 Income tax 2022-2023. Income tax formula example using tax forms and tax software. Let's do some wealth preservation with tax preparation. Here we are in our example form 1040. We're currently using LASERT tax software. You don't need tax software to follow along but if you have access to it it's a great tool to run different scenarios with. You can also get access to the form 1040 related forms and schedules at the IRS website irs.gov irs.gov so we're going to start with our standard scenario with the single-filer. We've got the name up top Mr. Anderson and the address up top and we're going to be focusing down mainly on the income equation components down below comparing and contrasting it to what we saw with the formula. So recall the tools that we have in order to do tax law and tax preparation. We've got the formula format. We've got the actual tax forms themselves and the software. So we use the formulas over here in order to help us to visualize. This is what you probably have kind of more in your head when you're trying to visualize what's going to 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 happen as you do data input into the system or contemplate the different scenarios when you're discussing something with a client. And then of course we're often going to use the tax software in practice to do the actual data input. So we'll do the data input not manually inputting it into the forms and reading each line item of the forms oftentimes but rather doing the data input in the tax software jumping to the forms and seeing if the forms are then populating in a way that we visualized would be populated possibly using tax software to jump to like a summary form which gives us a quick view of that kind of quick view of the formula type of format actually within the software. So we're going to we also want to think about when we might use the software versus a formula obviously when you're conceptualizing something then you're going to conceptualize something in formula format in your mind. I also use a tax formula format in Excel to kind of recalculate items separately from the tax software to help justify or verify the data input that has gone into the tax software. So in other words if I do the tax software then the software helps me to do the calculations but if I then enter the data again from the source documents into Excel it often helps me to better understand what's happening so I can communicate it to a client and it helps me to double check the information because it's quite easy to have a miskey with taxation and it's more difficult to have a miskey or you have more internal controls with bookkeeping due to the double entry accounting system. This is something when I learned taxes coming from an accounting world was frustrating to me because the whole reason I kind of liked the accounting system is that you have the double entry accounting system helping you with that double check. You don't have that kind of thing and therefore you have to input your own kind of internal controls to make sure that you're getting things right when you do the data input into the tax return. The tax formula helps in that as well. So we will actually build this worksheet in future presentations. I think that's also a great exercise to better understand the structure of this and also to try to build something that you can use in alignment with your data input practice as well when you're actually doing tax preparation but let's just get a feel for each line here. So we've got the income, the adjustments to income, there's our AGI then we take the greater of the itemized or standard deductions and then I'll get into a qualified business income kind of muddies the water. We'll talk about that later a bit and then we've got the taxable income and then the rate is applied and this is going to be the tax calculation and then we've got a tax credits, other taxes, the total tax and then the payments and refundable credits. So notice when I construct this Excel formula, we'll actually use these one line item items and then we'll put everything else on another schedule, which is I would think the ideal way to create the tax return if it was created from scratch today, it hasn't been they've been hodgepodge in the tax return together since it's been in inception, right? That's why it's kind of messy. Okay, so if I go back on over here, there's going to be an impact up top whether the filing status is single, married filing joint, married filing separate. And so we'll talk about that impact a bit as we get down below but it's going to have an impact on the standard deduction and the tax calculations that will be put in place. We've got the name and the address of course being important. We've got then down here the main thing being the dependence. So dependence are going to have an impact possibly on child tax credit, other dependent credits and so on as well could have an impact on the tax brackets depending on if you're head of household versus single. We'll talk more about that in future presentations. The income line item in our tax formula over here. We just put as one line item. Notice in the tax return, they've got this whole first page dedicated to income. So and they have other other schedules as well over here that will look into a schedule one additional income adjustments and income. Again, if you built this from scratch, you would think they would put everything on schedule one and just have like one line maybe on the form 1040 to make it more like a streamlined system as you might build in like an Excel thing. But they didn't do that because in the past, they wanted to have as few forms as possible. Multiple forms aren't as much of a problem these days because it's only done online. So that's you know, that's just what happens. So the form W2 is oftentimes going to be the type of form that will be populated in many tax returns. I would put that in a different schedule over here on our formula. Here's the W2 form that's feeding into this first page, the 100,000. Now we have a whole bunch of other kinds of income that we could have tip income, Medicare, taxable dependent care employer provided adoption, wages, tax exempt interest interest dividends and so on. So obviously, a whole lot of different things feed into the income line. And we also could have things like business income, say on a schedule C, for example, and we can see that the schedule one here also has additional income lines and these then feed into the form 1040. So we'll dive more into that in future presentations and we'll build our Excel sheet to mirror that we finally get down to the total income down below. And then we got the adjustments to income. So these are kind of like the above the line deductions. Now you might not have any of those. Let's take a simple scenario and say that we don't that would then give us to the adjusted gross income of the 100,000. This being the line item that's going to be useful for us to calculate the phase outs on things like credits. So that's a very important number. You got the standard deduction or itemized deduction. So the standard deduction is populated over here with the general rules. So 12,950 for single basically doubled for married file enjoyed head of household in the middle. So we started here with the 12,950 populating automatically. That's not something we entered in the data. It's pulling that from mainly the filing status that we chose up here as the single filer. So that's going to be that and then if the itemized deductions were greater than that, then we would be itemizing that's usually higher income tax returns where that is the case. This qualified business income deduction was put in place a few years ago. It's a it's a kind of a really messy type of thing and we'll dive into that a little bit more when we get into the to the to the sole proprietors and self employment income and that kind of stuff. And then we've got the subtotal of the 12,950 and then we finally get to the taxable income of the 8750. So if I look at that in formula format, this 12,950 I'm pulling in from my worksheet down here by pulling it from the table that I put for standard married head of household and then some other adjustments in some cases that we'll talk more about later and that'll give us the taxable income so I can kind of recalculate it in my excel formula and then this average tax notice I'm looking at the average tax I'm not actually calculating it here because remember it's a progressive tax system. I would have to look up the tax on the tax tables in order to calculate the tax manually and it'll even get more complex than that if I have different kind of things involved such as dividend income possibly being taxed at a different rate capital gains income possibly being taxed at a different rate and so on. Therefore, I'm often going to be dependent on the tax software to then populate into my worksheet. So I'm going to say page two. I'm going to let the system do the calculations. I double check. I double verify that I recalculate this number eighty seven fifty and then I let the system calculate the fourteen seven seven four for the most part and then type that into here. So if I type in the one four seven seven four I can back into the average tax which would simply be that divided by the taxable income. So that's seventeen. I would expect to be on my tax summary where we have the average or effective tax at the seventeen. Same thing. Marginal tax bracket is the highest tax bracket right. So that's going to be on something I can kind of recalculate and then I can also on my sheet I can basically read data input the bottom half of the equation which is going to have to deal with the credits the other taxes and the payments that we're making. So we're not at the end of the day here. We've got we've got amounts from schedule two and three and we're going to add those up. We've got the child credit and then adding the amounts from schedule three and line eight. So these are the schedules on the left. We'll dive into those in more detail and finally you'll get down to the total tax and then you have the payments. So that usually includes mainly the federal income tax withheld and then finally you're going to get to the amounts you owe. So if I didn't have any any other stuff going on down here the amount would be the same except they added five thirty three of penalties because I was underpaid. So penalties five thirty three this plus this gets us to the fifteen three oh seven and there's the fifteen three oh seven. So we can kind of double check it that way. Now just to give us a little bit of variation on this if I adjusted some other stuff up top let's say I had interest income let's just add another income line item I'd say okay boom let's say that we have interest income of from the bank and bank one and it was it was seven thousand of interest income. Okay so I'm going to pull that over that would pull in then to this page on line one you possibly could have a schedule B if it's over a certain threshold but it's pulling over to the first page of the 1040 as well. I can mirror that on my formula I'm not going to put it on the face of the formula I'm going to have another schedule that feeds into it right so that I can have this first page just as a formula and I'm going to say let's go to the income line and just say that I have somewhere in the this is W2 income I have a schedule B here which I said what did I say 700 uh seven I said seven thousand seven thousand a lot of interest. So that then would pull into the first page now it's included in that 107 and I can match that over I can say okay does the 107 match here 107 ties out and then my 12 that ties out my 12950 has still tied out so that looks good that gets me to the to the 9450 so I could say okay yeah that looks right and then I'd have to recalculate the tax because I'm not going to do the tax calculation I'm going to let the system do that that's at the 16414 so I could say okay 16414 and that gives us to the 1750 average so I can say does that match the average tax 17.5 looks right and then the second half we go into the second half right and so then I can also if I so obviously the income line items can get quite complicated if I had an adjustment to the above adjustments to income the above the line that's in schedule one which is right here and so one of the big ones in here is often going to be the IRA payments so let's and I can actually jump from here to the data input form so let's look for the IRA actually this is the income I want line two I want line two or page two and then I'm going to go into the irid deduction which is line 20 and then you could oftentimes in software right click and jump to the data input and then I'll say I'll say it's the maximum so I'm just going to put a one there for the maximum and that'll put the max of 6000 now this form then is going to feed into the 1040 that looks a lot like how you might might put together an excel worksheet now that makes kind of sense right if you were to mirror that in excel I would say another schedule which is going to be deductions adjustments to income and then we've got an IRA which I put 6000 in an IRA this number then is going to feed into the first page here and that's going to give us then our 6000 adjustment to the 101 so now here I've adjusted this 101 that looks correct I still have the 12950 that's the same which changes this number to 8850 that looks correct 8850 my tax is now going to have changed from 16414 to whatever they calculate on page two 1414994 was it 14994 and then I could check my average taxes at 17 percent again and I can kind of double check that so if I go back on up and say okay that's there could be multiple line items in there that I can adjust for that gets us to our adjusted gross income then we have the standard or itemized deductions now if we switch to a married filer then I've switched over here to filing a joint so now I've got the same 100 000 but my standard deduction has now basically doubled I can mirror that on my software by saying this number I'm going to pull it from down here it's a 25 9 and so that should then populate there and so now we're at this 75 100 so so that gets us to the 75 100 the 29 there and then my tax of course would change again so I can say my tax is now at 8604 so 8604 on the tax 11.5 percent on the average rate so there is that so if I go back to the first page and so we'll get into this one later and that kind of verifies the tax now on page two then we could have a whole bunch of other credits and whatnot that will dive into in future presentations and we'll talk about when it might be useful to recalculate those credits in our formula and when it might be useful to depend to some degree on the software possibly to help you out with the credits because things like an earned income tax credit is quite complicated to recalculate without software so the question is how much recalculating how much double checking do I want to do to verify the data entry is correct and if the software is populating correctly and so that I can actually explain what is happening to like a client and not saying it was just magic that's what the tax that's what the software did right and so then but we would also have the withholdings typically so let's say I jump to the withholdings area and say oftentimes the withholdings let's say we're you know 15 000 on the withholding so I'm going to jump back on over so that's going to be on page two so there's the withholdings so if I jump back on over to my formula and if I was to populate the withholdings I would have another another area for payments which I'm going to say the withholdings I said 15 000 are going to pull into page one of our formula so there's the 15 and so I'm left with a refund of the six three nine six and if I populate that that should match what I have here six three nine six so you can see how these two things kind of work in tandem some people might not use an excel worksheet but they'll but they'll use this tax formula a lot instead of jumping to the actual tax form on the form 1040 to summarize when they're jumping back and forth but I think visualizing it and double and entering it again into excel is really a great exercise to kind of understand what's going on and to use in practice as like a double verification so that's what I would do to kind of help you with that data input problem and you might if you're working in a staff situation have say the staff enter this stuff into the tax return and then you double check it and you know someone could it could be part of a review process to put it into like an excel formula kind of to give you a better double check on on the data input or something like that or have them do it you can come up with what different systems for it but we will build an excel worksheet like this and then we'll kind of adjust it as we do data input in our practice problems moving forward