 and welcome to the session in which we would look at the income tax formula and I will give you an overview through the income tax formula for form 1040. Before I start I would like to remind you that if you are a CPA candidate I strongly suggest you check out my website farhat-lectures.com. If you are studying for your CPA exam I don't replace your becker, roger, gleam, or widely. I can be a useful addition to your CPA review course. I can add 10 to 15 points to your exam by explaining the material differently, explaining the material as if this is the first time you are looking at it. You can check out my website. Your risk is a monthly subscription. Your gain is potentially passing the CPA exam and if not for anything check out my website to determine how well is your university doing on the CPA exam. I do have other courses such as auditing, intermediate accounting, financial managerial cost, so on and so forth. Please connect with me on LinkedIn and check out my LinkedIn recommendation, what other students say about my system when they use my system. Like this recording, share it, connect with me on Instagram and Facebook. So this is the income tax formula. We start with income and we're going to have one whole chapter about income. Then from income we can deduct. We are permitted. Notice we can deduct certain things from our income. We're going to have a whole chapter about this. What can we deduct? Income, we're going to have a whole chapter about income. Then we're going to come up to taxable income, the income that's subject to taxes. Then we're going to apply a tax rate. Based on our taxable income, we're going to have to pay taxes. We're going to have a tax liability. Then from the tax liability, we are going to determine how much we already paid or how much credit do we have. Again, payments and credit. We're going to have a whole chapter explaining this. And let's work some numbers real quick. If we started with $100,000 of income, we are permitted to deduct $30,000. And don't worry, I'm just using numbers to illustrate the formula. Our taxable income is $70,000. Let's assume our tax rate just for the sake of illustration here is 10%. I'm using numbers. We're going to look exactly how we compute our tax liability. The tax liability is $7,000. And let's assume tax payments. We made tax payments and money would help from our W2 and tax credit. We have $8,000 worth of those. Therefore, we have a refund of $1,000. Simply put, we are responsible for $7,000. We overpaid, therefore, we get a refund. Let's assume we only paid $5,000. Then we have a tax due of $2,000. So this is basically an overall picture of the income tax formula. Now, Form 1040 will help you illustrate the same concept, but actually using the form. So when you look at Form 1040, you start by determining your filing status. And we're going to talk about the filing status. Later on, we have five filing status. So for the illustration of this example, again, we don't have to worry about how we come up with this. We're going to assume married filing jointly. Then you input your information, first name, last name, if they are joint returned or social security and addresses. Then what's going to happen is we're going to look at income. So notice here, we have total income from line one to line nine. You remember we said we start with income. This is the income. Now, what type of income would a taxpayer have? Well, the most common income in the US for most people, there are wages, notice line one, wages, salaries, tips, and they say attach Form W2. Form W2 is a form that your employer will send you by January of the following year. So for example, for 2020, January by January 2021, they'll have to send you this Form W2. On the Form W2, they will tell you how much you were paid. For example, this individual earned $52,700. Their federal income tax was held as $3,991. This is how much payment they made to the federal government. Wages subject to social security, $52,766. And we're going to learn more about wages subject to social security, wages subject to Medicare, how much social security tax was taking, how much Medicare tax was staking. And here we have the state, how much wages subject to the state income tax and the state income tax. Now, simply put, this individual made $52,776. So this number here will start to report this individual wages, $52,766. Then we have online two interests, taxable interests and tax exempt interest. Simply put, the interest, some of it, some interest could be tax exempt and we're going to learn about this later on. Tax exempt means it's not subject to taxation. Specifically, we're going to learn if it's a municipal bond. Well, if you earn interest, for example, if you have money in the bank or if you lend someone money, they're supposed to give you what's called a 1099 INT. And on that form, they will tell you how much interest income you have. For example, this individual has $372.33. Therefore, we report $372.33 in interest income. Line three, any dividend, if you own stocks, you could have qualified dividend, ordinary dividend, we'll discuss those later. If you have any IRA distribution, we'll talk about IRAs later on, individual retirement accounts, pension annuities, social security benefits, anything in addition will go here. Line seven, capital gains and capital losses, we're going to have a whole chapter about this, attached Schedule D. Line eight, it says other income from Schedule 1, Line 9. In other words, you might have other sources of income other than those, and those can be seen here. You could have a taxable refund, alimony received, business income. We'll talk about alimony later on, date of the original divorce, you have to worry about this later on. Rental income, farm income, unemployment or any other income. We'll talk about those later on. So if you have any other income, you will add them here, then you put them on Line 9 here, Line 8, then you add all of your income, and this will be your total income. This will be your total income. So we're done with total income. After total income, you could have adjustments. What are adjustments? Something that you can deduct, okay? Form Schedule 1, Line 22. Let's actually go back. Here are some of the adjustments. You could have educator expense, certain business expense, health savings account, movement expense. We're going to have a whole chapter explaining this alimony pay, penalty on early withdrawals, and each one of those will be discussed separately. For 2020, if you made any charitable contribution, you can list it here. Again, we'll talk about that later on. Then we're going to assume you don't have any adjustments basically for the illustration of this example. You don't have any adjustments. So we're going to put zero for adjustments, total adjustment zero. Then we're going to come to adjusted gross income or AGI. This number is important. It's going to appear again and again in many computation. First of all, let's compute total income. Total income is $53,138, $53,138 minus zero gives us adjusted gross income of $53,138. So this is our adjusted gross income. This number is important. Then we're going to deduct either the itemized deduction or the standard deduction. Again, for the purpose, this is the beginning of this course. We're going to assume we're going to be taking the standard deduction. And what's the standard deduction? It's a deduction given by the federal government based on your filing status. And for 2020, it happens to be $24,800. Basically, a deduction. You can deduct this just because you are filing merit filing jointly. Now, what is itemized deduction? We're going to talk about that later on in later chapter. Basically, you will take a bunch of deductions and you put them together. If they are more than $24,800, you want to take the higher. You will take the itemized deduction. Again, for the sake of this example, we're going to use the standard deduction. Now, if you're looking at this recording in 2021, 2022, 2023, the standard deduction will be different. It doesn't matter. It's the same thing, the same concept. You deduct your standard deduction. Then you will deduct any qualified business expense if any. We don't have any for our purposes. Add lines 12 and 13. It's $24,800. Again, we'll talk about qualified business income deduction later on. Taxable income will take $53,138 minus the deduction, which is going to give us $28,238. This is your taxable income. Remember, we said income minus the deduction will give us taxable income. This is the taxable income that we saw in the formula later on earlier. Now, we go to page two. On page two, you will have to compute your tax. Based on your taxable income of $28,338, we find out that your tax is $3,004. Don't worry. We're going to look at how we compute the tax in a separate recording. Amount from schedule two. We're going to ignore this for now. Adline 16 and 17, $3,004. Child tax credit. We're going to assume we have no child tax credit. Adline 19 and 20. There's not really much to add. Line 21, subtract line 21 from 18 of zero. Don't enter anything. There's zero. Other, line 22, I'm sorry, subtract line 21. Yeah, it's nothing. Yeah, line 21 is zero. Line 22, subtract line 21 from line 18. We still have $3,004 because we don't have anything on line 21. That's how much taxes we have to pay. Line 23, other taxes, including self-employment tax. We'll talk about that later. There is none. Adlines 22 and 23, still $3,004. Federal income tax with health, Form W2. Remember this individual here, they have $3,191.12. So we're going to put $3,191. Form 1099, we have nothing from Form 1099. Other forms, we have nothing from other forms. So this is how much taxes you actually paid. Add them all up, $3,091. Now, here you have, if you have any sorts of credits, any payments or credits, remember you have to deduct payments and credits and we're going to assume we have no credits to reduce our taxes for the purpose of this example. Credits are zero. Now what we're going to have to do and add lines 25d, 26, and 32, we really have no credits here. Again, we have no credits. Now we have to compare for line 34, if line 33 is more than line 24, line 33, which is we don't have anything on line 33, is more than line 24, it's not, it's not, it's not, if line 33 is more than line 24, subtract line 24 from 33, this is the amount you overpaid. Well, simply put, you overpaid if we, 33,0, actually 33 should be total payment, sorry, total payment is $3,091. This is what, this is your total payment because we have to include 25d. Yes, you did pay, you overpay of $187, simply put, this is the, this is exactly what we saw. So simply put, the income for this individual, if we want to show you, show you the actual formula, the income was $52,000, I'm sorry, the total income was wages plus interest was $53,138. That was the wages and the income, we said we have minus zero deduction for the purpose of this example. The taxable income was $53,138 and the tax was, the tax amount was $3,004. Now this individual had paid $3,191, $3,191 in taxes, payments of $3,191, this individual overpaid $187, $187. Simply put, if you want to, you can either say I would like to apply this $187 for my next year or I would like to have a refund and you can have a direct deposit and get your money. So this is basically the 1040 in a nutshell. Now, bear in mind, we're going to go over through each line, like you're going to have to understand what goes on each line separately later on. We're going to have to examine each of these lines, even the wages, we have to go into the wages and learn more about the wages. We're going to have to learn more about these adjustments, which is they are on this page right here, these adjustments here, we're going to have to learn about these adjustments. We're going to learn about this income, but this is basically an overview of Form 1040. In the next session, I'm going to show you how to compute your tax liability, how we came up with this number. I just gave you the number, $3,004. So I'll show you how you compute your tax liability. Once again, at the end of this recording, I would like to remind you that if you are an accounting student or a CPA candidate, but specifically if you're a CPA candidate, to check out my website, farhatlectures.com. If you're an accounting student, I do have an income tax course. It will help you. It will help you study hard, stay safe, and good luck.