 Income tax 2023-2024. Other income part number one tax software example. Get ready and some coffee because contrary to popular belief you need a strong imagination to do 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 but that's okay whatever because our merchandise is 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 using LISERT 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 the forms schedules instructions at the IRS website irs.gov irs.gov starting at our normal starting point with our taxpayer Adam tax man just trying to avoid a dang tax man living in 90210 Beverly Hills single filer no dependence to start out with 100,002 income. We have the standard deduction 13,850 to get to taxable income 86,150 mirroring that in our income tax formula 100,000 13,850 and the 86,150 tax calculated to start off with 14266 as we can see in our software page number two 14266. All right let's go back to page number one we're still in the income area we're looking at the other income so we're scrolling down to the line eight additional income from schedule one I'll put a little check mark so I can find that faster next time we're going to go then to schedule one we have the additional income and adjustments part one additional income we're focused on line number eight now line number eight has various items that are included usually less common items that we're going that we would see so we'll go through a few of these just to get an idea of the data input related to them so we got the net operating laws gambling cancellation of debt for an earned income coming from form 2555 income from form 8853 and so on and so forth now the first one net operating loss now the general idea with a loss would be you're usually thinking about business income and we're thinking about a loss situation and possibly we might be thinking about a schedule C type of business in a prior year we can imagine that instead of having income we had a loss for example that means that on our income statement of the schedule C we had income minus expenses and you can imagine having a loss situation if you lose money then the IRS isn't going to want to pay you for the loss right they want to collect income they don't want to be paying off for people doing bad business they only want to collect money as the silent partner when the business makes money but you can imagine well if I have a loss here these are in essence deductions business deductions and if if I had to put an investment this year to generate revenue in future years it seems like I should be able to get these deductions when they start to pay off making money so that's why it seems reasonable to take the loss used to be like going backwards or at least going forwards so I can mass match out the investment I had to put in place in order to generate the revenue that's kind of the rationale of the of the idea of a loss situation now in practice note the loss can get kind of confusing because you've got these rollover effects and things that can and can't be included and the net operating losses and the changes and the laws can change from year to year and so on so I would recommend that if you if you have the same software that's used last year and this year rolling over the software to the current period will help you with things like an NOL net operating loss because it'll have hopefully help you to calculate and bring over the proper numbers if you're taking on a new client or using a different software then instead of just doing the data input in the current year of the software you might want to first go back to the prior year of the same software do the data input mirroring the tax return for the prior year so that you can then roll forward from the prior year to the current year the software helping you to get the to get that rollover process correct so that's what I would recommend in more complex returns those that have like a schedule C for example or a schedule a for example that's the practice I would generally recommend but let's just go over here and see what that would look like so I'm going to go on over and see if we can just do the jump to right click and jump to NOL loss and I'm just gonna say okay NOL loss year let's say 2022 we had a loss let's say of 10,000 and so amt could have an amt consequences I'm not going to deal with that right now I'm going to carry carry over available in 2023 I'm gonna say 10,000 amt carry over available I'm just gonna say 10,000 just to pull it in so we can see it populate in the current period now note again we might only be able to deduct like 80% of the loss and whatnot and so on and so forth I'm not gonna get into that in detail just to give a general idea of where it's gonna pull over now I'm scrolling back over we're in the schedule one we now have the loss that is pulling in so note that the loss is gonna be in the income areas but you can see it is in brackets brackets here so it's still kind of in the income area because the IRS I suppose didn't want to put it in the deduction area couldn't put it into itemized deductions you would think they might have put it on page two as like an above-the-line deduction but they basically put it as a negative income amount here so that means that it's gonna pull into page one I'm sorry page one of the form 1040 so now we've got the 100,000 and then mine is the loss that was pulled over not from the current year but from the prior year brings us down to 90,000 and then the the standard deduction of 13,850 gets us to the 76,150 so again that's just to show how it's going to populate on the return I would recommend possibly doing that rollover technique and try to make sure that when you have these things that are impacting multiple tax periods that you're double checking those numbers all right let's go back to the schedule one and then I'm gonna scroll down and this time we're gonna look at the gambling so gambling income if you're at like a casino or something like that you're supposed to report of course your winnings because the IRS thinks that everything that you receive is income unless there's an exception to it if your income is above a certain threshold the casino for example or wherever your winnings were from might be required to issue a document such as a w2g which will also of course go to the irs and so you're gonna have to make sure that you pick that up so let's remove then this loss here so I'm gonna say let's delete that and then we're gonna go into gambling winnings so I'm gonna go back on over and say okay let's see if we can just jump there right click and jump jump 21 jump street okay why is that in my 21 jumps rate seriously w2g and we're gonna say that this is gonna be let's say we've got the good old 10,000 let's just put the 10,000 here if we had withholdings on those we could put that here if you have winnings that will have an impact on your taxes of course and you might choose to have withholdings on it or adjust your your estimated payments if you had significant damp gambling winnings because they could put you into a higher tax bracket or something let's just put a thousand in here and then I can go back on over and we're gonna say okay so now we had the gambling winnings that's on line eight b if we pull back on over to schedule to the 1040 so now we have the 100,000 the 10,000 pulling in this time not from an nol but a positive 10,000 bringing the income up to 110,000 we have the same 13,850 for the standard deduction the taxable income now at 96 150 page two calculated in the tax at 16482 which it was at 14 right so 16482 you could see there's a difference in the tax from what we had before of 2000 to 16 and the income was $10,000 the change so we can say if we divide that out we had a tax rate that they hit us with of 22 to 2 percent about so if I go back on over here and I look at my worksheet then you can see that that it basically hit us we were in between the 22 percent and the 24 percent so it hit us with the highest tax rate and that gambling winning actually pushed us up so some of it was taxed at a higher tax bracket note that that could be the case with gambling winnings because if you actually win a significant amount then you're going to get it in a lump sum possibly which could bring which could increase your tax rates in a progressive tax system and then here's the withholding that we had here so the thing to be careful about with gambling winnings is if your if your tax professional then you're going to get questions like should I did should I collect my losses now you might have losses with them but if they're deductible they're typically deductible over here on a schedule a and the other you know the other deductions and that notice that that these schedule a deductions as we'll see later are going to have to be greater than the standard deduction on page one of the form 1040 they have to be greater than the standard deduction to take them at all the standard deduction was increased a few years ago and their their the itemized deductions could be limited to some degree as well and the deductions that you're going to get are only going to be up to as much as the winnings you cannot have more deductions than the winnings so you can say well yeah you might want to collect your your losses in the event that you have winnings so that you can write them off but you're probably going to be severely limited to the amount of deductions and if you don't itemize it's not likely that you're going to get any benefit from trying to write off the losses against the winnings because you're not itemizing the deductions so then you also might get a question like well if you see somebody that gets they hit the jackpot and they get winnings what's that going to do to their taxes well then you might have to do a projection or possibly go to the iris website and use their estimator tool to project what your tax impact will be because as we saw it could significantly impact the tax calculation which means that you'd want to make increased withholdings to compensate for it or possibly make estimated payments to avoid getting penalized at the end of the year okay those are just a couple things with the gambling let's see what else we have let's go back to the schedule again and we're going to say we have the gambling cancellation of debt all right so let's jump back to the gambling let's remove that one and say did you do gambling is gone I was just kidding I didn't win any money I never win I never win oh poor you I just like to play for the for expensive drinks I give them all my money and pretend like they're giving me free drinks anyways cancellation of debt so let's jump to that one cancellation of debt and so we're going to say that uh let's get rid of this bit too and then delete the cancellation of debt we'll put the ten thousand here but boom and we'll go back on over so of course there's the ten thousand now you might say why is cancellation of debt income well if you owed the bank money and then the bank said we are we think you're so unlikely you're so unlikely to pay us that we're actually going to relieve the debt that would be kind of like they gave us the ten thousand dollars as a gift as income or whatever and we gave it back to them in relief of the debt right you basically have income it's basically the same thing however if you can't pay like the bank back it's probably because you have an issue like your insolvent you don't have the money to pay it back and the bank recognizes that and therefore they're willing to cancel the debt or restructure it in some way shape or form in which case sometimes there's tax advantages or benefits that you could take because of whatever the current situation is we saw some of that stuff in the with the loan forgiveness and whatnot in the covid times but as a general rule if you if the debt is forgiven it would be included in income so if you have a situation which isn't totally common not too common where someone where there's a relief of debt like the bank says you don't always ten thousand dollars anymore then that would typically be income but there could be exceptions to that given the current situation that they are in okay let's go back on over to schedule one and say what's next we've got the foreign earned income so let's jump to this one and get rid of that one and say okay so that's going to be on so this is a whole another thing in and of itself on schedule two five five five so if I jump to that you've got foreign wages and so on and and so that so you can you could then imagine that we had foreign wages and and if so if I go back on over I'm just going to take a look at it here we won't go into this in detail it'll be kind of a specialty field in and of itself but just as a general idea if I go down to the form uh two five five five we're going to see here that we have foreign earned income now the problem when you have foreign earned income is that the foreign country is going to also have their own tax consequences and their own their own taxes and then if you're a US citizen you might be in a situation where you have double taxes from two different places which becomes a problem if there's a deal or a treaty between the United States and wherever else the income is coming from the question is basically who's going to be able to get the taxes from the income for that source and again that becomes kind of a specialty field in and of itself as a tax preparer your question would be do I want to take on tax returns that have uh foreign earned income situations that I can then uh have a more complex return that I'm going to be dealing with or do I want to not be dealing with with those types of returns but the general idea would then be that if you had that item applied if we then have the two five five five I won't go into it in detail we might take a look at it later in more detail be it but for now just the general idea this information would be pulling over to the schedule one and then we would be pulling into the foreign to earn income exclusion note it's a bracketed amount because it's an exclusion from income the idea being for income taxes everything is included in income enlisters and exception and the code is what the iris generally wants therefore this would be reducing income in a similar way as we saw with the net operating loss okay so then next we have the line eight e and eight f which are kind of similar line e being form eight eight five three which is the archer msa or medicare advantage and then we have line f which is going to be for the health savings account on form eight eight eight nine now typically going forward more people are going to be in the health savings account because that's kind of like the newest the latest and the greatest of the two you could take a look at those two forms if I go over to eight eight five three which is probably less used and as we go forward here eight eight five three that's going to be for the archer msa msa's and long-term care insurance and then we have the other form which is eight eight eight nine which is probably going to be the more current form that you might see more often eight eight eight nine that's going to be the health savings accounts the hsa's now again we might go into these in a bit more detail later but there are similar kind of tax strategy as you might have for a an ira in in that when you have an ira or retirement account you get a tax benefit to put the money into the ira a retirement account the irs trying to nudge our behavior that being to save for retirement therefore the money in that account is going to be restricted in terms of how we're going to use it or how we can pull it out same kind of concept here we would only put money into an hsa because it's going to be restricted if we get a tax benefit possibly at the point in time that we put the money in and possibly with the growth of the money and the ira's restriction is that we have to use the money in a certain way right so when i take the money out there might be then restrictions on how i use the money in order to maximize our tax benefits that's going to be the general idea so what is it what does it have to do with this line right here these lines then we're looking at the income side of things so we're typically looking at the side when we take the money out and we're asking the question as to whether it's something that needs to be included in income or not which might be dependent upon how we use the money so there's usually there's going to be questions in terms of when we put the money in to the account do we get a tax benefit such as reducing our taxable income when we put it in and then there's the growth of the money while it's in the account and it grows do we have to pay taxes on the possible dividend interest while it's there and then when we take the money out do we have to pay taxes in income taxes when we pull the money out those are going to kind of be the questions when we're looking at these lines we're looking at the situation where we're taking the money out so again we might take a look at those in a bit more detail in future presentations next we have the jury duty now jury duty is usually pretty straightforward if you had if you had to take jury duty then you might then get wages for the jury duty which is and then you might have to you might get a form that shows the jury duty possibly a 1099 type form and then that is going to be something that usually will be included in income let's put our 10 000 there it's usually going to be a smaller dollar amount therefore not having a big impact oftentimes on the on the tax implications however you can imagine a situation where the jury duty took a long time or something and you have a significant amount of income from it if that is the case and you have a significant amount of income and i go to page two that's gonna i mean i'm sorry go to the 10 40 that will of course pull into the form 10 40 here increase in our income from 110 from 100 to 110 again so 13 850 standard deduction 96 150 that would pull into then page two so the couple questions with the jury duty is one it's usually not a whole lot of money so it's not might not have a huge impact so but if it does then the question comes up in terms of your estimate your estimated taxes again do you need to increase your withholdings or possibly make estimated payments due to the tax consequences of the jury duty so that you do not underpay your taxes resulting in penalties and interest in taxes due at tax time now you could also have a situation where your employer might still be paying you for jury duty or something like that in which case they're going to say i'm still going to pay you because you're doing your jury duty business and instead of you taking the lower jury duty money will just pay you for it and therefore i want you to give me the jury duty uh in which case you might be able to to reduce the the income by the jury duty on the on uh on the schedule two or page two of the adjustments to income which we can see down here so we might talk about that more later but typically jury but the general idea obviously is if you have jury duty you might get documentation for the iris has it you're going to have to record it uh in income think about the tax consequences in terms of estimated taxes and then if you do have to pay your jury duty to your employer or because they paid you your salary anyways then think about if it might be deductible which we might talk about more in a future presentation all right so let's jump to that one let's go back on over and say okay that's fine let's go to the prizes and awards now remember the iris likes to say anything is income unless they exclude it and note what would happen if they didn't do that you can imagine people coming up with tax schemes where they say oh it it wasn't income i wasn't paying them for work that they did i just gave them an award it was an award for being a great human being it's going to be like those awards that you see these days for the most ridiculous thing just to avoid taxes right you're like oh it's a word for you know being a excellence excellence award well what are they excellent in i don't i don't really know but in any case you usually have to usually have to include the awards and income and there's various kind of of benefit kind of calculations if it comes from as to where the award comes from as to the reporting requirements for whoever gave you the money so remember the iris is always going to be pressuring the person that gave the money because that person's going to want to get a deduction usually and if they're going to get a deduction the iris is going to say well you have to rat out who you gave the money to so we can include it in income which means that you might get documentation based on an award in which case you would have to include it in income and if you have to include it in income it will once again feed into the form 1040 increasing your your income which could have significant uh tax implications possibly pushing you into a higher tax bracket and therefore you're going to want to make estimated payments or adjust your withholdings to to compensate for the increased income from the awards now if you have an award from like olympic or para olympics then it might be basically down here olympic and para olympic so they have the special kind of area for that one and uh so there might be a slightly different tax consequences i kind of feel like you shouldn't be taxed if you're if you're winning awards for the olympics you should be taxed when you lose you go if you're going to the olympics you're going to win or else you're going to be paying your taxes that's how it that's how it should work anyways uh let's see what else we have here then we have activity not engaged for profit so i'm going to right click on this one jump back on over let's get rid of this and then we're going to say uh activity not engaged in for profit now if you did engage in an activity for profit then you would probably report that on a schedule c we'd have income and expenses the benefit of a schedule c is that you get the deduction of the expenses which could actually result in a loss the iris is very skeptical of losses however because if you have a loss the iris is going to say were you really trying to make money or are you just writing off your personal expenses and then you're making and then you have a loss in them so this will often like if you have a tax return preparation business the iris is not likely to say hey you're just doing that for fun probably but if you have a business like horse racing or something like that and you keep on buying horses and the horses keep losing the races or not making enough money to pay for the the purchase of the horses and that happens for like 10 years and you keep on writing off losses against your w2 income the iris is probably going to become skeptical that you're just a horse fanatic or a gambler or something like that and you're trying to write off losses so that's when that's the question you have to say if you're if you're a content creator and you're writing off going to the movies or going to france so that you can see how whatever happens over there so you can do whatever you do the iris is probably going to say that looks like fun stuff and they're more likely to say that uh that it might that it might not be for business activities and that just means that that doesn't mean you can't do it but it means that you have to you have to make sure that you are engaged in a for-profit activity and have the evidence to prove that also if you have losses for more than three years in a row the iris is likely to say more likely that the the the burden of proof might be more likely to shift to you to prove that you are in it for profit rather than the iris having to prove it that you are not in it for profit right the default assumption would be that you're not after a certain point in any case i also note that if you had income however over here the bad part of a business side of things is you also might be subject to self-employment tax social security and medicare which we saw can be significant because you're paying both the employee and employee or portion so in that case it would almost be good if like if you had income of ten thousand dollars and you had no expenses then you would you would rather possibly record it as a hobby because if you recorded it as a for-profit income you would have to pay not only income taxes but possibly social security tax but if you had that same ten thousand dollars and then you had fifteen thousand dollars of expenses then you would end up with a loss in which case you would rather have it as a business thing on the schedule c because you can take the loss against the w2 income all right that's the general structure of it so if i go over here and we say okay uh we have the uh activity engaged not for profit jumping and we're going to say there's our ten thousand dollars here and go back on over okay and so if we add that up and we're going to say there's the ten thousand that pulls on over to the form ten forty so we have the form ten forty there's so once again that could increase our income substantially therefore if we have a w2 income and a hobby that's actually making us money then we're going to have to account for that increase our withholdings or make estimated tax payments now also note it used to be that you can deduct some of the losses for the for the hobby stuff on the schedule a but typically that's not the case anymore there was a change and they tried to simplify things a few years ago so that's the used to be like you can deduct the hobby losses on the schedule a up to the amount of the hobby income uh but the but you know even then it was on the schedule a and like i say they increased the the itemized deductions so even if you were able to itemize them they're not going to be helping you unless you're unless you would have the itemized deduction so generally if it's a hobby you're going to have to include it in income typically have none of the losses but at least you're not subject to the self-employment tax which would be the case that you would be subject to if it was a schedule c business but if it was a schedule c business like i say you get to deduct then the expenses and possibly have a loss which would be good for taxes all right let's see what let's go back on over to the schedule one and so all right we did that one stock options so there's the stock i won't go into that one in detail we're running kind of long here but if you have the stock options then you're going to you can put that in schedule in line k income from rental or personal property if you engaged in the rental for profit but we're not in business of renting such property so so now you have personal property that that you that you rented and you did it in order to generate money so again the idea one of the things you have to kind of keep in mind here is that if you if this was a business and you put it on the schedule c you might be subject to the self-employment tax let's jump on over here let's put the 10 000 here now and go boom delete it here and so now we're going to say that we have the 10 000 here and that's going to sum up if i go to the first page of the 10 40 boom pulls in over here if i go into the second page of the 10 40 you'll notice we only have the income tax we didn't pull in the self-employment tax so that's one thing to kind of keep in mind with this item and many kind of items that might be a little bit more unusual down here if you got income from a different source the question is is it if it's for a for-profit business activity then the issue is that you might be able to deduct expenses related to it in that situation but you might also be subject to self-employment tax and that's and so that's going to be the the problem or what you want to make sure that you're basically double checking so just to get an idea of that let me just show you if i go into uh the schedule c let's say on the schedule c we had income of uh let's say the 10 000 and then if i go back on over to the schedule c you could say okay there's the income of 10 000 i didn't have any deductions so i'm just going to say all right it was 10 000 but then i let's go back on over here and say i'm going to get rid of that other income that we had to to here let's get rid of that and then go back in and say now that pulls into the schedule one as we saw up top pulls into the form 10 40 and then you'll recall that there was a bunch of impacts that we had from that from the the schedule c business and part of that is on page two we've got the tax calculated but then we also have this self-employment tax which can be significant now again there's also a deduction for it and so on so there's pros and cons to it if i if i go back on over and i said there was a loss in the business let's say we had to do and then let's say we had advertising of 20 000 now we lost 10 000 well then on the schedule c we have a loss we're not going to pay any self-employment tax because we had no taxable net income in essence to apply the self-employment not only that but if i go to the form 10 40 i might be able to reduce my income by the loss which is good for taxes and why the iris is skeptical of losses so that's often the question that comes up with different types of income is it business income and then is it subject to to self-employment tax or not