 Income tax 2022-2023, W-2 income tax software example. Let's do some wealth preservation with some tax preparation. Here we are in our example Form 1040 using LASERT tax software to populate it. You don't need tax software to follow along, but if you have access to it, it's a great tool to run scenarios with. You can also get access to the Form 1040 related schedules and forms at the IRS website irs.gov. Support Accounting Instruction by clicking the link below, giving you a free 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. IRS.gov, our starting point as per usual with our starting point, single filer, Mr. Anderson, we've got no dependence down below. We're starting out with that 100,000 just an even number on the W2 income, and then we've got the standard deduction. Although I had another thousand in there, we took that thousand out. So then we just have the standard deduction at the 12,950 getting us down to the 87,050. I'm going to mirror that over here on our tax worksheet. So 87,050 and then we'll let the tax software calculate the tax on page two at the 14774 so we'll pull that on over here 14774. So there's our starting point. Now the W2 is basically the document that's most thought of when we think about the income tax preparation, one of the most prevalent types of documents, but it can also be one of the more confusing ones because it does have a lot of kind of data input fields within it. So let's just do some comparison with some different kind of mock W2s. This is just in an Excel worksheet and we're focusing in over here on basically the boxes of the W2s because these first three boxes are basically kind of income lines and these second three boxes on or the boxes on the right are going to be the taxes related to those kind of taxable income lines. This is going to be important to understand for the data input, although we can kind of mindlessly and most software do the data input. We want to understand what's going on with these kind of different boxes and what's happening with them so that we can understand what the software is doing, see if it makes a problem, be able to correct then the problem, and then we can also communicate with our clients about these different line items as well. So this first one we can see of course box one, three and five are the same. This will often be the case if you're at a lower income site W2 threshold for example and you do not have access to something like many benefits at the job like a 401K which is a common example which might be a differentiating factor. So if you saw something like this it would be a pretty straightforward kind of data input. Let's just kind of put that in here. We'd be putting into the data input the data input field. Now we've got other informational kind of stuff that has to be put in with the W2 as we have more tax software the IRS wants more and more information, right? So now they're going to want a little bit more data in terms of the employer identification number, their address and whatnot as we do the W2 input. But I'm just going to focus in on the data input for the amounts. So I've got 40,000 here. Now this amount, the second amount we're going to have to do the data input because that's not a flat tax. That's going to be like a progressive tax based on the tax tables because that's our federal income tax. So therefore the software can't really help us out to populate that. I've got to manually put that into place at the 4,000. So that's going to be 4,000. However the social security wages usually can be manually input. So notice I have to put this line which is actually social security wages, not the social security tax. Now oftentimes I didn't do the data input, the software is doing the data input because it's kind of assuming based on the rules that it's the same 40,000 because I didn't hit the cap for social security and they're correct. So that matches what's on my W2. Notice all this other stuff because it's black, it's showing and not blue. This software is trying to show that hey, they did the calculation for us. Now why is it possible that the software can do the calculation? Because these other two taxes are basically more like flat taxes. There's systematic rules that are a lot easier to calculate. So the 40,000 for example, times the .062, that's how the software is coming to that 2480 because the social security tax is basically a flat tax. We shouldn't have to do the data input, we should just be able to double check it if we've got the right dollar amount. Then they have the 40,000 for Medicare wages. Notice we have different data input forms but it's trying to guess that that's going to be 40,000 as well based on the data input on the first box. And if I take that 40,000 times .0145, 1.45%, that's how we're getting to the 580. So those two should be fairly easy to kind of check and verify and if I look at my W-2 form over here, those numbers were populated and everything looks good. Now on the bottom of the form we've got the state taxes. I'm not going to deal with the state taxes for our federal income tax example. That will depend on if you're in a state that mirrors the federal income tax system in which case it'll be much the same kind of process without the social security and Medicare but basically just these first two boxes and if you're in a tax that has a sales tax as their primary mode of taxation in the state, then you may not have any taxes for the income tax because they don't do that. They chose to do some other form of tax. So if I go to page one now, I could say, okay, now I've got the 40,000. If I want to mirror that in my tax formula worksheet, I'm going to say we have W-2 wages of 40,000. If I pull that back on over, okay. And then we've got still the standard deduction. So I'm going to go back on over here of the 12,950. So I can verify the bottom line should be 27,50. So there's the 27,50. Let's go back here. And then page two is going to be the 3044. I'm going to rely on the software to calculate that 3044. And then the withholdings, according to my W-2 now, the withholdings for federal income tax was 4,000. So I'm going to populate that in my worksheet here at the payments of 4,000. And that will pull back on over to the first page of the 1040 at 4,000, leaving us with a refund of 956. So we can kind of check that over here. There's the 4956. So you can see how you can kind of check everything out. Notice what you might be saying is, hey, look, I didn't see anything about this stuff. Why do I even need the Social Security, the Medicare and the Medicare tax? Oftentimes that might not be populated on your federal income tax reported on the form 1040 because it's already been dealt with. And so it will only be populated on your form 1040 if there was an issue with it. For example, if you over withheld oftentimes on the Social Security because you have multiple W-2s, or if you have some other form that you're paying Social Security and Medicare, such as if you're a sole proprietorship and you have self-employment tax, which is kind of the equivalent for a sole proprietor, which we will get into later. So if there's an issue that that could pop up and maybe we'll do an example with that. But before we get there, let's say we had a little bit more complex one. And now we're going to say that the income is higher. They made 150,000. Now, if that's the case, the Social Security caps, I believe in 2022 at 147,000. And then the Medicare wages is going to be doesn't have a cap. So it'll be at 150 if there was nothing else. There's no difference between Medicare and Social Security. And the federal income tax is there was no nothing else down here that could have been deducted from box one, such as like a 401k is a common example or some kind of possibly other benefits like health benefits and whatnot. So let's go back on over and just see the data input with that one. So if I was to do that, I'm going to say, okay, they made 150,000 in box one. And then I have to populate box two because this is going to be based on whatever they put on their W for. So I'm just going to have to put in whatever they have there. I got to do the data input. They can't help me with just a tax rate because it's a complicated tax system, a progressive system, 37, 5, 37, 5. And then, but notice here, I didn't populate the Social Security and the software basically knew what the Social Security cap should be. So and that should be the case over here because if I made 150,000 on one job, one W two income job, and that's my only income, then the system can see, oh yeah, well, you should have capped at the 147.5. And that then would calculate 6.2% of it 9441. And that's where we get the 9441. And then the Medicare doesn't have a cap. So that's why it jumped back up and the Medicare 1.45% is populated for us. So if I jump back on over to the 1040, now I've got on page one, we have the 150,000. If I mirror that on my worksheet over here, I could say, okay, page, this is going to be 150,000. And then if I jump back to the first page, there is that same standard deduction that gets us to the 137.50. So 137.50 looks good. Page two, then 267.28. I'll let the software do the calculation for the tax. 26, 267.38. That's not right. 267.38. Like what did you just type there? Where did you come up with that? You didn't even, that wasn't even 267.28. For goodness gracious. I don't trust you to type in. Okay, I got it. All right. I just double check. That's why I double check it over here. Okay. Any case. Then we had the withholding 37.5. 37.5. So we'll put that in the payments. 37.5. And pull that on to page one. So that comes out to the 10772. 10772. Just to do a quick kind of recap. I'm just kind of just trying to summarize this on both sides. We kind of see it in a formula format. And so, so again, you see that, you see that difference on the data input. And then if someone was to ask you obviously what their earnings were, it would be the 150, not the 147, right? If they're trying to think of what their compensation, but you can imagine, and in many situations you will have, a case where box one is lower than possibly box three and possibly box five often times. In that case, if someone asks you how much did I actually earn? You don't really want to be representing that with box one. And this gets kind of confusing because people often have issues when they're talking about how much they earn compared to how much possibly their spouse has earned and how much tax they should be paying versus how much their tax, their spouse is paying because the tax rates are being kind of manipulated based on both of their income. That becomes an issue. And when they're working at their job, they need to know how much they're actually earning because they're going to do comparisons with other people that are earning whatever they're earning. And honestly, sometimes because of the complication with the way things are set up, people start to think, well, box one is my earnings. And so they're not taking into consideration the fact that they're earning more than that because you're getting compensation in the form of benefits. And the reason that you get the benefits is because you get a tax break on it. So it's actually you're getting more compensation because of the benefits. So really kind of box five is more closer to your actual wages and it's good if there's a big difference between box five and box one because that means you're taking substantial advantage of benefits which are giving you those benefits plus of giant tax break on the benefits. So it gets kind of messy. Obviously taxes kind of messy, make everything more messy. But let's enter something like this. So this might look something like this. So this usually happens for a higher income individual, of course. So now we're going to say box one says 140,000. That's what box one said. And then box two is 35,000. So I'll say, okay, 35,000. And then box three is Social Security, which it capped for us once again at 140,000. It should be 140,000. But that's not right because this box is low due to the fact that we put money into the, I'm going to say that's a retirement plan. So I'm going to say, all right, so 140,000. So I have to actually manually input now 147,000. It couldn't guess the right number. Tried to guess, but it's not right because of that difference. Now that I've input that, it calculates the Social Security properly because it's 6.2% of whatever the Social Security wages are. And then on the Medicare, we're at 150,000. So again, it can't really guess that number. It's taking the larger of the two, but it's really 150,000. And so now once I input that, it can calculate the Medicare because the Medicare is just a flat rate based on those. And so then we got in box 12, you'll often see these little letters and you can look at the instructions for the W-2. And that'll be, I believe, by a 401k plan. So if I go into box 12, I'm going to say D. There's the 10,000 and that's kind of an informational thing saying this is why there's a difference between box one, the wages for the federal income tax and the wages for the Medicare because there's that $10,000 difference. Why is the Social Security different? The Social Security is different because it got capped at the 147,000 and possibly the reduction of the 10,000 from the federal income tax we're saying isn't a reduction for Social Security. So it got capped at the 147 because it would have been 150 then if it's not going to be decreased by that 10,000 like the federal income tax, but then it got capped at the cap for Social Security 147. There is no cap for Medicare, so it's at the 150. So you can see how this gets a little bit messy, but most of the time the W-2 is populated properly so we don't have any really issue over here. We're just really kind of calculating the federal income tax type side of stuff. Okay, so I won't put that back on over into the other form right now. I'll just run a different scenario just so we can see an example of where a problem could happen. Notice that I hit the cap here at the 147 with this one W-2 income but what if they worked at two separate jobs? Then you're going to have a situation where they could go over the Social Security cap. So let's say we had this W-2 and then this W-2 for the same person, right? Then they're going to have overpaid on the Social Security wages if I combined them together. For example, I'm going to go back on over and say I have a single individual, a second W-2, W-2-2, and then this one was 40,000 and we're going to say that we withheld, let's say 4,000 we said. So 4,000 withheld. Now the issue is the total of the two Social Securities are over the cap for an individual which should be 147,000 at the cap. So that means we overpaid the tax on the Social Security by this 40,000 times the 6.2 or the 2,480. So if I go back on over then and I try to look at this, I'm going to say, okay, the first page looks like normal but then if I go to the second page, I'm going to say, okay, the tax was calculated, okay, boom. But then I've got this item down here, a amount from Schedule 3, Line 15. Schedule 3 is now populated, Line 15. So I'm going to say that Line 15 is going to be, boom, that's going to be AdLines, Line 15 from right here, from Line 11, excess Social Security. So if you see W-2s that have large dollar amounts in them and then you see multiple W-2s for one individual, it's likely that they paid more into the Social Security than they should have because they paid over the cap. So that's not going to happen all the time. It's only going to happen when you have high-income people that are basically working as employees and they have multiple places that they're working for that you might see that happen. Notice the software can help to catch that kind of thing from happening, which is great, but we would like to be able to intuitively see when that would happen and you get an intuitive sense. Well, the people are making a lot of money. I expect something like that to happen because there's two W-2s and they're high-income earners so they might go over the Social Security limit. And then when the software does do it, you want to be able to double-check it and say, ah, you shouldn't just be like, well, the software does whatever the thing does. You'd like to be like, well, why did that happen so that we can know what happened and also we should be able to explain that line item to a client. So we might dive more into that when we get into Social Security in a future presentation. Now obviously you could, if you are a single individual, you might have multiple W-2 wages and it gets messy as well when you've got different kinds of income, W-2 income, dividend income, interest income, Schedule C income, Schedule E income and stuff. So we'll get into more complex tax returns later, but those can complicate things in different areas such as the Social Security, for example, because if you have self-employment income, which is a Schedule C, then you also are paying Social Security on self-employment and if you also have W-2 income, you've run into that similar kind of situation. Now if you have a married couple, it's quite likely that you have W-2s from the two married couple. So in that situation, it becomes relevant. We have to actually assign out oftentimes which spouse the W-2s are going towards because now you have two different people, although married, that are paying in to do two different Social Security funds. That's one reason we still have to kind of track their income separately so that the proper amounts are being allocated to the Social Security and if one person paid over on the Social Security, we can see that. So let's see an example. Let's put them in a married couple. Okay, so now I have married filing joint. So we've got Mr. Anderson and Jane Anderson. Why don't I have a checkbox up here and then I'm going to go down and so now I've got that same 180,000, the same scenario with those two W-2s but now the standard deduction is 25.9 so instead of the 12.950 and then on page two, tax is calculated. I've got the federal income tax withheld but the point I want to make here is that this 2004-80 is still there. Why? Because even though married, I assumed both those W-2s, I indicated on the software that they were for one spouse instead of two spouses. Now, if those two W-2s were for two spouses, then I wouldn't have an issue with that overpayment, right? So now I'm going to say, okay, these two W-2s were for the same spouse. What if this second W-2 was for another spouse? You're the spouse. Well, then we shouldn't have a problem if I go back on over and say this one was spouse item. And by the way, when I entered the fact that this one had a $10,000 amount, I should check off the retirement plan kind of thing to put that in the indication and that'll be indicated on the W-2 in... Where is it? In box. In box 13, generally, I believe it is. But in any case, let's go back on over and say, okay, so now the point is... The point is... That I have the same amount. They're being taxed kind of like as one entity because they're a married couple for federal income tax purposes. So we should line up basically the same on page one. But then down here, we don't have that other tax anymore because for social security taxes, they still kind of break it out not as though you're one entity for taxation. I think he's talking about taxation. Kind of two entities, both of them paying into social security based on your own social security number, each having their own cap. So you can see how these... The tax law, like many laws, but in particular tax law, gets fairly easy rules start to be complex when you start to compound those rules in a more complicated return. Because then you start seeing how the rules mix together with the other rules and that's when things get messy. So it's usually the fact that there's no one kind of law that's difficult. It's not hard to do the progressive tax system calculation, but when you combine the progressive tax calculation to a different rate for capital gains tax and passive income and dividends and whatnot, then it becomes complicated. The progressive tax is actually complicated in and of itself. But when you add all that other stuff, it starts to get messy. If you add multiple... It's a pretty straightforward type of calculation, but if you add multiple different W-2 forms and multiple different people in a household and that kind of stuff, then again, it gets kind of messy fairly quickly. So that's the nature of it. We'll run examples to see that and we'll continue to do so in future presentations.