 Income tax 2022-2023. Other income part number one software example problem. Let's do some wealth preservation with some tax preparation. 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. Here we are in our example form 1040 populating it with Lesser tax software. You don't need tax software to follow along, but 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, irs.gov, our normal starting point, single filer, Mr. Anderson got no dependence to start with W2 income 100,000. We've got the standard deduction 12,950 getting us to the taxable income 87,050. If we mirror that in our income tax equation in Excel 100,012,950, there's the 80,087,050. We then allow the tax software to calculate the tax on page two that being 14774. We said there was 15,000 of withholding to get us to the 226 down below, but our major focus right now is on the income lines up top and then getting down to this taxable income as we think about the other income categories. So note and remember that everything that you get is basically income, everything that you receive unless exempt by the IRS. That's their general rule. So a lot of that line items are up here on page one of the form 1040. And then we have other income if we hit the plus or the check mark in the schedule one, and we've gone through some of these schedule one additional income and adjustments to income. Now we're looking at line number eight, which is going to be the other income line down below. Now first, just realize that when you get a form that's going to be indicating that it's possibly income such as a 1099 form that oftentimes if you get like a 1099 the iris might expect to see a schedule C. And there's a big difference between reporting something on like a schedule C and then putting it over here as like other income that being the social security and the Medicare. So let's just give a quick look at that. If you get a 1099 form, you're going to have to show it, you know, somewhere have some income that's equal to or greater than the 1099 or you would expect to get an audit of some kind. If you had it as income that's subject to self-employment, possibly that would be the schedule C. Let's just do a quick recap. Recap the mission for us of what that looks like, even though we took a look at this before and we'll dive into schedule C in more detail later. Let's just imagine you had a 20,000 schedules 1099 that subject you believe to social security and Medicare. The reason there's a big difference here is that if I go back on up and say now I've got my form 1040, I've got the 100,000. I've got the 20,000 here that populated into schedule one up top, which we looked at before line three, the 20,000. And then that pulls into the 1040 here. But then there's also an impact with the self-employment, which is you can see on the self-employment schedule, which is calculating other taxes of 2008-62. That is significant. That's not income taxes, but we have to calculate it on the 1040 calculations because we don't have any W2 or employer doing the calculation for us. Therefore, on page two, we see that we have the normal tax calculation. And then we also have this other tax that's been calculated, which again, that's painful. That hurts. That's significant. And then you've also got an impact of the adjustment, which is half of that. And then on page one, you could have possibly be subject to this credit. And we looked at all those big differences and changes if you add a Schedule C. Now, if you're adding something, let's remove the Schedule C now. I'm going to say let's take that away. And if instead it's not subject to self-employment, then you might have it somewhere in here as like an other income line item. And we'll go through a couple of them down here. And in that case, then you might not have that added complication, of course, of the self-employment. That's a significant difference. Okay, let's go through a few of them. We've got the net operating losses. So we saw with the Schedule C, it's possible to have basically losses that would be accumulated. You would think that oftentimes from like a business type of activity, losses, the IRS doesn't want to actually pay you for losses oftentimes in the year that you incurred the losses. So if you do have a loss, possibly you can take that against your other taxable income, in this case, W2 income. But oftentimes, if you're full-time, you know, as a Schedule C business, then you don't have any other income. You might have a loss. And then the question is, can you, the IRS is going to say, I don't want to pay you for the loss. We only want part of your gains, not your losses. But you might be able to get some benefit for the losses by possibly carrying them forward or something like that. And in that case, that's when it might be populated down here. Now, note that if you have a situation where there's Schedule C income, and especially if there's any carryover of losses or anything like that, then if this was a new client, I would suggest entering the tax return that was from the prior period into the prior year tax software, and then rolling it over in the tax software, because then the tax software can help you out with those rollover calculations, rolling it into the current year. That might cost more to do that because then it depends on how you're paying for the software. But if you want to get off on the right foot and you have a more complex client, then it might be worth doing. And then you can kind of deconstruct, you know, how the software is treating this rollover and see if that's an appropriate calculation. So if I jump over here and go to the NOL and I populate it, there's the net operating loss. We've got another schedule that is going to be shown here. And remember losses are things that the IRS is going to be more skeptical of because they're kind of good from a tax standpoint, because although it's on the income line, it's a loss. And therefore it's pulling into the 1040 as a negative income line. So it'd be like your income statement when you have those contra income accounts, like a negative income account here pulling down the total income, which is obviously a good thing for taxes. So there's that one. Also just remember that rules over time can change with regards to the capacity, what you can do with losses, carry them back, carry them forward, and so on and so forth. So just remember when you're looking at losses, you want to make sure to kind of double check, double check the law, where you stand with regards to the type of loss and what your capacity to do with the loss is. And again, the tax software is often a useful guide to help you with that. All right, let's do the gambling. So gambling is another common one because people might get like a form 1099G, or I'm sorry, W2G, and that might come from a casino or a horse track or whatever like that. If they're gamblers and they gamble a lot, then they're probably kind of have an idea of how the gambling winnings are going to work. If you get a documentation for it, like anything else, you're gonna have to report at least that amount on the tax return, or you're likely to run into a problem with it. Now, can you deduct the losses? Not often, because if you could deduct the losses, you'd have to deduct them on a schedule A, and only some people are going to be able to categorize for the schedule A because they're going to be taking the standard deduction. And the losses are typically just limited to the amount of income that you received as well. So there's a severe limitation in the amount of losses that you might be able to take. Now, if you could claim that you're a professional gambler or something, if it's a legal activity, then maybe you could do the schedule C and then have losses, but obviously that's not typically the case. And then you might have some clients that just get a win, they just go to Vegas and they win a car or something, you know, they win a significant amount of money at one time. That could be a shock to some people because it could have a significant impact on their taxes. So when you do that, we're going to say, okay, gambling income, possibly on a W2. So let's say this is a W2G. So let's say W2G. And then I'm going to say that we had a winnings of, let's say it was significant, like 30,000, right? And then I'm going to go back on over. And so now we've got the winnings, of course, that are going to be populated here. And that's going to be significant going on up to the 1040. Now just something to kind of be aware of. So obviously we're populated here on the 1040. And so our income is going up. And then our taxable income is going up. I won't do it on the tax software, because I think it's a fairly straightforward for our formula, because I think it's fairly straightforward right here. And I want to do a couple more of these. But let me just do an example. If I was to remove that. And then I was to say that the wages income was, let's say they were earning $40,000 and they withheld $5,000. Now you've got $40,000. $12,950 gets us only $27,050 of income. The tax is at $3,044. If I look at my tax summary, then I'm at a highest tax bracket of 12% average 11.3. Now if I had a significant amount of gambling earnings then of that $30,000, that's going to come as quite a shock. You know, someone in that situation might win a car or something or whatever. And they're going to go and or they get a lot of money and they're just going to spend it possibly. But the tax bill is going to be painful because that's a huge increase, which is going to have an impact on their highest brackets. And now their highest bracket is at 22%. So that's going to be a significant increase. So when these, if you get a big windfall profit for whatever reason, like you won the lottery or you won a prize or you went to Vegas and won a car or something like that, if you're going to receive that at one time, this is what needs to be taken into consideration. And if you run into a classic kind of scenario of would you rather have an annuity of payments, a series of payments over the next so many years or a lump sum today, then the lump sum, when you do that figure in that calculation, it's better to have money today than the annuity if the payments were equal. But there's also a big tax implication on it as well. Because if you take the money today, then you're going to be paying possibly higher rates because it's going to push you possibly into higher tax brackets. So it's just something else to kind of consider, you know, if you have someone that runs into that kind of situation. Also, if they got a windfall amount or they got winnings, they might withhold from it something that most people don't do. But you know, it would be smart. I mean, you might do that obviously because now if there's a significant increase to your to your taxes, then you might have to withhold and you might have to withhold more than even your marginal tax bracket before in order to be okay. Because now you're going to be taxed at your highest tax bracket, which now in this case got pushed up to 22%. So in the form 1040 page two, then we'd have our withholdings here from the from the w twos and then other withholdings. The other 5000 it was withheld here. Then we got the cancellation of debt. Now this one's often a shocker for people as well. Because because what if you get cancel of debt, you didn't actually receive money. So people often don't see it as income. But obviously, if someone if you owed someone money legally and the and the and then they said you don't have to pay me, that's kind of like they gave you money and then you gave it back to them, right? They canceled debt. So that would be an income. So unless there's a rule that says the government, it's kind of like the government is the same standard rule for income unless there's an exception, which there often could be because most of the time when debt cancellation happens, it's going to be it's going to be because people are insolvent, incapable of paying the debt, then you would have to include an income. So what you'd want to do is have a the 1099 C is what you would receive. You're not going to see that all the time. But if you see it, you say, okay, it's a 1099. So I would think I would have to include that, which would include it in our income line on schedule schedule one. And if I have to include it, it would pull over to the form 1040. And then it would pull in here and now our income has going up and so on and so forth. Now next, we have the foreign earned income exclusion from form 2555. And again, that's more of a kind of specialty area. So if you have people, like I say, if you're a professional tax preparer, you might specialize in people that are in the same state. And that might be some cheaper in some ways as well to do the tax preparation and get software for it, or people that are in multiple states, or possibly people that have or have income from multiple countries. Obviously, when you have different taxes from different areas, there could be there could be a possibility for double taxation. And the United States could have agreements with other other governments in order to to not have a situation of double taxation and whatnot. And then you could dive into basically the detail on that possibly by going to the form 2555, which is right here. And then you can look at the instructions on the irs.gov if you want to dive into this in more detail and dive into that in more detail as well. So I won't go into a lot of detail on the on the example here, but we might maybe we'll go into it more in a future presentation. Let's go back to the schedule one. We also could end up in an income situation from form 8853 for the Archer MSAs and long term care insurance contracts in certain situations. We might go into the MSAs in a future presentation in a bit more detail, but I'm not going to dive into that in a lot more detail at this time. And then you could have situations where income could result from the health savings account, the HSAs, which again, we might talk about the HSAs a little bit more detail in future presentations, but you can look at the form 8889 and instructions for more detail there. Then we've got the jury duty pay. Now the jury duty pay gets a little bit messy in terms of like did the employer compensate for the jury duty pay and so on and so forth. But usually the jury duty pay is often like kind of insignificant in relation to the overall pay. And usually it's going to be, you know, a taxable item. So I'm going to say jury duty pay here. Let's say it was, you know, a thousand dollars for jury duty pay pulls in to line eight H and then obviously populates down here pulls into the form 1040, which is now included on the total income line eight and then included in line nine. Let's go back on over to the schedule one schedule one. And then we've got jury duty. We've got the prizes and awards. So if we had prizes and awards again, that would be here like notice that this would be different because the prizes and reward awards, although you earned them aren't usually subject to social security and Medicare. So notice that's significantly different than if you put the prizes and awards or for jury duty for the same thing on schedule C or something like that because then you'll probably be calculating social security and Medicare. So that's one of the main things you kind of want to be keeping in your mind is this income. And if it's income, it's less burdensome to be included, including it where it doesn't have the social security and Medicare involved. So activity engaged in in for profit. And I believe that's the hobby income. And so again, significant not for profit engaged activity. So in other words, you might be doing stuff. The classic example is like horse racing. You had rich people that liked to race horses and they and they and they often tried to take losses on the horse racing because it wasn't a profitable thing. Oftentimes. And then they would get these benefits from from like horse racing and and but really it's just a hobby because so so now if the IRS says it's a hobby, it's like, well, now you got to record the winnings and not really the losses, you know, the losses might be included, clutable up to the amount of the winnings kind of situation, right? So now it's it's a not for profit activity. So if I go back in here and I jump, then I'm going to say, let's put, you know, the 10,000 here, let's say that's going to now pull in here. Now the benefit of it pulling in to to the 10,000 here is that you don't have the social security taxes on it as you would if it was W2 income. So if it pulls in here, notice, you might get forms like a 1099 types of forms for your hobby. And you'd say, well, it's, but it's a hobby. It's not for profit. And therefore possibly not be subject to social security and Medicare. The downside is that if it was a for profit business, like the horse racing, the people that have the horse racing to trying to claim it was self for profit is that you can report the 10,000. And then they had expenses for their hobby that way exceeded, of course, the 10,000 of revenue resulting in a loss. That's what the IRS is going to be skeptical of losses because the loss, they remember they want to take a piece of the income. They want a piece of your profits. They don't want to take the risk of losses, right? They don't want to be paying for your hobbies. So, so that's a, so, so that's the pros and cons of the hobby income. If you get a 1099, is it a business? It could be good or bad if it was business income or hobby income, but you need to be able to determine the two. If it's business income, it could be good if you had expenses more than the amount of the income because then you might have losses, but it could be bad because if you don't have the expenses and you're just recording the income, then of course you're going to be subject to the self-employment tax. Now it used to be that you'd say, well, if it's hobby income, maybe they, you can get a deduction on the schedule a, similar to the, it's like the gambling losses, but basically they made a change fairly recently. So you don't really even get the capacity to deduct the hobby losses up to the income amount on, you know, the schedule a type of situation. So, so that's going to be the general rule with the hobbies. Then we've got the stock options. This would usually be for more well off individuals that are getting paid in the form of stock options. Now you got to be careful in terms of is the value being included in say a W2 form or whatnot. And then if, if not, if you have to record the added income, then again, it's another kind of income that's not included anywhere else. Therefore, it's in the other income category here. Next line, income from rental of personal property. If you engaged in the rental for profit, but we're not in the business of renting such property. So again, it's somewhat of a strange situation. Normally the rental property would be reported on the schedule E, but if you follow into the specific area, possibly you reported in the other income here. And then we have this Olympic and Paralympic medals and USOC prize money. That's obviously a fairly unusual type of situation where you have someone has the prize money from from athletic money like this, but obviously the Olympics are or something where you could see why there might be, you know, an exception of that kind of prize money. And that seems reasonable to me. Try to try to get those people the top of the podium on the on the prize money for the, for the Olympics and whatnot, but, but whatever. So there's that one. We're going to continue on a few more of these possibly in future presentations, but the general rule, of course, is that they would be summing up over here. If you've got to include another income, pull it into the first page of the form 1040 and being included here. And there's a difference being included in other income and having for, for profit type of income subject to self-employment such as schedule C income. And oftentimes rental income has its own kind of set of situations and rules as well. So if it doesn't fall as for profit income, it's not normal kind of rental income schedule C schedule E then possibly, and you got to put it somewhere, then you would think it might be falling somewhere on that line eight other income schedule one.