 Income tax 2023-2024, alimony and IRA, IRA, deduction, tax software example. Get ready and some coffee because we're laying down the facts about income tax preparation 2023-2024. First, a word from our sponsor. Yeah, actually we're sponsoring ourselves on this one because apparently the merchandisers, they don't want to be seen with us. But that's okay whatever because our merchandise is better than their stupid stuff anyways. Like our trust me, I'm an accountant product line. It's paramount that you let people know that you're an accountant because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep complex and nuanced questions. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com Here we are in our Form 1040 example problem using LASERT tax software. You don't need tax software to follow along but if you have access to tax software, it's a great tool to run scenarios with. You can also get access to forms, schedules, instructions at the IRS website, irs.gov, irs.gov. Starting with our normal starting point. We've got Adam Taxman just trying to avoid a dang Taxman living at Beverly Hills 90210. Single filer, no dependence starting off with the assumption of W-2 income 100,000. Standard deduction 13,850 to get to the taxable income 86,150 which we can mirror on our income tax formula 100,000 standard deduction 13,850,86,150 taxable income tax calculated by the software 14,266 which we can see on page two of the Form 1040. Okay, let's go back to page one, scroll down to the adjustments to income. This is coming from line 20, I'm sorry, line 26 of schedule one. So let's go to the schedule one, which is the additional income and adjustments to income. We want the adjustments to income therefore page two, which is part two, adjustments to income. We're looking at the alimony paid and IRA deductions. Now I'll go over the alimony paid quickly because we saw it on the income side of things. So when we thought about income, we had the question of can we or do we have to include alimony and income. And we talked about the fact that there's going to be symmetry with regards to the payments in a similar way as you see with other types of payments like W2 wages, for example, in which case the person paying or the employer paying the wages wants a deduction. Therefore they're going to record the deduction but then write out who they gave the money to with the form W2 as well as in that case give withholdings. And so so that the person that receives the money has to report it as income because if they don't, the iris will of course know about it because they have the W2 in that case they have the money because it was withheld. 1099 same kind of situation where the person paying the money wants the deduction. Therefore they're going to reduce it on their side and give the 1099 not only to the recipient but also to the government so that the person receiving the money has to report it. Otherwise the government might come after them. Same thing happens if alimony was something deductible to the payer. You have a divorced situation in theory, right? And then one spouse is paying the other spouse. If the spouse that is making the payment gets a deduction like in a 1099 situation, they would have to rat out the spouse that's receiving the money, putting the social security number on the tax return, and then you also have the date of the agreement because if it's an old agreement or divorce that happened before the cutoff date, then that's when you might be able to deduct it. And that means that the recipient would have to include it in income because if they didn't, you'd have a similar situation like a 1099 that was sent out for somebody that didn't include it in their income. The IRS would most likely see that. So the symmetry here is this one, alimony, this is on the payer side, and then on the recipient side they would have to include it in income. Now we're the payer this time, so we're saying can we deduct it? Note that typically it used to be you had to kind of come up with in the divorce agreement and you had sneaky lawyers of course that would manipulate the tax consequences so the complexity obviously benefits the lawyers, right? So then you had to differentiate between the child support and the alimony because there was different tax consequences between them. Now they tried to simplify that and take the tax consequences out so that you didn't really have this difference between the payments between child support and alimony which probably makes the creation of the agreement easier. So this whole deduction is there prior to then that adjustment. So if you're going to take the deduction you would say the recipient's name, Jane, last name, Smith, Social Security number, you've got to give them the Social Security number, and then the amount if we paid $1,000 and then we want the agreement date. So I'm going to say if it was before the cutoff date, let's say it was on, I think the cutoff date is December 31st, 2018. So I'm going to say it was on 01, 01, let's say, hold on a second, 01, 01, 17, 2017. And so I'm going to say okay. And then if I go back on over then we're going to say all right now we have the deduction here. We've ratted out the other the spouse and we have the date there. And so we're taking the deduction that's going to add up down below. We're going to go then to the form 1040 and there's our 100,000. We get to deduct the 1000 getting us to the 99,000. There's the 13850 standard deduction has not changed bringing us to the 85, 150. Now on the spouses side, what would happen if I go to the schedule, they would be on the schedule one for additional income and they would have to report the alimony as income. So that would be bad for the recipient because they'd have to include it in income, which is usually bad and good for the payer because they get the deduction. But really if you get to make the agreement before without having this in play, meaning in the simplified method that has been put in place after December 31st, then the divorce agreement will reflect the tax consequences you would think and you would just be able to make a more simple agreement with everybody being able to understand a little bit better because they don't need to be a tax expert to basically figure out what's actually happening with the agreement. So I think it's actually going to be beneficial on both sides because now they can come up, both sides will have better information to make a better choice about what the fair terms would be. But that is that. All right, let's go to the IRA. I'm going to go back on over and say let's delete this one. And so I'll say delete it. And so the general rule would be if it was an old agreement that took place, then you might still keep having this. If it was a fairly new divorce agreement that came into play, then you take into consideration the new rules. Okay, now let's talk about the IRA. So the IRA is an interesting one, which seems kind of straightforward and easy, but actually can be fairly complex given basically different scenarios. So let's first thing to note is an IRA deduction is something as a tax preparer. You're probably going to be dealing with no matter what type of client tell you have more well off versus less well off. And it's one of those tax planning things that you can do even at the tax preparation time, which is unusual because most tax planning things are stuff that has to be done before the end of the year. So in other words, if I go to the form 1040, if I'm doing taxes for 2023, if I want to change the client's behavior to benefit their taxes, usually I have to convince them to do something before the end of the tax year of 2023, even though we're actually filing the return if it's before the extension date by April 15th of 2024. But with the IRA, we have up until the filing point of the tax return, not including extensions April 15th of 2024 to do some last minute planning, which might include investing in an IRA. So that's great because no matter where we stand, we can do the taxes and then see if there's a maximum or some amount that we can still put into an IRA. Many softwares have an analysis type of thing, which will help people with this kind of calculation. So in LASERT, it's here. So you can see here what I have thus far. In 2023, taxpayer could have contributed 6,500 to an IRA with estimated tax savings of 1,430. All taxpayers could have contributed 6,500 to a Roth. As Roth, assuming no other changes, contributions can be made up until April 15th. That's great tool to have. You have to make sure the data input has been properly input to see that that has been populated properly, which we'll take a look at in a second. But that allows you to say, hey, let's do the tax return. Let's get it done before the extension date. And let's see if we have any last minute IRA contributions that you can make. Now, when people ask you general questions about an IRA, then the general idea is going to be, well, if you have access to like a 401K plan, which would be through a W-2 employee, in other words, if I go to my data input W-2 wages, if on the W-2 form you have the checkbox indicating that they have access to a retirement plan, even if they haven't really contributed to it, if they have access to it, then that might limit their capacity to put money into an IRA. And typically it is beneficial to put the money into the retirement plan through the employer as opposed to an IRA because you can usually put a whole lot more money into those plans than you could with an IRA and you might get matching along with it, the employer putting money into it as well. However, if it's a 401K plan through the employer, I don't have the capacity to basically say, okay, let's do your taxes and then see if you have any money left over to put into your 401K plan for 2023 when I did your taxes sometime before April 15th of 2024, right, because the year has ended. So I can't go back and adjust your withholdings for payroll back before the year had ended. So with the 401K plan, you have to make the planning upfront to try to max out the withholdings that are taken out if you have the cash flow to do it, right, whereas the IRA is something that you might be able to do afterwards. Now, even if you're spouse, if you're married and your spouse has access to a retirement plan, that could possibly impact the IRAs in a married situation, the capacity or ability to put money into an IRA in that situation. So in those cases, the basic idea would be, hey, look, you might still be able to put money into an IRA. It kind of depends on your income circumstances. If you have high income, it's likely you won't be able to because you had the capacity to put money into a 401K or a 403B. And if you were able to double up those things, that would be kind of excessive taking advantage of the tax code. That's the general idea. Now, if you don't have access to a retirement plan, this thing is not checked, then you don't have access to it, even though you are a W-2 employee because your employer doesn't have a 401K plan set up or anything, then you would think you would be able to put money into an IRA for the most part and put the maximum contribution into the IRA 6,500 or possibly if you're over the 57,500 would be the general idea. Now, if you don't have W-2 wages and you get your money instead from a Schedule C, for example, or some kind of pass-through entity like an S-Corporation or a partnership, then you would have your income reported on the Schedule C. And if you don't have any retirement plan with the Schedule C, then again, you would think that you would have the capacity to put money into an IRA. However, you might say, hey, look, I'm limited to only 6,500 to put money into an IRA. Whereas if I had a 401K plan, I could put way more than that in usually, then what can I do to put more money in? Could I set up my own type of 401K plan for the Schedule C? Well, you could, but it's typically easier to set up a simple or a SEP. So these types of plans, if they're a Schedule C type of business, basically could kind of replace the money that you would be putting into an IRA if you have self-employment income and not the capacity to put money into an employer plan of a 401K plan. So, and for the SEP, for example, might give you that same capacity, which is great for a small business of actually being able to do the taxes first and then figure out how much money you can max out to put into the SEP after you do the taxes. And I think you can even do that after extensions, including extensions. So make sure you understand that the rules, I'm not one to get into the details of the SEP and the simple right now. But the general idea is that if you have these set up, the reason you set them up is because you're going to basically have that for sole proprietorship as opposed to the IRA, typically because you can put more money into them and therefore get more tax benefit. Now also note that all of these plans typically favor more wealthy individuals. These are things that high income individuals often are pushing for because although the argument is that they're trying to get everybody to save for retirement, the reality of the situation is you can only put, take advantage of these tax benefits if you have cash flow, if you have excess money that you're not spending on current necessities so that you can then put the money into an IRA and then get the tax benefit from the IRA or if you're talking about a SEP and these plans, you're putting tens of thousand dollars into these plans, you've got to have the cash flow basically generally to be able to do that. So that's going to be of course the detrimental factor for many people. Do you have the money to put in? So when you're doing the tax planning, you're going to be wanting to think if you have a SEP or something like that, you save up some money so that we can do that last minute tax planning if you can with an IRA, same thing. If you haven't put money into a 401K plan or something or even if you have, try to save up a little bit of money so that we can do that last bit of tax planning and see if you can still put money into an IRA. Okay, so let's jump on over and let's say that they did not have access to a retirement plan. Well, I could max out the IRA by putting a 1 here for example and that would pull in the max in this case of the 6,500 and then I'm going to say that pulls down to the bottom, goes into the form 1040, 100,000 minus the 6,500 brings us to the 93,500, 13,850 standard deduction, 79,650 of the taxable income. I can mirror that over here in my worksheet making adjustments to income and I'll just say we have an IRA. Let's do another one here and say we have IRA and there could be two of these because they could be a married couple. So I'll make this black and white and then I'll say I'll give it two blue cells here for the data input and then I'll say the first one was 6,500 which was the max. You might put the max over here, max and then over I think 50 is the age. If they're over 50 is 6,500 to 7,500 just so you have that you could say okay this is the max of the 6,500 total IRA we'll sum that up here and then we'll put some boxes around that too maybe. Sum it up, sum it up little darling 100,000 minus 6,500, 93,500, 93,500 that's what we have here and 13,850, okay 79,650, 79,650, page two calculating the tax at 12,836. So now we're at 12,836 on the tax calculation. All right let's go back on up and complicate things a bit. Let's say that they are older than 50 and I try to put my max contribution in. So we're going to say calculator calculations and we're going to say that we have 2023 minus let's say 53. So they were born in 1970 so that's why the date of birth is going to be important to make sure that you have that accurately populated so that calculations like this will populate properly as well. Schedule one is page two is now calculating at the 7,500. Here's your worksheet that's basically doing that calculation. All right let's bring it back to the normal so we see that we can see the age maximum contribution change. Let's bring it back to the date of birth is back to let's just say 1978 let's say and then we're going to go okay. So now it's back to the 6,500. All right so now let's say that if I go back on over and say income that this box is checked off. Now remember I had W2 income. If I forget to check that box then it's going to it's going to improperly say I can put money into an IRA. So be very careful with that. We should be able to now I'm going to check that box and that would mean that this box one is not including the amount that was taken out of my paycheck and put into a 401K plan. I'm going to imagine that that happened down here the the 10,000 right so we took 10,000 out went into a 401K plan which means that box one might be different than the social security right which might be now 90,000 and this one might now be 90,000 on a W2 right. But the bottom line is now this box is checked off so it's going to confuse my calculation here's my worksheet it has now disappeared. Why because if I go into here we can see our calculation I won't go into it in detail if you want to dig down on it. But it basically says you know we're not able to put money in because we had access to the 401K plan and our income is fairly high right. So so what if I brought by what if I brought this down to like 70,000 I'm just going to keep this at 70,000 or this will this would be 60,000 maybe 60,000. Okay, so then what would happen. Now I'm back up to this the 6500 even though I had that box checked off and there's some phase out you know between that let's say it was 80,000 and this is going to be 70,000 70,000. Let's see if I can hit a hit the spot in the middle now 100950 so if I go into this you could see the calculation 83,000 minus 80,000 3000 and then 100950. So again I don't want to get into the weeds too much in detail but you can check a take a look at that schedule to see what the phase outs are now you probably not going to memorize all the phase out amounts. When you're giving someone like talking to them because you're going to help the software will help you to do that, but the general scenarios of do you have access to a retirement plan or not. You want to kind of keep in your mind as to whether or not they might be able to put money into an IRA that's the general idea. If they're married, then then you have two spouses which which gets even more complicated, because now you have two individuals both of which could have access to their own iris. This is where it gets weird because usually if you think about two separate returns that come together, they've come together one heart one soul, one tax prepared pay or but with regards to the iris it's usually by social security number. So now they're still kind of separate but married and so on. So if I go back on over. And we say, for example, that they're married now. So let's say married filing joint. And so now you have two of them. And so let's go back on over. And so now you've got Adam and Jane. Okay. And then if I go to the schedule one page to the adjustments in terms of the maximum limits are going to change. So so now I have the 6500. Here's our worksheet. In this case, breaking it out for taxpayer and spouse. If I go back on over and maximize for both. So now I'm going to try to maximize for the taxpayer and the spouse. Now we have the 13, the 13,000 and you can see the calculation broken out here for the 13,000 even though one of them had access to a 401k plan. And so if I go back on over to the income. Now let's imagine that we had another one W2. This one's for the spouse. Let's imagine the spouse doesn't have access to a retirement plan. And they made, let's say 100,000 and okay. And so then we're going to go back on over and say, okay, schedule one. Now it's been limited to 6,500, which is kind of what you would expect because now it's it's basically the one that has access to the retirement plan doesn't get access to the IRA. Right. But the other one that didn't have access to the retirement plan still basically has that maximum contribution of the 6,500, which is kind of the result that you would expect. But if I make it higher than that, if I go to 200,000, they still don't have access to a retirement plan. And then I go back on over here. Now it's been wiped out completely. And so, so again, it gets a little bit complicated is the general scenario when you think about all the different combinations between a married couple when one has access or neither of them have access to like a retirement plan. So that my recommendation would be that you have the general idea of what's happening. And then of course, rely to some degree on the software to get down to the nitty gritty details and use your analytics tool to help you with that last many minute kind of tax planning situation. Now also note that if you didn't have any earned income, then you might not be able to put money into an IRA as well. So let's go back to the first scenario and let's say that it was a single filer and we're going to go to wages and let's say let's say delete and delete and let's say they had income, but it was all like dividends. So we had corporation one and they had like, you know, 60,000 of dividends, but no W2 income. So now if I go back on over, we have 60,000 of income and so on. But schedule one, it's not populating for the IRA because there was no, that would be passive income and there was no like earned income in that situation. So that's another scenario that could come up, which is less common. Usually the confusion comes up with this idea of what kind of retirement plan are they putting money in? And if I have access to another retirement plan, can I still put money into an IRA and how much can I put in and how long do I have to be able to put it in there?