 Income tax 2021-2022. Other income, part number one. Get ready to get refunds to the max diving into income tax. 2021-2022. Income tax formula, line one income. First page of the form 1040. We're looking at line number eight. Other income from schedule one. Here is the schedule one looking at not line eight, which has other income broken out into the subcategories down below. The schedule one part one feeds back into as we saw the first page of the form 1040, line number eight. So we're going to back to the schedule one. We're looking at other income, which is fairly self-explanatory for many of the items because they kind of break out the items down below so you can go in and dive into them in more depth. If it's applicable to you, like the net operating loss, the gambling income, the cancellation of debt for an earned income, and so on and so forth. So we'll go into some of these in a bit more detail. So other income, do not report online eight A through eight Z. Any income from self-employment or fees received as a notary republic. So if you received income from like self-employment income, then typically you have your own business, you're self-employed. You usually report those on a schedule C. Now note that if you're reporting something on a schedule C, there's kind of like a double edged sword. As we say that there's some pros and cons to the schedule C. A big con, a big problem with the schedule C is that you might be subject to self-employment tax. So if you have income on the schedule C, you're not only possibly subject to the federal income tax, but you have self-employment tax, which can be a huge portion of the tax. On the plus side, you typically have expenses that you could deduct and you may actually have a loss with losses being good for taxes because you might be able to take them on other income. But if you have income, it would be nice if you didn't have to report on schedule C because it's more likely that you're not going to be required to pay not only the federal income taxes but the self-employment tax social security and Medicare. So instead, you must use schedule C if it's a business, even if you don't have any business expenses. So note, you might be saying, hey, look, I got this thing here. It's a business income. I don't have any business expenses. But if it's still a business income, you got to report it as income on the business income, possibly subject to self-employment tax, which is what you would not want to do because you'd like to report it somewhere else, but since you don't have any expenses, you would like not to report it as business income because you don't want to pay the self-employment tax. So also, don't report online 8A through 8C any non-employee compensation showing on form 1099 miscellaneous or 1099 NEC unless it isn't self-employment income such as income from a hobby or a sporadic activity. So the other form that usually indicates that you have self-employment income because remember how this works, the government tries to pressure the payer to issue some type of form to the person receiving the money because it's income to the person receiving it and that's where the IRS steps in and tries to get their portion of it. So if someone issues a 1099 to somebody else like a 1099 NEC, then that usually indicates to the IRS that that person has a business, has a business income and therefore would have to report it as income generally on a Schedule C and if they've reported on a Schedule C, they're usually subject to self-employment tax. Now, you might not be subject to self-employment tax if it doesn't qualify as a business. So for example, if you have a hobby, you're not doing what you're doing in order to try to generate profits. You might be generating a loss and you might not even been trying to generate profits. You just have some revenue, but you have more losses than revenue than it might be treated as a hobby in which case you might be able to put the income somewhere other than the Schedule C, possibly here as other income so that you will not be subject to the self-employment tax and just have to pay the income taxes on it in general. So instead, see the instructions for the recipient included on Form 1099 M, Miscellaneous or 1099 NEC to find out where to report that income. So you can look at the instructions IRS website for those if you want. Most likely Schedule C, unless an exception would be the form you'd be looking at. Form 1099 K may also include non-employee compensation. Don't report it on Line 8 for more information about what is being reported on Form 1099 K. See the instructions for payee included on that form and visit irs.gov forward slash gig. So if you got a 1099 K, it might be coming from the gig economy. Again, the IRS would most likely be assuming that if you have that form that you might be filling out at Form 1099 C unless there's some exception such as it being a hobby. So net operating loss, the NOL deduction. A net operating loss is something you're more likely to find when you're working with tax returns say that have business income say are recording a Schedule C type of business. Remember that if you're a tax preparer, then you want to set your goals and see where you're going to be focusing in on and you're focusing on returns that are possibly more complex in the form of having business components, in which case you might have to deal with some more complexities. For example, net operating losses and the tax implications with them and bookkeeping side of things, or are you going to be focusing more on items that don't have that components possibly recommending and building a network to recommend people to help out with those kind of components. So keeping that in mind, if you have a business income on Schedule C type of business, if you have income then the IRS of course is going to want to take a portion of the net income coming from the Schedule C. However, what happens if you have a loss? You would think the IRS doesn't want to basically subsidize a loss. They don't want to give money away if there's a loss. They just want to take the money if there's income. So the question is, if there's a loss, the IRS is going to be very skeptical. What do I get to do with the loss? If I have a loss in the current year like tax year 2021, can I take that loss and then apply it out against other income such as W2 income, lowering the amount of tax I owe? So that would be the loss that happens in the current year that I might be able to take and get a benefit from in the current year. But what if I have a loss that's greater than even my W2 income? Do I just lose that loss or possibly can I match it up to prior year or future year income, which you would think would be kind of reasonable because a lot of startup businesses take on a lot of risk and they might have losses up front and that's just normal. And so you would think that they would be able to match up that loss against income possibly in the future. Now there's carry back and carry forward rules. Generally there's more restrictions in terms of the carry back, which is kind of easier for tax preparers generally. So you might be able to carry forward possibly a loss as well. And if there's any kind of carry forward or carry forward kind of information between tax returns, it's really useful in those more complex returns to be using the same tax software, which will help you out with the calculation of those carry forward. So that's kind of the general idea. So enter online 8A, any NOL deduction from an earlier year. Enter the amount in the preprinted parentheses as a negative number. The amount of your deduction will be subtracted from the other amounts of income listed on lines 8B through 8ZC publication 536 for more details. So that publication can be found on the IRS website. Gambling income. Gambling income is interesting because you might see gambling income in basically any income level. And you might see some clients that are more consistent or have gambling income from year to year because they like to gamble and are more likely to then have gambling income. And other times you might just see gambling income randomly come up because people won some kind of thing and it's just a one time type of thing. So the general idea with the gambling income is you will usually get documentation. It's just like any other kind of income the government's going to be pressuring the payer. In this case, if it was a casino or something like that, if you make over a certain amount of winnings, they're going to pressure the payer to issue documentation, possibly a W2G to yourself and to the government so that they know the gambling winnings and you can have to report it then on your side. Usually fairly straightforward process as long as you know where to report it on the tax return, which we'll possibly take a look at in the following presentation. And you might have questions from people asking about, well, what about gambling losses? Because I spent a lot more money. If people gamble a lot, they might quite likely spend a lot more money than they make through the gambling winnings. You might be able to deduct the gambling losses. But even if you can, there are going to be Schedule A deductions, which would only be applicable if people were itemizing as opposed to taking the standard deduction. That's the general rule. Okay, so enter online 8B any gambling winnings. Gambling winnings include lotteries, raffles and lump sum payment from the sale of a right to receive future lottery payments, etc. For details on gambling losses, see instructions for Schedule A line 16. So we'll talk more about that when we get to the Schedule A. But the general rule is you're going to have severely limited losses, especially if you're not basically having the itemized deductions which are reported on the Schedule A. So attach forms W2G. So those are the forms that you'll typically be getting if you have gambling winnings over a certain amount that the government can force the payer to give you a form about it. To form 1040 or 1040 SR if any federal income tax was withheld. So if there's withholdings, they need to know what the withholdings are. And again, if your income was, if your winnings were substantial, then the Fed could possibly, you might have requirements that they require some portion of it to be withheld and pay the government in a similar way, similar way as kind of like W2 withholdings. Cancellation of, or you might have the option by the way of withholding some of it because if you get a lot of gambling winnings, if you won a lot somehow and you didn't have any withholdings, then you would have tax consequences on that, of course. So anyways, cancellation of debt. Enter online 8C. Any canceled debt? Cancelled debt may be shown online in box 2 of form 1099C. So canceled debt would be something like you have a bank, like if you had a loan that was taken out and for whatever reason you negotiated with the bank and said, hey, I'm not going to be able to pay that loan or something like that. And they said, okay, we're going to cancel some of the debt. Well, if they do that, they basically gave you free money at that point in time because you got the money and now you don't have to pay it back. So the IRS would say, well, that's income. So income would either be they gave you money or they relieved you of the debt, right? So now that you'll usually get the form just like normal, a form 1099C. And this is less likely or more unusual of a type of form that you will see. But if there was a canceled debt, you could possibly see it from time to time and you'd have to report possibly the income related to it. However, part or all of your income from cancellation of debt may be non-taxable. See publication 4681 or go to the IRS.gov to enter canceled debt or foreclosure in the search box. So oftentimes canceled debt happened in linking up with people that are having solvency problems. That's the reason the bank relieved the debt because they don't think they're going to get paid. And in those instances, you might be able to cancel the income or possibly not be able to report it in some instances. Foreign earned income exclusion or housing exclusion from form 2555. So these are going to be some items that is another area where you want to concentrate and think about where your tax practice. If you're doing a tax practice is focused, do you want to take on clients that are outside of the country, which could make it a little bit more complex to be dealing with income, foreign source income, and even out of different states. So if you're in a particular state and you know how the state is taxed, do you want to pick up tax returns that could have tax implications for multiple states? So enter the amount of your foreign earned income and housing exclusion from form 2555 line 45. Enter the amount in 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 AE through 8Z. So obviously, you could take a look at the instructions for form 2555. For more detail there, you can find those on the IRS website. Complete the foreign earned income tax worksheet if you enter an amount on form 2555 line 45. Taxable health savings account distribution. Enter the taxable amount of distributions from a health savings account HSA or an Archer MSA. So if you have questions or those items come up, you might get documentation to help you out with that. But if you have general questions on the health savings accounts, you can basically look at them up in more detail as well on the IRS website, irs.gov. Distributions from these accounts may be taxable. If A, they are more than the unreimbursed qualified medical expenses of the account holder in 2021 and B, they were not included in a qualified rollover. You can take a look at publication 969 for more detail about the HSA. You may have to pay an additional tax if you received a taxable distribution from an HSA or an Archer MSA. See the instructions for form 8889 for HSAs or the instructions for form 8853 for Archer MSAs. Again, you can find those on the IRS website irs.gov.