 Hello, and welcome to the session in which we will discuss the income tax formula and form 1040 and its related schedules Now I just want to let you know right from the get-go. This is from a 30,000 foot view So on this session, I will go over the tax formula But from any grand perspective and this is what it looks like and as I go over this formula I'm gonna show you where things go on the actual tax return So it's very important for a student to know the formula. That's good. And this is the formula But it's very important to know how everything fits in an actual practice Tax return why because it's gonna stick more. So if you could look at the tax return, it's easy to review Starting with gross income and think of this income tax formula like an income statement Not necessarily not necessarily an income statement, but like an income statement and for an income statement How do we start we always start with revenues or income for tax purposes? It's called gross income now. Let's talk about gross income. We're gonna have a whole chapter about many sub chapters about gross income What is gross income income? Sales revenues That you generate that's taxable. Well, what's the most common one for individuals? Your wages your W2 wages you work as an employee you get paid So this is the 1040 and the first section will include income And this is basically from line one right here line one all the way To total income which is line nine before we proceed any further I have a public announcement about my company farhat lectures comm Farhat accounting lectures is a supplemental educational tool That's gonna help you with your CPA exam preparation as well as your accounting courses My CPA material is aligned with your CPA review course such as Becker Roger Wiley gleam miles my accounting courses are aligned with your accounting courses broken down by chapter and topics My resources consist of lectures multiple choice questions through false questions as well as exercises Go ahead start your free trial today. No obligation. No credit card required Now I blocked the year and the reason I blocked the year because if you are Looking at this in a separate year than the form students might say well, this may not be relevant I teach you the idea now if this is if we are in year 2028 Well, I would assume the 1040 would look something similar, right if we are in year 2026 it should look similar Okay, I'm teaching you the concept. So the first concept is income The largest portion of income usually wages and salaries and here you have to attach your w2 once we talk about income more specifically I will show you what a W2 looks looks like you could have interest income Some of it is tax exam although it's tax exempt you reported some of it is taxable Dividend we could have qualified dividend ordinary dividend IRA distribution and the taxable amount of it any pension and annuity income The taxable amount of it any social security and the taxable amount Notice these type of revenues Some of them may not be taxable and we'll have a separate session for each concept of these then the taxable portion will go here Then we'll have a capital gains or loss and we'll have to attach a schedule the edit notch I'm not gonna show you schedule D today We'll work on that later on then we could have other income from schedule one line ten because schedule one line ten is a lot So I'm gonna show you schedule one line ten and basically what is what is a capital gain and capital losses When you sell a capital asset and you have a gain or a loss That's all what I'm gonna say for now, but it says here other income from schedule one line ten So let me show you schedule one line ten So this is schedule one additional income and adjustment to income We're just gonna look at the income for now additional income. Could you have additional income? That's taxable. You could taxable refund Alimony received unemployment compensation rent a real estate other income Cancellation of that gambling income jury-duty prices and award believe me We're gonna go over all of those in separate session So you could have many other income and total them then you're gonna go back and put them Put them here on line nine then we will have total income line eight other income Then we'll have total income So this is the first portion of the income tax formula income and again, we're gonna have maybe 10 to 13 sub-lessons About income. So that's a lot from income. The government says you can deduct certain adjustments Basically, take your income minus expenses to arrive to something called an important concept in Intaxation adjusted gross income or for short a GI or we call a GI any deductions above the line Now what are? Adjustments, so let's take a look at the income tax return and look what that the adjustments Well, you got to your income and let's use numbers. It's easy. It's better to use numbers Let's assume your total income is happens to be $100,000 Okay, this is total income now adjustment to income from schedule one from schedule one line 26, let's see what what adjustments are so notice this is schedule one We list on it additional income and adjustments now back back in the old days So again, just to kind of give you an idea that tax form could change The adjustments were on the on the 1040 so the adjustments were listed actually here now We we list them separately the idea is the same so in a different year if they change back the If they switch the form it doesn't matter what matters is the concept the idea of adjustments the idea of adjustments So what type of adjustments could a taxpayer have and we're gonna have a separate recordings about this Education educator expenses certain business expenses of reverse Reservist health savings account moving expense for the armed forces self-employment SAP Simple plan penalty on early withdrawal alimony paid IRA deduction student loan interest and many other adjustments I'm not gonna go over them So you add them up and let's assume our adjustments happens to be I don't know $5,000 100 minus 5,000 we deduct the adjustments we come up to something called adjusted gross income 95,000 and this is our adjusted gross income that happens to be 91,000 So we said income 100,000 we have adjustments of five. This is an important number four in tax Because a lot of deductions a lot of phase-outs are based on something called a G I and Any deduction above a GI it's called above the line deduction To arrive to a GI now After you get to a GI you'll have two options. You can either deduct another deduction your standard deduction or Itemized deduction. What is a standard deduction? Let's start with a standard deduction? Standard deduction is a number given to you by the government just a number and for the for the purpose of this Recording the standard deductions happens to be I don't know for single individual 12,000 to 15 now from this you're gonna know what year the stacks return is if you'd like to but I blog the year on purpose So to tell you this will change this will change Okay, and actually you can find out what year but it doesn't matter the point is it does not matter The what matter is the idea of you have a standard deduction again in a different year This could be a different number for single. Let's assume this individual is single. We have a deduction standard deduction We're gonna take the standard deduction of 15 so we said we have a choice we could either use the standard deduction or the itemized deduction now What are the itemized deduction the itemized deduction is a list of deduction that goes on something called schedule a So what are the itemized deduction? Well? This is schedule a itemized deduction and again We're gonna have many few lessons about schedule a what you do is you add up your medical and dental expenses subject To some limitation and you'll have a number here taxes you paid state and local taxes other taxes State and local real estate taxes, then you will have a total here Interests you paid certain interest is deductible usually how mortgage interest you'll have it you will have a number here Gifts to charity you'll have a number here casualty and theft losses if applicable. We have a number here then you add them and If your total itemized deductions are greater than 12,550 for this particular year that we are discussing because this was given by the government if this total is greater than 12,550 that's assumed it's 15,000 you are better off Choosing your itemized deduction because it's a greater than what the government is giving you if it's less obviously you would use the lower amount Because the lower amount I'm sorry if it if it's less you would use the number given by the government So for the sake of this illustration, we're gonna use the standard deduction So after you after we arrived to 95,000 you can deduct 12,550 happens to me that year. So we're not using the itemized deduction It's or then you can deduct qualified business income. We're gonna assume you have no business We keep we're keeping everything simple because qualified business income is a one Two one or two one or two chapters by themselves lectures now. I need I need my calculator to figure out what is my Taxable income. So I have 95,000 AGI minus 12,550. I'm gonna come up with 82,000 my taxable income is 82,450 Okay, now, let me show you on the form. So here we have my taxable income 82,450 this is my taxable income now I'm gonna go from my taxable income and now compute my tax Now notice you go from taxable income then you have to compute your tax Well, that's gonna depend on your tax rate and we're gonna have a separate recording showing you how to compute your taxes times some rate Okay, for the sake of this illustration just to keep things simple. Just you know, I'm gonna assume It's 23% and this is not even real just a kind of just to make up a number. So your taxes will be 8,963 dollars. I'm just gonna put 63 not 60 63.50 now I'm gonna come up to your gross income tax liability. Well, we said sorry The rate is 23 so the the gross income tax liability is 18,963 and I multiply this by the rate It's not that simple. The rate is not flat 23 percent. There's a way to get to it I'm just I'm just making up numbers to keep going now your gross income tax liability is 18,963 we can say this is what you are responsible for unless you have what we called tax credits And before we talk about tax credit, I want to let you know that standard deduction anything that's the standard deduction is a deduction below AGI notice it's below AGI and all itemized deductions or Itemized deductions are below the line below AGI notice. It's below AGI So sometime you have to differentiate whether this deduction is above the line or below the line. What's the line? The line is a AGI adjusted gross income now. Let's go to Our credit you could have many many credit I am not gonna show you all the credit, but you could have many credit child tax credit There's a whole form for different type of credit and we're gonna have separate recordings about these credit earned income credit So on and so forth now from those credits and the difference the good thing about credit is they reduce your taxable income dollar for $2,000 and let's assume you have $2,000 in tax credit notice the $2,000 in tax credit would reduce your taxes by $2,000 That's it. That's credit. So now we have you now you are responsible for 18,963 Now this is what you are responsible for now We'll compare this number suits to what you already paid what you already either paid or taken from your W2 Let's assume what you already taxes paid Directly to the government or deducted from your W2 is 20,000 if that's the case then you have a refund because you paid 20,000 and you're responsible for 16,963 20,000 minus 16,963 and that's gonna give you $3,037 $3,037 that's a refund. Let's assume you only paid rather than 20,000 you only paid from your W2 of 15,000 well guess what you paid 15,000 you're responsible for 16,000 16,963 minus 15,000 I hope I did not make any math error. You are responsible to paying 1,963 you also might be subject to a penalty at this point who knows depending on many factors Well, which we'll talk about later But this is basically an overview of the income tax formula from again from what type of you? 30,000 view now you understand what I meant by 30,000 view now embrace yourself. I'm gonna go over The whole form not line by line to a degree line by line showing you how everything how everything is computed How do we come up with everything and I'm gonna try my best again? I'm gonna try my best I promise my best to use forms to this way you can see the numbers you can see the concept But you can see the form once again the risk with the form is once you see someone the form and they saw they see a different here Oh, this may not be relevant not at all the idea is the same the numbers might change You could have also changes to the form itself, but the concept is the same What should you do? What should you do now? Go to far have lectures and start to take multiple choice through false look at the children lectures Exercises that's gonna help you whether you are a CPA candidate or an enrolled agent candidate the income tax formula Understanding the basic concept is extremely important. Good luck. Everyone study hard. I'm always here for you and stay safe