 Income tax 2023-2024. Who qualifies as your dependent tax software example problem? Get ready and some coffee because we're looking at some useful hacks for income tax preparation. Hey, I said useful hacks. Get that legacy media reporter hack off the screen for crying out loud. This is not a joke. This is not some presidential press conference where we talk about chocolate chip ice cream. This is serious for crying out loud. 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 that's okay, whatever, because our merchandise is better than their stupid stuff anyways. Like our accounting rocks product line. If you're not crunching chords using Excel, you're doing it wrong. A must-have product because the fact as everyone knows of accounting being one of the highest forms of artistic expression means accounts have a requirement, the obligation, a duty to share the tools necessary to properly channel the creative muse. And the muse, she rarely speaks more clearly than through the beautiful symmetry of spreadsheets. So get the shirt because the creative muse, she could use a new pair of shoes. 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 problem using LASERT 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, and instructions at the IRS website, irs.gov, irs.gov. Starting at our normal starting point, taxpayer Adam Taxman, just trying to avoid a dang tax man, living in 90210 Beverly Hills. We're starting with the single filing status. We're going to say that they're back to 100,000 of the W-2 income standard deduction at the $13,850, and that gives us the taxable income of the $86,150. We don't yet have the dependence. We're going to be focusing in on the dependence and looking at the impact of the tax return from the starting point. We can mirror this information in our Excel worksheet. 100,000 on the income line item. Standard deduction from our table for the single filer brings us to the $86,150. We rely on the tax software oftentimes calculating the tax on page number 2, 14266. There's the 14266. We withheld $12,000, therefore taxed $2,266. And then the software is calculating a $43 penalty for $2,309. So here we have that, the $2,309 on the bottom line. All right, let's go back to the first tab. And now we're going to be adding the dependence. Now the easiest dependent to add typically would be just a child that's clearly like a sibling, a child. I mean, a child of the taxpayer, son or daughter, right? So we're going to go, okay, let's go to the first tab and add a child. So we're going to say let's do this and say we're going here and we want a dependent. And I'm going to just call it SAM. And birth date we'll say is on 010521, let's say. And did not die. That is good. Date of adoption not adopted. We're going to say social security number. We'll just say son. And we're going to say months lived at home. So that's one of the tests you will recall when we looked at the instructions. So here is our test. You'll recall we went over this in a prior presentation to think about whether they are a qualifying child. And then if they are a qualifying child, do they qualify for the child tax credit? If not, then do they qualify for the dependent credit? So the questionnaire will typically think first, can I get the child tax credit? Then can I get the dependent credit? So lived at home 12 months, we're going to say type the child living with taxpayer versus child not living with taxpayer, dependent of other than child head of household and so on. And then we've got the earned income credit. So we could have an impact with regards to a dependent for the earned income credit. And then we have the child tax credit. And that's going to be the main credit that we're thinking of. So we're going to say when applicable here, dependent not claimed each year. So it's possible that you could have a joint custody situation where the dependent might be on your return one year and like on another return the other year or something like that, this year claim or suppress of the year. And so let's pull it on over and say, okay, what happens here? Now first note that I didn't change the filing status. That's the first thing you want to kind of be aware of. The filing status will not always change if a dependent is added. But if you're talking about a single filer, then it's possible that that dependent could push them up to a head of household, which is one reason that in a joint custody situation, that child is even more significant possibly because that also can have a significant impact on the taxes because we know that that filing status has an impact on the tax rates that will be applicable, more beneficial rates, and the standard deduction. So let's move that over too. I'm going to go to the detail over here and say, all right, let's move them up to head of household, head of household. And so there we have it. Okay, so now head of household filing status, we have the dependent in the dependence area here, social security number, relationship, this box being checked because we're saying that they qualify for the better of the two credits, the child tax credit as opposed to credit for other dependents, 100,000 still on the income, but now the standard deduction jumping up to 20,800, that's one of the major impacts. So if I change the standard deduction here in our worksheet to mirror that, we're now at the 20,800, head of household, getting us to taxable income, 79,200. There's the 79,200 page number two, calculating the tax, 11,131. Let's put that in our worksheet here, 11,131, letting the software do the tax calculation. And so then we've got the child tax credit. So here's the big one, 2,000 child tax credit. We'll talk more about this credit later, but right now we just want to note that that's going to be one of the significant impacts of having the child. Could have an impact on the status, filing status, but the credit is really the thing that first comes to mind. So for now I'm just going to show that over here on the other credits, child tax credit for child one. I'll just say, or Sam, let's put his name, Sam. We're not the IRS, he's not a number. He has a name, he has a name, Sam. Okay, so then we've got the 11,131 and the 2,000, that brings the taxable amount to 9,131. So we go, okay, there's the 2,000, 9,131, and then the 12,000 are withholdings. We have no penalty, so 2868 refund. All right, so there we have that. So there's the impact of that one. Now note that if the income is below a certain threshold, we could have an impact in terms of an earned income credit. So let's just to show that, we'll talk more about these credits later, but just to show you the impact on lower income individuals, like if I put this down to 25,000, I'm just going to get rid of the withholding. I'm going to go back on over and say, okay, so now we had 25,000 of income, standard deduction 20,800, which means the taxable income is only 4,200. If I mirror that over here, we're going to say, all right, I put income 25,000, and then boom, and then so 20,800 still, 4,200 on the taxable income, 4,200, page two, tax calculated 423. So the only tax we have to pay 423 then, but now the credit was 2,000 before, and I can't take the full credit to bring it down to zero because the top part of the credits here are the non-refundable portions of the credits. So notice what happens here. I can only get a credit that brings me down to zero, which means that this credit has to be 423. So if I go back to my credits and I say this needs to be 423, and I could get fancy with a formula over here to do that, like let's say I, so let's put the actual tax on this side. I'm going to say just to show this and I'm going to say, okay, this is the tax and then I'm going to put this over here. I'll just say this is going to be equivalent to this number. So when I type that number in, it'll populate on this side. And then I'm going to put over here 2,000, which is normally what we would get for the credit, but it has to be the lesser of this or this, right? So I can say I'm going to use an if function to do that. So I'm going to say this is if brackets, this number is less than this number. And I know I'm doing this fairly fast because it's not really an Excel course, but this is a logic test. So I'm saying if that number is less than that number, then comma, what do you want to do? Then I want you to take this number. However, comma, if that's not true, if this number is not less than that number, then I want you to take this number. And it's just a logic test so I can say, okay, so there it's going to take the 423. If this one was smaller, if this was 400, it would take the 400. So I'll put the 2,000 here because that's what I would normally get. And then I could say, oh yeah, then it calculated this way and picked up the 423 instead of the 2,000. I'm going to copy basically this formula down. And then I'm going to sum up the outer column here. And so that can give us a little calculation. Let's make this bordered. I won't make it blue because we're not doing data input here. We do the data input here. We see it populate. And then if I go back to my credits, so now I can see it's pulling in that 423, bringing the taxable amount down to zero. But if I go back on over, then I've got these earned income credits down here, which is partially based on the child, which is significant, as you can see. And then we have the additional child tax credit, which again, we'll dive into in more detail in future presentations. But just note that these two can be quite significant, of course. So for now, I'm just going to put those end numbers in on the payments and credits. So I'm going to say we had the child tax credit, and I'll just say that that was the 1577, 1577, and the earned income credits, which I'm going to say was 3441. 3441, I'm just relying on the salt where to calculate that at the 1718. I got rid of the withholding for the W2. So that means this brings it down to zero. No payments were made, but still gets a refund, quote, refund of 5,018. And so we go, okay, 5,018. And so there we have it. So these really kind of confuse things, these refundable credits. We'll talk more about them later. I'm just letting the software do the calculations for now, but just note they also could have significant impacts on the tax return, of course, and they also have funny incentives in terms of filing status married versus a single or a head of household situations. Okay, so let's bring it back up to the 100,000. So we'll bring it back to the wages of 100,000. So now if I go back on over, we're going to say the income, let's mirror this over here, 100,000. And then we've got the head of household status, to 79,2. So then we're going to say it on the end of page one, we're back to 79,200. Page two calculates the tax, 11,131. So we're going to say this is 11,131. And then the 2,000 now has populated automatically because over here in our credits, it's now taking the lesser of, which is now the 2,000 with our logic test. And then over here, I could make this one a little bit fancy as well to try to get more fancy with this formula, but I'm not going to do it right now. I'm just going to delete these. No earned income credit or child tax credit. If I go back to the first tab, then there's our other credits. So the tax is at the 9,131. I'm not going to put the payment back in place. We started with 12,000 before. So if we have a penalty on it of 422,9553. So 422,9553. Okay. So now let's say they get married. So now married. And so now we have the dependent going for married, head of household to married. Well, one more thing to note, if there was another dependent, let's add two dependents and say they were both children. So let's say just say child to get generic child to come on date of birth, out to 16, 20, 21 again. I don't know if that's what I put before. Date, social security. And then let's say this is daughter and oh, you don't, you don't name the woman. Right. You Patriarch Tickle. Well, I just got lazy. I was okay. We're going to say let's put it. Let's put her over. Let's put that here. And so now if I go to, if I go, now we've got Adam Taxman. I'm still head of household. So there was no change to the head of household status. That's what I want to point out. It's only when you have like going from single to head of household or possibly if you're in a qualifying surviving, surviving spouse situation where the child could have a significant impact on that part of the equation, but still has an impact for the child tax credit and possibly the earned income credit, which we'll talk about those more later if there were lower income side of things. So now 20,800 still here. Same on the first page. Page two now though has 4,000. So we're at the 11,131 same 4,000 now for the credit. So that's the major benefit that comes to mind. So here we have child two, child number two. Wait, that's over here. Child two. My daughter, we call her child two. Okay, wait a sec. I need to say this number is going to be, let's do an F4 here and then F4 here. Making that absolute. So when I copy it down, then I can copy this down. And then there's the 4,000. Okay, so let's go back to the first tab. So now we have the 4,000 child tax credit. And then so that comes out to 7131, 7131. And then 330 brings it to 7461. So 330, 330, 7161. Okay, so now let's say they get married. If they get married, we're going to go, okay, filing status. They're going to get married to Jane. Or who is it? Adam married Jane. Okay, we're going to go back on over and say, okay. So now we have Adam and Jane married filing jointly. So now, and Jane's blind. No, Jane and she's old and blind. No, that was for the last presentation. They're similar ages now this time. Get the story right. You're messing it up. 78 will say for Jane and she's not blind. Not that there's anything wrong with being blind. I'm just saying we're going, okay. So now she's, now we have the two children there. So 100,000 still. But now I'm in the wrong thing, 1040. So now she's, they're married, two children, both child tax credit 100,000 same here, 27,007 on the standard deduction now. So standard deduction is going to be equal to the 27,7 bringing us to the 72,3. So there's the 72,3. And then on page two, we have the tax 8239. So I'm going to say, all right, 8239. And then we still have the 4,000 is the same. So you can see this was the primary thing that was impacted here that it wouldn't change the status if they were married to have the dependence. The primary thing that would be affected are the credits, which also could impact the refundable portion of the credit. If the income was lower and possibly the earned income credit, which is fairly complicated that we'll talk about later. So 4239, so 4239, we'll just go here. I won't add the penalty down below. All right, so there's that one. Okay, so then if I go back on over, we have some of these other conditions that could be taking place here. So we could say that if Sam was over 19, then he might still qualify as a dependent as a qualifying child, but possibly not for the child tax credit in that case. So let's pull out the trustee calculator and say that he's over 19, but under 24. So I'm going to say 2023 minus, let's say 21, 2002, 2002. And so if I said 2002, and then I said that he was a student. So here not dependent head of household. No, we're going to say student age 19 to 23. Okay, so now if I go down, I'm going to say, okay, still married, but now we've got Sam is now a qualifying child, but not for the child tax credit, but rather getting the credit for other dependents. So still beneficial, but not as beneficial. So we're at the 72, 300 page one. And then on page two, we've got the child tax credit or credit for other dependents. And so you get the 2000 and plus the 500 basically is the idea here. We could take a look at the form by the way as well. So here's the credit for qualifying children. We might focus in on the credits more later. Now we're kind of listing just basically listing the dependents, but this is the major impact of the dependents. So here we have this, we'll go over that worksheet more possibly in a future presentation. But so 2500. So now if I go into my worksheet, I'd say, okay, the credits are 2000 for the child tax credit. And then let's let's pull this one down and say instead of having other credits, and then I'm going to say other other T H E R dependent credit. And so let's do, and so I'm going to leave some space in here for other dependents. I'll make that blue and bordered. And now this is going to be Sam is down here now the max is $500 instead of this and that $500 also has to be greater than the tax because it's non refundable. So I could do that fancy calculation. I can say, okay, this needs to be if this number is less than this number F four, because I want to make that absolute comma than what do you want to do? Then I want you to take this number. But if it's not comma, that's what the comma means. If it's not, then I want you to take this number and then I'll do the brackets. And this one needs to be F forward at four. Now this still isn't perfect because if I had multiple people here, then you know, they would both calculate something. So but the idea here is that if this was, you know, 9000, then it would take this number, right? But this is below. So it took this number. So it's not perfect, but that'll help us. And then the then this I was pulled this down. This is going to be the total other dependents credit is going to be equal to the sum of these. And then my total other credits thus far is the child tax credit total plus the other credit total 2005, which is pulling over to page one 2005. Then we're at the tax at 5739. 5739. So those are the major two impacts of the credit, right? The child tax credit or the other dependent credit. And then you can think about different variations based on this questionnaire, different scenarios as to when someone might qualify for those credits. And you can kind of see those on the data input as well. So if you look at the data input and try to question why the data input is the way it is, here's the relationship that's obviously kind of like the relationship test. It's helping you out with the relationship test months lived at home. That's helping you out with did they live with you test. And remember that you can get into kind of weedy areas with with that one. Try to because they might not have lived at home because they were in the hospital or something, which means they would generally count as though they were living at home for that timeframe and so on and so forth. The type child not living with taxpayer dependent other than child. So if they're not the child, then when we go to the questionnaire, we wouldn't be looking as to whether they qualify as a qualified child, but would be skipping down to the is your qualified relative possibly right. And so that would be someone other than the child. Head of household or qualifying surviving spouse only. That's fairly rare, but we talked about situations where head of household usually means that you have a dependent, but possibly you have a situation where it's not a dependent, but still qualifies helps you qualify for the head of household status. So that was a, you know, somewhat of an unusual type of situation. And then the earned income only not a dependent earned income credit. So we'll talk about the earned income credit later, but again, you could possibly have strange situations where they're not actually a dependent, but possibly still help you qualify for the earned income tax credit. We'll talk about the earned income tax credits later in the credits section. And then in here, student disabled force suppress with relation to the earned income credit, which again, we'll talk about more later, the child tax credit. You could suppress the child tax credit, suppress or applied for the itin because you that was you'll recall in the instructions where we had a situation where you might have applied for it, but you haven't yet got the number yet, in which case, if you get the number, then then it's supposedly, well, that's just kind of an unusual situation. And then we have this one dependent not claimed each year. So that would be that situation where you possibly you had a deal with the other parent most likely that of a split custody situation, and you're trying to basically split the tax benefits on a year by year basis, which again, gets kind of messy. But then you have if you click that one, you have suppressed this year claim in the odd years, claim in the even years, which might be a common type of thing that could come to an agreement on, you know, a joint custody type of situation. So that's the general idea. So the bottom line, if I go back to the forms is that if you're if it's going from single to head of household, or if there was a surviving spouse situation, then another dependent could be significant in that it might pull someone up from the the filing status to a better filing status, a much better filing status typically in those cases. But if you have more than one dependent in the case of a single or qualifying surviving spouse or something like that, or if you're married, then you're not going to get a filing status benefit, which would have an impact on the standard deduction and the tax rates. But instead, you're primarily focusing in on the credits that you would get a benefit for. If it's a qualifying child, as we defined in our rules over here in the instructions, and you can see kind of with the data input, then you might qualify for the child tax credit. We'll talk more about just the ins and outs of all the details in the child tax credit later, but you can look at it more on the instructions on form 8812. Typically you have like the $2,000 for the child. But if you don't have any tax, then you these above these credits up top that are non refundable won't take the tax liability below zero. So then you have the question, well, if it does take my tax liability below zero, do I still get a benefit from the credit even though I'm not paying any tax basically at that point in time? That would be not a refund. That would be like a welfare or benefit, you know, type of Chrome, like a safety net type of program. And so then we have to get into the portion of the child tax credits, which would possibly be refund refundable. And again, we'll talk more about that when we get into the credit section in detail. Right now we're just kind of listing out the dependence, which have a primary impact on the credits. And then of course, the child tax credit, if you're talking about low income individuals, you always have to keep in mind this earned income tax credit because it could be quite significant. And it's actually quite complex with regards to how big the credit will be if you're single versus married and then filing status, as well as how many dependence that you have will have a significant impact, as well as your income levels, which is strange because it actually goes up. I kind of make sense from a from an economics standpoint to incentivize work, but from a from a logistic standpoint, it's all pretty confusing. And so we'll get into that in more detail later. I also think the incentives are a little backwards, not only in terms of incentivizing people to work, but incentivizing whether, you know, couples should stay together or break, break up. If you break up, you get like $5,000 on the tax, you know, you could possibly, you know, this seems something weird, not quite right with that. But again, we'll talk more about that in future presentations.