 Income tax 2022-2023, other income part number one. Let's do some wealth preservation with some tax preparation. 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. Most of this information comes from the form 1040, Instructions Tax Year 2022, Instructions for Schedule 1, Additional Income, and Adjustments to Income. You can find the IRS website, irs.gov, irs.gov, looking at our income tax formula. Focus once again line one income. Remembering that the income tax formula, the first half of it in essence is an income statement. Although a strange one where we have income minus the equivalent of the expenses, those being the deductions gets us to the equivalent of net income. This being the taxable income, everything's flipped on its head. We want the taxable income as low as possible as opposed to in normal circumstances net income, which we usually want as high as possible. That means with the income line we're focused on we need to determine if something is classified as income and whether or not it's exempt income with regards to recording it for taxes. That's the general concept. Looking at the first page of the form 1040, we're focused down here line number eight. Other income from Schedule 1. If we look at Schedule 1, this is the additional income and adjustments to income. We're now down here on line number eight where we have these other somewhat kind of random items and we're going to go through some of these items. They're not quite as common, which is why they're kind of all grouped up into the other income down below. The net operating laws to gambling, the cancellation of debt, and so on and so forth. So let's look at them lines by lines and list some of them out and then we'll take a look at some of them in the tax software. Lines 8A through 8Z are the other income lines. Now remember the general rule from the tax code perspective is everything from the IRS perspective that you receive is kind of like income unless it's exempt from income. Classified as not income. So you can get very creative and start saying, well, what if this happened? What if that happened? I've got money because of this or that and the other thing. Well, those might fall into this line, which would be the other income type of situation. So caution, do not report on lines 8A through 8Z any income from self-employment or fees received as a notary public. Instead, you must use Schedule C even if you don't have any business expenses. Also, don't report on lines 8A through 8Z any non-employee compensation shown on form 1099 Miscellaneous, 1099 NEC, 1099 K. Unless it isn't itself self-employment income such as income from a hobby or a sporadic activity. Now, this is really important to understand. Why is that the case? Why would I need to be reporting something on a Schedule C or why when I get a form 1099 Miscellaneous or 1099 NEC or 1099 K is the IRS expecting to see, in essence, a Schedule C and not something reported on this other income line because we have the self-employment tax that's going to be coming into play here. So note that we're talking about income taxes as the primary focus when we look at the form 1040. But if you have W2 wages, the W2 also reflects the social security and Medicare that was taken out. And usually it's done already. You don't have to really do anything extra if it's W2 wages because the IRS got the employer to handle that on the tax side. So it's just a reporting thing. But if you're self-employed, then the IRS is going to say, if you have self-employment income, we want to treat you as both the employee and employer. Therefore, the 1040 is not only going to be used to calculate your income tax, but also the employee, employer portion equivalent that being the self-employment tax, social security, and Medicare, which can be quite significant. So that means that if you have some income that's classified as business income, the IRS is going to want a piece of it, not just for income taxes, but also for the social security and Medicare components of it. So then you can get into classification. Should it be a hobby income or should it be self-employment? You can get into questions as to whether something is self-employment income. If you get a 1099 miscellaneous or something like that or an NEC or a K, then the IRS would generally assume you would think that it's going to be self-employment income. They would expect to see a schedule C unless you claim it's a hobby. So if it's in the reason the IRS will allow people to take a hobby, is because obviously they don't want people to be able to take losses. So if you have schedule C income from a 1099 and you had more expenses than income, then you can end up with a loss, which is actually good for taxes, right? Because then you might be able to write that off against the W-2 wages, which the IRS doesn't want to see, right? So they're going to say, if you had income, then they're going to try to hit you with self-employment tax as well as other income. And if it's a hobby and that's why you got one of these 1099s, then that's when the exception might apply. So just general rule to keep that in mind. Instead, see the instructions for the recipient included on form 1099 miscellaneous, 1099 NEC, 1099 K. So you can always look at those forms for more instructions to find out where to report the income. So for more information about what is being reported on form 1099 K, see instructions for payee included on that form and you can visit IRS.gov forward slash gig word. The 1099 K in other words is kind of like a newer type of form where the IRS is trying to pressure in non-traditional kind of formats in every transaction. Usually you have a pay earn and a payee, you have someone generating income from the transaction and someone that is paying which would have an expense or deduction if they were a business for taxes. But with this gig economy situation, because the end user is really an individual, the IRS has less leverage over them. So they started to work on forcing not only the payer of a business situation, but trying to get the intermediary platforms like the gig economy platforms or the credit card companies and pay pals of the world and whatnot and try to pressure them to issue these 1099 K forms. Okay, so line 8A, net operating loss, NOL deduction. Enter on line 8A any NOL deduction from an earlier year. Enter the amount in the pre-printed parentheses as a negative number. The amount of your deduction will be subtracted from the other amounts of income listed on lines 8B through 8Z. You can see publication 536 for more details. So if we have a net operating loss, we talked about losses a bit, meaning that like if you had a schedule C for example and you had more expenses than income, that's quite common for startup type of businesses. The IRS is going to be quite skeptical of losses because what does the IRS want? They want you to make income so they could take part of it, right? If you have any loss, they don't want to take on the risk of your business losses. They just want the benefit of the business gains, right? So they're going to be skeptical of the losses. So it's possible that you can write off the losses because you would think that in a startup business that you should get some tax benefit for the losses because that's your investment that was necessary to increase income in future years. So then they might limit the losses, right? If they limit the losses, then you got to see, okay, is there some way I can get a tax benefit from the losses that were limited, possibly carrying them forward? If you have a situation where there's losses being carried forward or something like that, that's more complex from a tax preparation standpoint. So you're going to want a most likely, anytime there's more complex situation, I would take the tax return from the prior year if I had a new client and enter that into the prior year software so I can roll over all the information from the prior year software so that the rollover of the losses will properly rollover as well and hopefully be populated properly in the system. If you have a continuing client, then again, the software is quite useful if you're using the same software can help you to analyze what the software is doing with the rollover and then see if it's an appropriate thing and explain it to a client as well as yourself. So line 8B, gambling. So enter line 8B, any gambling winnings. Gambling winnings include lotteries, raffles, a lump sum payment from the sale of a right to receive future lottery payments, etc. For details on gambling losses, see the instructions for schedule A, line 16. So gambling is often one of those areas where people have questions, right? If you have someone that gambles a lot, like it's just like their hobby, then they're pretty aware, most likely, of the rules related to gambling, which is basically the winnings that you're going to get if they're over a certain amount. Once again, the government will often pressure, say a casino or the horse track or whatever, to give documentation of the income. And so they're going to have the income then that you're generally going to have to report. And then, can I deduct something? Well, usually most gamblers aren't going to say it's a schedule C business because it's not their main business or anything like that, so you don't really have the losses there. So the only other place you might be able to deduct losses would be on the schedule A, but the losses are severely limited to be able to deduct, unlike they would be if it was like a business, because first you have to be able to itemize to take the deductions, and most people don't itemize, and then also you're limited to taking the losses up to the amount of the gambling winnings. So you don't have this situation where you can have more losses than winnings, which would be like subsidizing a gambling habit or hobby, so that kind of makes sense. So the losses are severely limited to how much you could take opposed to the winnings. Obviously, if you deal with non-gamblers that went to a casino and they just won a car or something like they just won a prize all of a sudden, they are often hit suddenly with the fact that they've got this big win, and that could have a significant impact on their taxes because of the progressive tax system. If they take all of that windfall profit, all that big gain in one year, then it's going to increase their tax rates, and oftentimes if it's a physical thing like a car they got, or even if it's money they spend it all and they don't realize the tax bill. That's also why you might end up with situations where if they give you an annuity or if they can pay it out over a long period of time into the future or have a lump sum today, there's a couple things to take into consideration. One is the time value of money. So obviously a lump sum today is worth more than an annuity if they were for the same total dollar but also there's a tax implication because if you get this big hit in one tax year, then your taxable rates will go up as well whereas if you were to get less money over a longer period of time, then you might have lower tax brackets. But in any case, tip. Attach forms W2G to form 1040 or 1040 SR if any federal income tax was withheld. So note that's another thing that if you got like winnings like a lottery or something and you got a W2G reporting those winnings, you might want to have withholdings out of the winnings. Most people don't do that oftentimes because they're not really thinking of taxes because taxes is one of those things that's kind of in the back of most people's minds that's just being taken care of with their employee or situation. The employer is responsible for my taxes, right? But obviously if you have a win full profit or gains of some kind of big hit like a win in the lottery, that's going to have a tax implication you might want to withhold on it. Line 8C, cancellation of debt. So enter on line 8C, any cancellation of debt, canceled debt may be shown in box two of form 1099C. However, part or all of your income from cancellation of debt may be non-taxable. You can see publication 4681 or go to irs.gov and enter canceled debt for closure in the search box. Now cancellation of debt is a strange one because most of the time you'd say, well, why would someone cancel the debt? Like if I had a debt with the bank, like mortgage for example, I owed them a loan back, then it would be strange for them to cancel the debt, right? If they canceled the debt, you would think that they would do that only because they didn't think that they were going to get paid from us. So they're going to cancel the debt. Well generally, you would call it income, right? Like because that would be the equivalent if they canceled the debt of them giving you money and then you paying it back to them to pay down the debt. So you basically kind of got money that paid down your debt obligations that are owed, which would be a taxable event. Now the issue thing there is that most of the time when there's a cancellation of debt issue, it's because someone is in a financial hardship situation, that's what drove the bank to cancel the debt because they knew they weren't going to get paid anyways. So then you've got a situation where maybe the tax code will be lenient in certain situations and we saw some with the COVID. The PPP loans is a strange situation with the cancellation of debt kind of situation that was going on with that. And then if people are in insolvent situations, there could be areas where the normal kind of income from the cancellation of debt would possibly not have to be included as income. So there could be exceptions to the general rule. So the general rule makes sense. If someone cancels the debt, you owed them money. Now they say that you don't owe them money. Then they basically gave you money, right? That you got income and like paid off the debt. So it should be income. But because most people are in financial hardships, there could be many exceptions for the IRS to say that that income is exempt from income for whatever reasons. Line 8D, foreign-earned income exclusion and housing inclusion from form 2555. Enter the amount of your foreign-earned income and housing inclusion from form 2555, line 45. Now obviously when you get into foreign, people that have foreign income, it gets a little bit confusing because depending on where the foreign income is coming from, there's going to be agreements of course between the IRS and possibly other countries so that you don't end up with like an unfair kind of double-taxing type of situation. And that is also kind of a specialty area. If you are doing taxes, then do you want to be working on taxes that are going to be more complex in the area possibly of people that have income from multiple places, multiple states, makes it a little bit more complicated as well as multiple countries make things more complicated or do you want to specialize if you're doing taxes on more places for a single location, possibly specialized in a certain state and or a certain country which would make things a little bit easier. Possibly, you know, you could find tax authority that might be a little bit cheaper if it doesn't have to deal with like rules for multiple states and multiple countries and whatnot. And so that's just something to keep in mind or you might specialize like by industry and that kind of stuff. So, which again, the industry codes or the tendencies of businesses within different states even might be different given the rules for different states as well. So in any case, enter the amount of the pre-printed parentheses as a negative number. The amount from form 2555 line 45 will be subtracted from the other amounts of income listed on lines 8A through 8C and lines 8E through 8Z complete the foreign-earned income tax worksheet if you enter an amount on form 2555 line 45 foreign-earned income exclusion and housing exclusion from form 2555. So you might look at that form and the instructions for that if you want to dive down into more detail with it. Line 8E income from form 8853 enter online 8E the total of the amounts from form 8853 lines 812 and 26 you could see publication 969 for more detail there on the IRS website of course caution. You may have to pay an additional tax if you've received a taxable distribution from an Archer MSA or Medicare Advantage MSA so another kind of specialty area we might touch on a little bit more in future presentations but you could see the instructions for form 8853 for more detail there. Line 8F income from form 8889 enter online 8F the total of the amounts from form 8889 line 19 to 20. So again, we might be able to look at the instructions if you want to dive down on that more of the form 8889 caution. You may have to pay an additional tax if you received a taxable distribution from a health savings account you can see instructions for form 8889 for more detail there. Line 8H jury duty pay also see instructions for line 24A so there's different kind of rules on the jury duty if you got reimbursed and what not and all that kind of stuff usually it's a fairly small amount that someone's going to get paid for jury duty so it's not usually like a really material tax different often times for most people but depending on the earnings it could be so line 8I prizes and awards enter prizes and awards but see the instructions for line 8M Olympic and Paralympic medals and USOC prize money later so this is similar to the winnings kind of thing now you've got money you've received prizes and awards for something that was done and again from the IRS perspective if you've got a prize or award everything is basically income unless they say otherwise and if you would think if you earned the prize then you would think it would be kind of like earned income for the most part unless there's some kind of exception related to it line 8J activity not entered in for profit income so it's not a for you entered into an activity that's not for profit so remember we talked before about the idea that if it is a for profit thing if then you're going to want to have to put it on the schedule C or something like that because if it's business income you have to pay Social Security and Medicare so that's a big deal because that's a big difference whereas if it's not a for profit activity then possibly you can put the income somewhere on the other income section and that's where it's usually not going to be subject you're not going to be calculating the Social Security and Medicare on it often times so line 8K stock options enter on line 8K any income from the excess of stock options not otherwise reported on form 1040 or 1040 SR line 1H line 8I income from the rental of personal property if you engaged in the rental for profit but we're not in the business of renting such profit or property you can also see the instructions for more detail on that on line 24V later you got line 8M Olympic and Paralympic medals and USOC prize money the value of Olympic and Paralympic medals and the amount of United States Olympic committee USOC prize money you receive on account of your participation in the Olympic or Paralympic Games may be non-taxable so I haven't personally had a situation where I had a client that was good enough of an athlete to do that but if you do if you find one or yourself are that good then you might have a tax exemption benefit from it so these amounts should be reported to you in box 3 of form 1099 Miscellaneous to see if these amounts are taxable first figure your adjustment gross income including the amounts of your medals and prize money so I think that's good because we need to be number one in the Olympics and Paralympics and everything so whatever here we go if your adjustment gross income is not more than $1 million $500,000 if married filing separately these amounts are non-taxable and you should include the amount in box 3 of form 1099 Miscellaneous online 8M then subtract it by including it online 24C so you've got this similar kind of situation where you're gonna say okay now you've got a form saying that you've got income if it's exempt from income you're gonna show it to the IRS on the line and then subtract it telling the IRS there's an exemption happening and this is a common practice even though this situation might not show up itself it's a common kind of concept to do that you've got the tax form the IRS has the tax form you wanna make sure that your number ties in to what the IRS has if you plan on reporting income less than what the 1099 reported and then possibly subtract out and give the rationale as to why you're subtracting out so the IRS can tie their form into the top line