tax return but you want to be able to understand the interplay between box box one box 12 and then to be able to say yeah you actually earned compensation closer to 150 000 right because the medicare wages isn't hitting a cap as social security is although that might be an older cap here but the idea is there's a cap on that the medicare doesn't have that cap and it's not being reduced by something that's reducing box one which is oftentimes like a retirement type of plan that's good information to be able to talk to somebody about and also to be able to understand the relationship between retirement plans like a 401k plan and say like someone taking an ira deduction for example okay let's just take a look at the general rules for for line one a on the form 1040 total amount from forms w2 will be in that box so we're going to be having possibly multiple w2s if someone worked at multiple jobs and or if you had a married filing joint situation you could have multiple w2s that are comprising the amount that's going to be on the first page of the form 1040 box one enter the total amount from forms w2 box one if a joint return also includes your spouse's income from forms w2 box one caution one if you earned wages while you were on an inmate in a penal institution you will now report these amounts on schedule one line eight you so that would be obviously somewhat of an unusual situation but possibly one to keep in mind do not report those wages on line one a see the instructions for schedule one line eight you if you're in that situation caution number two if you received a pension or annuity from a non-qualified deferred compensation plan or a non-government section 457 b plan and it was reported in box one of form w2 do not include this amount on form 1040 of line one a this amount is reported on schedule one line 18 so somewhat unusual situations those two line one b household in blue employee wages not reported on forms w2 so if you have a household if you got wages as like a household employee or are doing taxes in that situation it's possible that there's no w2 information because of of the rules and regulations due to that type of of work and therefore you'd be putting it in in line one b instead of where you put one the first line with the w2 wages so into the total of your wages received as a household employee that was not reported on forms w2 and employer isn't required to provide a form w2 to you if they paid you wages of less than $2,400 in 2022 so that's one of those situations remember the general rule the irs is always trying to force the payer to issue some kind of report such as a w2 or 1099 but in some cases they can't they don't do that or they're not forcing in that case because in this case you're not talking about a business situation you're talking about more of a personal like type of situation and therefore and the income is fairly low under a certain threshold and therefore even though you don't get a w2 you should still need to report the income for information on employment taxes for household employees you could see tax topic 756 tax line line one c tip income not reported on line one a so enter the total of your tip income that was not reported on form 1040 line one a now tips are a mess so if you worked in a place where you where you are receiving tips note that it used to be a situation where you could basically there was a business model that worked quite well for certain types of restaurants and whatnot where basically the someone would be earning just simply tips and the employer would just basically be making money on say the food earnings the profit there and the drinks and possibly the servers would be earning say tips for example but the irs doesn't like that situation because then the person that's receiving the tips is getting paid directly from a customer that that doesn't need to issue them a w2 or a 1099 so you can see what the irs would like to do to force the tips to be reported as income is try to get the employer involved in the reporting be responsible for the reporting of the tips so now you've got different kind of scenarios where the employer might have to involve themselves in the tip process and if they do then the question is are the tips being reported on the form w2 if they're being reported on the form w2 then they're being reported you're paying taxes on them if they're not then you still have income from tip income which the iris you know wants a piece of and so that's the idea so this should include any tip income you didn't report on your employer to your employer and any allocated tips showing in box eight on your form w2 unless you can prove that your unreported tips are less than the amount in box eight so again it's on box eight of the w2 or unreported tips because you have income so if they're on the w2 obviously if they're part of your income in box one they're going to be included in income if they're in box eight then you have the tip income and usually when you enter this into the software it'll help you to determine the line to be put on into the tax software if you don't have any reported tips but you did earn tips then you should be still under the general rules of the code reporting income that has been earned even if you didn't receive documentation on it allocated tips aren't included as income in box one so again there's different rules in terms of how the employer is going to structure the whole tip or the whole business model system set up if they're now having to be involved in the reporting of tips in some way shape or form so if they're reporting tips then as tips then it won't be basically in box one possibly so again you might want it wherever you're working if it's a restaurant or whatever you want to get an idea of the whole tip structure and how the taxes are kind of involved in the tips and it's a good idea to understand how the taxes are probably distorting the business model that is being used with when tips are involved so c publication 531 for more details also include the value of any non-cash tips you received such as tickets passes or other items of value so notice that the whole point of a tip often time is that you're you're giving someone someone value directly for work that's been done over and above possibly uh and and and again that's hard for the iris to basically to to basically track and tax you know but in cotton theory you should so even if the tip was in the form of something else like they gave you tickets to a concert oh like a real concert concert or something like that then you should be reporting that as income right so although you don't report these non-cash tips to your employer you must report them on line c caution you may owe social security and medicare or railroad retirement uh r rta tax on unreported tips see the instructions for set schedule two line five line one d medicaid waiver payments not reported on forms w2 box one so enter your taxable medicaid waiver payments that were not reported on forms w2 also enter the total of your taxable and non-taxable medicaid waiver payments that were not reported on forms w2 or not reported in box one of form w2 if you choose to include non-taxable payments and earn income for purposes of claiming a credit or other tax benefit so note that generally obviously income is bad for taxes so if you can not include something as income that is usually beneficial however there are situations such as for the earned income tax credit when reporting the income may have a tax benefit because something like the earned income tax credit for example actually goes up uh as earned income goes up to a certain point and then basically it goes back down so you end up with these weird situations where the iris might have something that's trying to help people out by not including something in earned income which is usually a good thing for taxes but actually works to be detrimental to somebody because if they were able to include it in earned income their tax benefit would actually go up due to refundable credits sets as the earned income tax credit which is kind of an unusual type of situation but can come up if you and your spouse and his spouse both receive non-taxable medicaid waiver payments during the year you and your spouse can make different choices about including payments and earned income see the instructions for schedule one lines 8 s if you want to look into more detail on that you've got lined one e taxable dependent care benefits from form 2441 line 26 enter the total of your taxable dependent care benefits from form 2441 line 26 dependent care benefits should be shown in box 10 of your form w2 so if you see that in box 10 usually if you're using software to help you to kind of do the data input it'll help you to show the boxes that'll help you to run scenarios and and help you to populate this information on the tax return so software is helpful to kind of better think through what is happening and so what we might run some scenarios on this in a future presentation but first complete form 2441 to see if you can exclude part or all of these benefits line 1f employer provided adoption benefits from form 8 8 39 line 29 so there's no more of a somewhat unusual type of situation with the employer provided adoption benefit so enter the total of your employer provided adoption benefits from form 8 8 9 3 line 29 employer provided adoption benefits should be shown in box 12 so that's that all-purpose box box 12 which then will have usually a letter next to it which will give you an idea of what is being done there you can see more information about the letter on the instructions to the form w2 so it usually has the code section t for this item so but see the instructions for form 8 8 39 to find out if you can exclude part or all of the benefits you may also be able to exclude amounts if you adopted a child with special needs and the adoption became final in 2022 then you've got line 1g wages from form 8 9 1 9 line 6 enter the total of your wages from form 8 9 1 9 line 6 you've got line 1h other earned income so the following types of income must be included in the total on line 1h you've got strike or lockout benefits other than bonafide gifts excess elective deferrals the amount deferred should be shown in box 12 of your form w2 and the quote retirement plan in quote box in box 13 should be checked if the total amount you or your spouse to filing jointly deferred for 2022 under all plans was more than 20 500 excluding catch up contributions as explained later include the excess line on line 1h so remember box 12 is that catch all kind of box and you might have some retirement plan like a 401k for example that are included in there now usually as we saw if there's something included for a retirement plan then it might have been removed from the wages in box one so that means it's not going to be taxed because you lowered the box one wages by the amount that was put into the retirement plan however if you combine the w2s together and it turns out that you actually over you put more into the retirement plans than you're allowed to reduce your taxes by then you might have an you might have to adjust that you might have kind of like an income situation again software is quite helpful to to to catch some of those types of situations and obviously if the software does catch the situation you put a couple w2s in and the software says hey look you put too much you deducted too much for the 401k plan more than you're allowed to then oftentimes in those situations you could back in and try to figure what happened why did it happen why is the software saying that so you can explain it to someone else and double check to see if it is doing what indeed it should so this limit is a 14 000 if you have a simple plans now these are the different types of retirement plans so we'll talk more about retirement plans later but the general idea is that if you can put money into a 401k plan then you would like to be able to do that that's one of the biggest benefits that an employer can give you but you can only take advantage of that if you have cash flow to put money into the retirement plan for small businesses instead of having like a 401k plan they might have a simple plan which is a little bit a lot cheaper to manage than a standard 401k plan but there's different limits to it or you can have b 23 500 for section 403 plans if you qualify for the 15-year rule in publication 571 a 403 b plan is often one that's similar to a 401k plan but for a not-profit or government entity oftentimes so you have that larger limit although designated Roth contributions are subject to this limit don't include the excess are attributable to such contributions online one H in other words you don't have the same kind of problem with a Roth IRA because in a Roth IRA you didn't get to reduce the amount in box one from the amount you put into a Roth IRA so you still have limits on how much you could put into a Roth IRA but but you don't have this problem where if you combine multiple w two forms your actual taxable income in the combined box ones are too low because those boxes are not being reduced by the amount that's being put into the Roth IRA because they work differently so they are already included as income in box one okay so a higher limit may qualify to participants in section 457 b deferral compensation plans for the three years before retirement age contact your plan administration for more information if you were age 50 or older at the end of 2022 your employer may have allowed an additional deferral a catch up contribution as they're known of up to six thousand five hundred dollars three thousand for section 401k 11 and simple plans so this additional deferral amount isn't subject to the overall limit on elective deferrals tip so if you received scholarship or fellowship grants that were not reported to you on form w two you will now report these amounts on schedule one line eight r see the instructions for schedule one line eight r if that's applicable and caution you can't deduct the amount deferred it isn't included as income in box one of your form w two disability pensions showing on form 1099 r uh r if you haven't reached the minimum retirement age set by your employer but see instruction premiums for for the retired public safety office officers and the instructions for lines five a and five b disability pensions received after you reach minimum retirement age and other payments shown on form 1099 r other than payments from an ira are reported on lines five a and five b payments from an ira are reported on lines for a and for b so these the 1099 r is another you know common form that you might receive more often for people that are uh older individuals so oftentimes we can kind of we can kind of distinguish the types of forms that we would expect to see depending on the age of the taxpayer if they're in their working years their primary sources of income will probably be from w two income or business income like a schedule c or something like that if they're in retirement years we're likely of course to see more say 1099 r type of distributions which are going to be distributions from from retirement plans like a 401k plans and and and those kind of plans which could be subject to uh income tax because you got a tax benefit when they put the money into say a retirement plan for example but in this case we're looking at disability pensions showing on form 1099 r if you haven't reached the minimum retirement age set by your employer so so we'll talk more about the 1099 r's uh in a future presentation as well corrective distributions from a retirement plan showing on form 1099 r of excess elected deferrals and excess contributions plus earnings but don't include distributions from an ira online one h instead report distributions from an ira on lines for a and for b so we got line one i non-taxable combat pay election so if you elect to include your non-taxable combat pay in your earned income when figure in e ic enter the amount online one ic instructions so here we have another kind of situation if someone is in combat pay then the government would try to give a benefit by saying well possibly we don't have to include that as income for taxable income purposes which is generally good because then you'd be lowering the net the taxable income lowering tax but it could be bad in the event that you're trying to calculate something like the earned income credit in which case the iris might say we're going to allow you to include it if it would be a benefit for you to include it in income due to something like the calculation of the earned income credits that's another kind of one of those weird situations