 Income tax 2022-2023. Dividend income software example. Let's do some wealth preservation with some tax preparation. Here we are in our example form 1040. We populated using 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, 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. To the form 1040 related schedules, related forms at the IRS website, irs.gov, irs.gov. Our starting point here as normal. We've got the single filer, Mr. Anderson. No dependence, 100,000 on the W2 income standard deduction at the 12,950 to get us to the 87,050 taxable income. We're mirroring that over here on our tax worksheet. 100,000 up top standard deduction, 87,050. We're dependent on the software to calculate the tax on page two, which is 14774. This is going to be a key point right here because when we look at qualified dividends, then we note that they might use something other than the progressive tax tables. So we want to be able to kind of see that. So we'll get back to that shortly. So that's the 14994. This should be 14774. That's what it should be, 14774. And then we have the 15,000 payments that bring us down to the 15,000 payments to the 226. Now our major focus is going to be recalculating the taxable income, but also we have to jump on over here to page two because there might be a different kind of set of formulas or tables that are going to be used when we talk about dividend income when we have the qualified dividends. Okay, so let's go back to page one and add some dividend income. So notice that you're usually going to get a 1099 div, something like that. The major focus when you get one is going to be on the boxes one and two. So box one is usually going to be all the dividends that you get box two then is not usually going to be saying, look, these are dividends over and above you got in box one. They're saying that the dividends that are reported in box one A of those dividends, this is the qualified portion of them. That's the general kind of way to read that. And then again, you might have some of these other items down here as well, such as the total capital gain distribution, which is kind of like a distribution that was received, but it's not being categorized as a dividend because it didn't come out of the retained earnings and therefore needs to be populated as like a capital gain possibly on a schedule D instead. All right, so let's add some dividend income just for the fun of it. We're going to be over here on the first page of the form 1040. We're looking dividend income. So let's jump on up to a dividend income. See if I can just jump there like that. And I'll say this is corp one. Now remember that in practice, you might have somebody that is investing. Most individual investors are going to be investing in mutual funds oftentimes if they're long-term investors and not like day traders. And oftentimes much of their investment is going to be under the umbrella of say an IRA or 401K plan in which case you might not get the dividend income because it might be part of under the umbrella of a retirement plan. My lifestyle is my retirement plan. So just remember if you have normal people that have money in investments, you're going to think about the reporting that might look a little bit different depending upon whether it's under the umbrella of a 401K or an IRA. If it's not under the umbrella of a 401K or an IRA and they have some investments that are not under that umbrella, then you would expect that you would get reports, 1099 div and interest and whatnot that would be showing the returns that they received from them. All right, so then we're going to have the total dividends. Let's just start with the total dividends of let's say 1,000 here and then let's say none of that is qualified. So let's say that would be like box one had 1,000 and box two, no qualified items. So let's go back on over and say, all right, what does that do then? So now we've got the 100,000. We've got the dividends at 1,000. That brings us to the taxable income of 101 standard deduction still at the 12,950 brings us to the total income or taxable income of the 8850. Let's mirror that on our return here. So I'm going to go to my schedule B. Notice that schedule B wasn't populated yet because our dividends are below the threshold of 15,000. But over here, I'm still going to call my tab, the schedule B tab. I'm going to go into the dividend areas, call it corp one, corp one, let's say, and say we have the dividends of 1,000. So 1,000 on the dividends and that's going to bring us to our total 1,000 which pulls over to page one, 101,000 and standard deduction is the same, 8850 and that brings us to the tax, which is now calculated. I'll depend on the computer to do that. It comes out to the 14,994. So 14,994. Let's kind of compare that to what it was before. Let's put the old number here, 14774. And this is now going to be the 14994. So then if I subtract this out, we had a 220 increase in the tax. And basically we had another $1,000. So if I had $1,000, I'm going to say 220 divided by 1,000. If I make that a percent, that's like a 22% that was applied to the tax, right? Because it was a, and why would that be if I go back on over and I go to my tax summary and I look at my good old rates down here, the marginal rate, the highest rate is 22%. So it got taxed at ordinary income rates, the highest rate, not the average rate of the 22% because it wasn't a qualified dividend and it got taxed at the highest rate. Now let's say, okay, well, what if, what if that dividend was all qualified? So now it was in box one and box two. So it's a qualified dividend. Okay. So I'm going to go, let's go back on over and say that 1,000 is here as well. So forms. So notice no change in terms of the total income. You got the hundred thousand, but now you do have it in the qualified dividend section on the left, still over here on the right and included to the total income. So no real change in the total income and no change in the standard deduction. We're still at the 88,050 just like we were before, but we're going to come up to a different tax. So if I go to page two, now we're at 14,924. So before, so last time, so now we're going to say we were at, we were at 14774 before and then if it was ordinary income, it was 14994 or non-qualified. And now we're saying that it's at 14,924. So 14924. So 14924. Hold on a sec. Is that the right number? 149, where did I get a seven from? Where did you get that seven? Huh? Huh? Where'd that come from? Anyway. So now if I compare that to what it was before, the difference is 150,000, right? So 150,000 compared to that other $1,000, it's now being taxed at the 15% rate. So notice we have a different rate that is being applied over here. If I go to my taxes, you can kind of see that if I look at my little tax worksheet and you can go down here and I won't go through the whole thing, but it'll kind of go through in a step-by-step and you can kind of see where the breakout of what that $1,000 is basically being taxed at the 15%, as opposed to what it was before, which I think was like the 22%. So notice it had to apply a whole different tax schedule. You got the progressive tax schedules and now a different tax schedule for that $1,000, which had to be at 15%, because the income threshold for this individual was a single individual and they were between this range, 100,000, therefore it taxed them at 15%. So you can see what it's doing. It's just trying to pick a percent where it's going to tax at a favorable rate and that happened to be the 15% in this case. So let's go back on over. Now if you were to change the scenario to say that the income was below a certain threshold of 40,000, then the rate would be zero, right? 15%. Let's say there are 15%. It would be too high if you wouldn't get a benefit from the favorable rate for lower income individuals. So if I change this down to their income, say wages to like 35,000 and say this is zero and now we're going to say, okay, so now we've got 35,000 and let's say that we don't have any dividends at first. Let's pull the dividends out. Let's pull the dividends out to start with. No dividends, boom. 35,000 W-2 income and so let's mirror that over here. 35,000, 35,000, boom. And then standard deduction and that gets us to the 2350 standard deduction but I still have 36 because I still have the dividends in there. Let's take the dividends out and so there we have 35. That gets us to the 2250. 2250, page 2 calculated at 2444. So now we're at the 2444. And then if I add the dividend income so let's say, all right, let's add dividend income, boom, dividends, dividends. That's not dividends. What are you doing? Capital, let's just make it ordinary so they're not qualified so it should be taxed at the ordinary income rates. So now we added the dividends. So I'm gonna say, all right, let's do that on my worksheet over here. Dividends, schedule B, 1,000, boom. And then that pulls over to the 1040, 36,000. We should be at the 2350. And so if I go to page, or the bottom of the page 2350, tax is now at the 2564. So let's say it was before 2444. Now it's at 20564. No, that's not right. That's quite high. It's at the 25464. Where did I get the zero from? Where did that come from? That's a little bit different. Slightly different number, 2564. So that's a change of 120, which means it was taxed, that extra thousand dollars was taxed at 12%. So if I went back on over here and said, okay, what's my tax rates? The ordinary rate, the highest rate is 12%. So if I then said the dividends were taxed at just a flat 15%, that would be a disincentive to invest. Therefore it has to be some number that's under that so it should be taxed at zero. In other words, if I went back on over here and said, okay, $1,000 qualified dividends. Now I should have the same first page, except now they're qualified dividends included in here. The taxable income has not changed 2350, 2350, but on page two, now we're at the 2444, which is basically what it was before because we didn't have any tax applied to it. So it had the zero rate that is being applied to it. So now we're at 2444, and it didn't tax, even though we included or increased taxable income, there's no tax. Now, so notice the software pretty nicely and easily does that calculation for us. But when we explain this now to a client and we say, well, what's the benefit of having something in ordinary? What does that even mean? What is it doing? What is it doing? Well, the government's trying to give us a tax benefit for putting money into the, I'm trying to find, they're trying to give us a tax benefit for putting money into the corporation and deal with this double taxation stuff if they're U.S. corporations and qualified corporations and whatnot. But you're going to see that tax benefit not in your taxable income. It'll still be included in taxable income, but it's going to apply a favorable tax rate is the general idea. Now, let's make this go over the threshold. So Schedule B will show up now. So I'm going to say, let's go back to the other scenario. Let's say that it was 100,000, back to 100,000. And let's say we had 15,000 here. And then let's say that we had another dividend. Let's say another dividend from a 1099 Corp. Corp 2, Corp number two. And let's say this was 13,000. And let's say 500 of it was qualified or whatever. 500 of it was qualified. So now if I go back on over, now you're going to have on page one, the amount here of the 1,500 are qualified portion of the total, 14,000 total dividends between the two. And we now have a Schedule B, which is going to show the dividends over here, Corp 1 and Corp 2. So we've got the total dividends kind of listed out by Corp that pulls in to the first page of the Form 1040. I won't run that out on our Excel because we're getting kind of, it's going kind of long. I do want to point out on Excel though that over here you might, like this is pulling into the income line, but you might want another column like this for the qualified portion, just for your data input, qualified purposes. So you can kind of see it over here. Even though whether it's qualified or not, it's going to pull over to the income line. So if there was a portion of this that was qualified, I could say, okay, I'm just going to show that on my form over here. And I could say whatever of the 1,200 was qualified or whatever the whole thing on that one was qualified. Let's see if this is spelled right. Did I spell that right? I did. Of course I did. Why am I even checking? I'm crying out loud. Did I spell it right? Who do you think I'm a spelling master? Anyways, let's take a look at a situation where we had a capital gain situation now. So if you see something on the capital gain, we'll talk about capital gains later, but capital gains, you usually think, well, that's the sale of the stocks and bonds for most people. But you might see it on that 1099 div. Most data input software is going to have this box for the capital gain distributions. And if I just put whatever's on the 1099 in this box like $300, then it's going to pull over not as a dividend, even though it was distributed in kind of a dividend, but rather down here in the capital gain schedule D situation item. So we'll talk about capital gains more later. But the general concept, if you see that here, would generally be, you might have a question like, why would that be put there? Because the distributions that came out were given like a dividend. May they make beautiful dividends together. But they didn't come out of like the retained earnings. They came out of the investments from the original issues of the stock or something like that. That's why you might have like a distribution, like a dividend distribution that's reported this way and being reported like a capital gain kind of situation possibly, even though you didn't actually sell the stock. So if you were to just plug that into the software, that's what it will come up to. We'll talk more about the schedule Ds because that can come up to another situation where you have these capital gain rates, which might be different than ordinary income rates for another similar kind of reason. So we have another kind of situation where the actual tax calculation over here usually is based on the progressive tax system, based on filing status. But now we have this other exception for a different whole set of progressive tax systems. If we had qualified dividends and then when we get into capital gains, you might have a whole nother set of tax rates and whatnot that are based on capital gains for other reasons we'll get into in another time.