 Income Tax 2021-2022, Tax Income Overview, PPP Loans, Foreign Source Income, Bankruptcy Cases, and Community Property States. Get ready to get refunds to the max. Dive in into Income Tax 2021-2022. Most of this information can be found in the Form 1040 Instructions Tax Year 2021 found on the IRS website, irs.gov, irs.gov. We're looking at the tax equation, the income tax equation, focusing in on that first line of income. Now note when we're looking at the income tax equation, it's deceptively simple because when we're thinking about the income tax line, there are multiple things that could be included in that line. So we're going to imagine expanding on it as we will see when we go to our Excel worksheet, as we will see when we go into the Form 1040, which is kind of like the first sheet, which all the other schedules and forms will feed into and we'll think about all the things that are included that feed into this income line, things like W-2 income, things like Schedule C or business income, things like the Schedule E and so on, so forth, Schedule D and so on. So we'll get into those in future presentations. Note that the primary area where you're thinking about income being reported is the first page of the Form 1040, which looks like this. We got Line 1, which is the most common form of income that being the wages, but we have all these other forms of income that could be fold in to this first page of the 1040 and we have a bunch of other sub-schedules that then could be pulled in to the income line. So there's a lot going on with the income line. And when we're thinking about income, and this is the Schedule 1, by the way, where we have additional income and adjustments that can then feed into the first page of the 1040. So this is just one added schedule with other income line items that will feed into Page 1. Now when you're thinking about income and the income tax equation, remember that it's completely on its head. It's reversed to what you would normally think of when you're thinking about financial accounting, which is normally you want to look good. You want to earn revenue and you want to have minimal expenses so that your net income is high. For taxes, that's all flipped on its head, which is kind of some of the problems with the taxes. There's a disincentive with taxes to some degree because for taxes, you want it to be the opposite. You want your income to be low. You want to look bad and you want your expenses, or in other words, deductions typically to be high because that would lower your income, which for taxes would mean if it's an income tax, you're going to be paying less tax. So when you're thinking about the income line item, ideally what you would like to have is income that you actually earned but income that you don't have to report in taxable income because you're legally not required to. So in general, when you're thinking about income then, is that the IRS general rule is everything that is basically kind of a receipt of some kind should be income unless the IRS says otherwise. So if you're getting something that you think is going to be income, the general rule for the IRS is to catch all rule. Everything's basically income as opposed to unless the IRS specifically says that it's not income. That's kind of the position that they're going to try to hold or try to take here. So it's a very broad definition in that case. Generally, you must report all income except income that is exempt from tax by law. For details, see the following instructions and the Schedule 1 instructions, especially the instructions for lines 1 through 7 and Schedule 1 lines 1 through 8 Z, also see publication 525. Now also note that the income line item is one of those areas where the IRS is going to be pressuring most likely the payer to try to give the information to the IRS so that they can have a double check, some verification on the income that's going to other people. So for example, the most common example is the W-2 type form. The IRS is going to be requiring employers to not only give you as an employee a W-2 form, but also the IRS 1099 forms are going to be a similar kind of situation. We'll talk more about those in the future. But the fact that you get a form or that you don't get a form, for example, doesn't mean that you do not have an income reporting requirement. It's quite possible you don't get a form for some type of income and you still are supposed to report it because basically the IRS is saying you got to report anything that could be basically income or fall into the category unless they say specifically otherwise and then they go on top of that and try to pressure the payer because that's where the leverage is at to issue the forms to the IRS so the IRS can verify that income is being reported like W-2 forms like 1099 forms and so on. We'll talk more about that in future presentations, but for now forgiveness of the Paycheck Protection Program PPP loans. These were loans that went out in response to the pandemic. If people qualify typically this is going to be a business related item. There was a bunch of questions when the laws were rolling out with regards to them because there was a forgiveness conditions of certain conditions were met. You didn't need to pay back the Paycheck Protection Program loans and if normally a bank forgives the loan, that looks like income because you basically got free money at that point in time. You took out a loan, the bank's saying you don't need to pay them back. Well then is that going to be income? So the questions related to the Paycheck Protection Program forgiveness come down to well is it going to be income? Is it going to have a tax implication? Do we have reporting implications related to it? And if I have to report the income, when do we report it as income? Because obviously when I got the loan I had not yet met the conditions. So do I report it as income when the conditions are met? Or do I report it as income when the bank officially basically says that they forgive the Paycheck Protection Program loans? So those were some questions that they were dealing with as they rolled out kind of this new law, this new policy. So the forgiveness of a PPP loan create tax-exempt income. So it creates tax-exempt income. So although you don't need to report the income from the forgiveness of your PPP loan on Form 1040 or 1040 SR, you do need to report certain information related to your PPP loan. Rev procedure 2021-48, 2021-49 IRB 835 permits taxpayers to treat tax-exempt income resulting from the forgiveness of PPP loan as received or accrued. One, as and to the extent that eligible expenses are paid or incurred. Two, when you apply for forgiveness of the PPP loan. So that was kind of one of the conditions, right? You had to basically get the loan, you got to spend the money in accordance with what they wanted it to be spent with and then tell the bank that that's how you spent the money in order to see if you qualify for the forgiveness. And then three, when forgiveness of the PPP loan is granted. If you have tax-exempt income resulting from forgiveness of a PPP loan, attach a statement to your return reporting each taxable year for which you are applying revenue procedure 2021-48 and which section of revenue procedure 2021-48 you are applying either section 3.012 or 3. Any statement should include the following information for each PPP loan. One, your name, address, ITIN or Social Security Number. Two, a statement that you are applying or applied section 3.0112 or 3 of revenue procedure 2021-48 and for what taxable year 2020 or 2021 as applicable. And that's where the kind of cutoff information is going to be relevant in terms of when this took place. Three, the amount of tax-exempt income from forgiveness of the PPP loan that you are treating as received or accrued for what taxable year 2020 or 2021. And four, whether forgiveness of the PPP loan has been granted as of the date you file your return. So that, again, special kind of case here with the PPP loans, if it's something that applies, typically a business-related item might be something that would apply in that instance. Foreign source income, so another kind of confusing topic with regards to income, generally foreign source income, you must report unearned income such as interest, dividends and pensions from sources outside the United States unless exempt by law or a tax treaty. You must also report earned income such as wages and tips from sources outside the United States. If you worked abroad, you may be able to exclude part or all of your foreign-earned income for details. You can see publication 54 and form 2555. So if that applies to you, then those publications typically can be found on the IRS website, irs.gov, irs.gov, publication 54, form 2555, foreign retirement plans. If you were a beneficiary of a foreign retirement plan, you may have to report the undistributed income earned in your plan. However, if you were the beneficiary of a Canadian registered retirement plan, seize revenue procedure 2014-55, 2014-44, IRB 753, available at irs.gov to find out if you can elect to defer tax on the undistributed income, reported distributions from the foreign pension plans, online 5A and 5B. Foreign accounts and trusts. You must complete Part 3 of Schedule B if you had a foreign account or received a distribution from or were a grantor of or a transferor to a foreign trust, foreign financial assets. If you had foreign financial assets in 2021, you may have to file Form 8, 9, 3, 8, C Form 8, 9, 3, 8, and its instructions. You can find that on the IRS website and then Chapter 11 bankruptcy cases. If you are a debtor in a Chapter 11 bankruptcy case income taxable to the bankruptcy estate and reported on the estate's income tax returns includes earnings from services you performed after the beginning of the case, both wages and self-employment income and income from property described in Section 541 of Title 11 of the U.S. Code that you either owned when the case began or that you acquired after the case began and before the case was closed, dismissed or converted to a case under a different chapter. Because this income is taxable to the estate, don't include this income on your own individual income tax return. The only exception is for purposes of figuring your self-employment tax. For that purpose, you must take into account all your self-employment income for the year from services performed both before and after the beginning of the case. Also, you or the trustee if one is appointed must allocate between you and the bankruptcy estate the wages, salary or other compensation and withheld income tax reported to you on form W-2. A similar allocation is required for income and withhold income withheld income tax reported to you on form 1099. You must also include a statement that indicates you filed a Chapter 11 case and that explains how income and withheld income tax reported to you on form W-2 and 1099 are allocated between you and the estate. So obviously this would be somewhat of a special type of situation but there's unfortunately more of these Chapter 11 bankruptcies or bankruptcies in general due to the problems that were happening for COVID. So four more details include acceptable allocations four more details including acceptable allocation methods you can see notice 2006-83-2006-40 IRB 596 it's available on the IRS website. Then we have the community property states this is going to become more and more important especially if you're a married filing joint or possibly thinking about married filing separate then you might have different kind of circumstances in terms of the state that you're in whether it be community property state or not so this is going to be something you want to be aware of. Community property states include Arizona, California, Idaho, Louisiana, Nevada New Mexico, Texas, Washington and Wisconsin if you or your spouse lived in a community property state you must usually follow state law to determine what is community income and what is separate income for details you can see form 8958 and publication 555. Again that comes into play a lot of times you've got married filing joint and then you're trying to basically file a separate return possibly married filing separate and if you're looking how to do that up then you want to make sure you're taking into consideration the regulations in conformity with the state that you're in whether it be a community property or not so we got Nevada, Washington and California domestic partners a registered domestic partner in Nevada, Washington or California must generally report half the combined community income of the individual as his or her domestic partner see form 8958 and publication 555 for more details there.