 Income tax 2023-2024 unemployment compensation tax software example Get ready and some coffee because we need to save some money for vacation with the help of 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 Yeah, 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 iris.gov, iris.gov Starting at our normal starting point our taxpayer, Adam, tax man just trying to avoid a dang tax man living in 90210 Beverly Hills single filer we have no dependence to start off with our starting point as usual the nice round 100,000 W2 income we've got the 13850 standard deduction 86150 taxable income we can mirror that in the income tax formula of Excel 100,000, 13850, 86150 the tax then calculated by LASERT 14266 page 2 of LASERT or tax software 14266 Alright let's go back to page 1 and we're going to imagine there was some unemployment income so typically from a data input standpoint it's pretty straightforward because you will usually get a form something like this from the state which will have that 1099G for it and will have something like it'll be the unemployment compensation and then there may or may not be withholdings for that and so the data input is fairly straightforward what is usually more complex is when people are going from job to job and receiving unemployment should they take withholdings might be a question that comes up from a planning standpoint and how much should they withhold or should they make estimated payments how much of the estimated payments should they make let's first just see where the data input is and then we'll touch on some of those more complex questions that you might run across so we can find this we can go and say alright if I where is this going to be this is going to be down here where we see the line 8 additional income from schedule 1 it's going to feed into there and that's going to come from the schedule 1 so if I go into the schedule 1 we're looking at additional income and we're looking for the unemployment which is line number 7 so I'm going to go here and then I'm going to try to jump to there from the software most software has this capacity to kind of jump to the data input there's the screen that we're looking for and I'm going to say this is going to be not a refund this is the unemployment compensation let's say it was 10,000 of unemployment compensation so we're going back on over to the forms there's the 10,000 being populated on the schedule 1 part 1 scrolling down coming up to the 10,000 on the bottom line that pulling over to the form 1040 so within the form 1040 we still had our W2 income we're saying of 100,000 but now we've got the 10,000 that pulled in from the schedule 1 to get to 110,000 we can mirror that in our formula over here by saying income and then we had the unemployment which is on schedule 1 so I can go into the schedule 1 and then I'll just add another line here let's just add one line unemployment unemployment compensation we're probably only going to have one line item so I'll just make that like black and white right there or blue and bordered I should say well no let's make it black and white I was right the first time and then I'll make this blue and bordered border blue and we said it was 10,000 and then my total down here is adding these up so let's just pull this down to add it up down to there check the spelling review spell check it boom good spelling okay I'm going to go back to the first page there's the 110 we're still at the 13,850 bringing the taxable income to the 96,150 there's the 96,150 page 2 calculated the tax now at 16,482 so I'm going to say alright this is going to be 16,482 so there we have it and so that looks good okay so then so that's that pretty straightforward on the data input people might have questions about you know in prior years that they didn't have to include unemployment compensation because of the whole COVID thing now we're basically back to normal the unfortunate thing about the unemployment is people are often not doing withholdings on it so if they have a whole year of like unemployment compensation or like six months or whatever it's going to be included in income and they might not have the tax withholding so sometimes it's kind of a scary situation from the data input side because you're thinking oh no this is going to end up in a situation where they're going to owe tax because they didn't do any withholdings on it as far as the estimated tax they could make withholdings if I go back on over and let's say that in the withholdings line they withheld 2000 then of course that would pull over in a similar fashion as the W2 withholdings so now we've got the 10,000 here page 2 calculating the tax and now I have 2,000 that was withheld so that the tax the amount owed is now 15151 plus a penalty that's including the penalty here so the withholdings are there as well so when people are trying to determine how much tax they're going to owe it gets a little bit complex because note that let's go back to the original starting point I'm going to go back on over here and say let's remove this bit and let's go back over and say we're back at the 100,000 and the 13850 so let's see that over here and remove it so I'm going to go to and remove this and then back on over and so 86150 so 86150 page 2 at 14266 so we're at 14266 so notice that that is being taxed at an average rate of 16.6 so we have the marginal rate and the average rate so when you're thinking about how that is calculated meaning when you wake withholdings you would like your withholdings to be something greater than the 14266 so on the W2 we probably would have withheld something like 15,000 and that would result in a slight overpayment and a refund now the question is well how did we get to this 15,000 well on a W2 income we would have populated the W the W4 given it to the employer and then they would have had to make withholdings how does that W4 work well it's going to have to manualize the income and it's going to have to kind of estimate that you're going to make 100,000 at the end of the year and then give you and then it's going to basically take out of your paycheck the average rate which would determine to be about 16.6% so it could take out an even amount of pay over the year but we know that the actual tax is calculated on this progressive tax system at multiple different tax rates so what does that mean it means if I pull out the trustee calculator here like if I took 100,000 and we said we got paid monthly divided by 12 then we would be making 8333 each month and we'd have to say okay I'm just going to multiply that times the average tax rate which is going to be the .166 about to get my withholdings which will be even over the year so I can basically budget and what not however if I get laid off or something like that then instead of making the 100,000 if I get laid off in the middle of the year I might have only made 50,000 well what's that going to do you can see my tax brackets my top tax bracket is 22% what if I got laid off in the middle of the year and I'm at I only made 50,000 well it's the middle of the year so if I withheld 15,000 before you would think 15,000 divided by 2 I might have withheld by the middle of the year 7,500 right because I would have had half the year of the withholdings if I go back on over you can see then now I've only earned the 50,000 because I was laid off I'm not looking at the unemployment at this time I still have the 13,850 of the standard deduction 36,150 page 2 is now calculated a tax which is only 4,121 so you can see the tax is a lot lower than you might expect because of that lower tax brackets because of the progressive tax system so the basic idea is that when you do the withholdings or the estimated tax payments you have to try to project what you're going to earn for the entire year so that means that for the first half of the year if you were to get laid off and not make the amount that you thought you were going to make then you're probably over withholding on the first half of the year because you're going to have lower tax brackets for the tax system so if you were to get laid off in the middle of the year and then get unemployment compensation the question is should I withhold on it or not and you're going to have to include the unemployment compensation in income so it will be taxable but your tax rates are going to be kind of messed up because the withholdings that you made for the part of the year that you were working are probably over or too high on the income that you were projected to make if you worked for the entire year you see it gets somewhat met the planning whenever you get into the planning process the progressive tax rates have a big impact it starts to get complicated so what do you do in that situation should I withhold or not is going to be the question and or should I make estimated tax payments or should I have to include it in income well if you have tax software you can plug the information into the tax software and say okay well if you only make 50,000 and you withheld 7,500 then you'd be okay how much unemployment are you getting let's say we're going to get another 10,000 of unemployment so I can say okay let's go to the unemployment let's jump to it again go to do it unemployment jump and we're going to say that's going to be 10,000 and okay and so then I go back on over so there's the 10,000 boom and I can say okay now we're up to 60,000 makes sense because we had to include the unemployment and then if I go to page 2 we have the 5,466 withheld 7,500 so in that case you can say okay we're still should be good without withholdings because you probably over withheld for the first half of the year because of the scenario we talked about that's the kind of calculation that you could do like you can help people do that for projection kind of situations although well and then you can also recommend people do that for themselves by going to the IRS website irs.gov, irs.gov and look at the withholdings estimator and that will help them to basically have software kind of similar to this in essence that will help them to do a projection which will help them to determine if they need to make estimated tax payments due to the fact that they no longer have withholdings from the W-2 income but now are getting revenue in the form of unemployment compensation they're going to have to pay taxes on and they'll have to determine how much of that do they need to pay either in the form of withholdings of the unemployment compensation or in the form of estimated tax payments remembering that if you don't pay it and you don't have any payments then you're going to get hit with the tax at the end of the year plus you get hit with the penalties and interest possibly for underpayment because the IRS wants their money during the year even if you're unemployed anything that's income they want to get paid as the year is progressing is the general idea