 Income tax 2023-2024, unemployment compensation. Get ready and some coffee because you're supporting an entire generation with their income tax preparation. 2023-2024. Most of this information can be found in the Instructions for Schedule 1 section of the Form 1040 Instructions Tax Year 2023, which you can find on the IRS website at irs.gov, irs.gov. Looking at the income tax formula, we're focused on line one income. Remember, in the first half of the income tax formula is in essence a funny income statement. Normally an income statement having income minus expenses resulting in net income. Here we have income minus various deductions resulting in taxable income. When looking at the income line item, we typically want it as low as possible for taxes. Therefore looking for things that might be exempt from having to include an income. Also noting that there could be some items included in income which could have favorable tax rates other than being taxed at ordinary income examples being the qualified dividends and possibly long term capital gains. First page of the Form 1040, we're looking at line number eight additional income from Schedule 1. That's pulling in from the Schedule 1 additional income and adjustments to income. Part number one is the additional income part. Line number seven is the unemployment compensation. So when we think about unemployment, the question of course will be, do I have to include that in income? Remembering the default position from the government from the IRS with regards to income is whatever it is, whatever you got, it's income unless there's an exception for it. That's kind of the default type position. So what is unemployment compensation? Well typically if you're in employment and then you're out of work for a period of time you might be able to collect then unemployment compensation possibly from the state. First a word from our sponsor. 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 this CPA thinking cap for example. CPA thinking CAP you see what we did with like with the letters. And this CPA thinking cap is not just for CPAs either. Anyone can and should have at least one possibly multiple CPA thinking caps. Why? Because based on our scientific survey of five people all of whom directly profit from the sale of these CPA thinking caps wearing this CPA thinking cap without a doubt according to the survey. Increases accounting productivity tenfold. Yeah at least. Apparently the hat actually channels like accounting energy from the quantum field ether directly into your head. Allowing you to navigate spreadsheets faster. It's kind of like how in like the matrix when Neo learns kung fu. Or at least that's what the scientific survey saying. So get one because the scientific survey participants could really use some extra cash. If you would like a commercial free experience consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. In that case the question of course is well I've got something. Is that something typically going to have to be included in income. And usually the answer is yes. Now note what we're talking about here is for the federal income tax purposes. Now they made some changes to that in some prior years. So some people could still be confused about the unemployment compensation because when we went through the whole covid thing. There were weird changes that were made all over the place. So part of the process that was somewhat static such as typically having to include unemployment got confused for a little while. And we're kind of back to the norm at this point in time. Which is that you would generally include unemployment compensation and income. Okay unemployment compensation is typically considered taxable income for federal income tax purposes. Reporting to the IRS recipients of unemployment compensation should receive form 1099 G certain government payments. So that's usually what you're going to be receiving you'll get the form for it. It's usually fairly straightforward from a data input standpoint because you'll be getting the 1099 like with other 1099s that will typically go to the IRS as well. And therefore the government already sees that income they know about it. Therefore you would think you'd have to report it typically in a similar way as you have to report W2 income and other 1099 income like interest and dividends and so on. Because if you don't the IRS is going to catch that basically automatically they already have you know that information. So obviously we report it because we're required to by law but also just note the IRS of course has this information. So that's from the state unemployment agency. So this form reports the total amount of compensation received and any federal income tax withheld. So if you get unemployment compensation you might have gotten withholdings from it. Sometimes people opt into that although they often do not note that if you have someone that's working at a W2 job and then they basically get laid off. Then the payments that they were making or the wages they were getting from the W2 job were typically or usually have unemployment. Sorry the federal income taxes withheld meaning they probably provided their employer W4 form and the employer was forced into being the tax collector by the IRS. And therefore we're taking the federal income taxes out of the wages and paying that to the government for each paycheck. When you get unemployment then you're getting a source of income but you don't have that same kind of withholding mechanism typically because the employer isn't forced to do it. So you might choose if the unemployment is significantly high to have them withhold money from unemployment. Otherwise what's going to happen if it's significant if you have a lot of unemployment it's going to result in income that you have not done withholdings for which could lead to tax and it could lead to the sticks, penalties and interest, the metaphorical sticks of the IRS. Also just realize however that if someone like worked for three months let's say at a place of employment and they were having withholdings coming out of their paycheck then they probably are over withholding on the money coming out of their paycheck. That's why because you'll recall that we have a progressive tax system. So if you made a few thousand dollars in the first few months or something like that you would think that it wouldn't even be subject to tax because of the standard deduction and the tax brackets in a progressive tax system. But what you have to do to do the estimated tax is try to project how much tax you're going to owe in the entire year. And then you're going to basically take kind of like the average tax is one way that you can approach it that so you have a standard rate that's coming out of your paycheck for the entire year even though we have a progressive tax rate system. So that means if you made a few thousand dollars in the first few months but you were expecting to make $70,000 in the year but you really only made like $10,000 before you were laid off then you were probably having withholdings that were based on the idea that you're going to be making $70,000 which would be a higher tax bracket. You see again this is an area where the progressive tax system is pretty easy to do the tax calculations once you have all the W-2's and stuff but when you get into these planning situations it can kind of get complex. So just some things to consider if you're talking to someone who's basically getting laid off and thinking well how much should I be withholding from possibly the unemployment. Is the unemployment subject to tax? Yes. How much do I have to withhold? Well it depends. What's one thing that you can do to try to estimate that? You can go to the IRS website and take a look at the Estimated Tax Payment Calculator and that could help in those types of situations to see what withholding should have. So taxpayers must report this income on their federal tax return for the 2020 tax year due to the COVID-19 pandemic. There was a temporary exclusion of up to $10,200 of unemployment compensation per person but this specific relief was unique to 2020 and does not apply for tax years 2023 unless new legislation is enacted. So in other words there was that weird glitch which could still stick in people's minds. People often lag in their thinking of the tax code and so we're kind of back to normal at this point in time which is basically you would have to include it in income. So withholding and estimated payments, tax withholdings, individuals can choose to have federal income tax withheld from their unemployment benefits at the time they apply for them. This can help avoid large tax bill when filing their annual tax return. So again the question comes up how much should you withhold or how should you have withholdings or not. You might do an actual estimate to basically help you out to determine that answer. Estimate a tax payments. So if no taxes were withheld or if the withholding is not sufficient recipients may need to make estimated tax payments to cover the expected tax liability on their unemployment compensation along with other taxable income. So what if you worked for part of a year got laid off or something or taxpayer did and then they didn't withhold from the unemployment. The unemployment becomes significant. Well now you're in a situation where you still want to pay the government before you file the return. If you wait to file the return and you owe taxes then you'll probably have to pay the taxes. But you'll also be hit with the penalties and interest which is the sticks that we're trying to avoid. So then you might just make estimated tax payments. The question being how do I know how much to pay and you're going to have to run an estimate to do that and you could use IRS.gov has an estimator tool that's pretty good. It's basically projection software or you can try to use actual tax software which you might be able to get access. We have a video we did a presentation on some of the free resources from the IRS. So you might be able to look at tax software to get an idea of how much you will owe so that you can calculate the proper amount of tax withholdings or estimated payments to make to try to avoid penalties and interest. So special considerations due to the economic impact of events like the COVID-19 pandemic. There have been temporary changes to the taxation of unemployment benefits. For instance the American Rescue Plan Act of 2021 included a provision that allowed for the exclusion of up to 10,200 of unemployment compensation for taxable income for the year 2020 for households with adjusted gross income under 150,000. It's crucial to stay informed about anti-temporary changes or relief measures related to the taxation of unemployment compensation as these can significantly impact tax liability. All right, line 7. Let's just take a look at the line instructions. Where do these go? We've got line 7 unemployment compensation. So you should receive the form 1099G showing in box one of that form the total unemployment compensation paid to you in 2023 report this amount on line 7. So caution if the amount reported in box one of form or forms 1099G is incorrect report on line 7 only the actual amount of unemployment compensation paid to you in 2023. Now this became an issue during this whole Corona virus thing because a lot of people couldn't go to work and so on. And the fraudsters out there took advantage of possible situations where people could qualify for unemployment and basically applied for unemployment and kind of tried to steal the unemployment kind of situation. And that resulted in people realizing that when they got the 1099G which basically says that they have to include the amount they received in unemployment and income. And they're like I didn't get any unemployment because someone else stole the social security number or something like that happened. So then the question is what happens if I get a 1099G and I didn't actually get unemployment compensation or it's wrong. Well you have the same kind of situation as any of these forms that are wrong. The IRS's perspective the person that is paying the money is usually the one that IRS is going to go after to make sure that they report who they paid the money to form 1099 for W2. For example are these types of forms. If the 1099 is wrong the IRS has that 1099. So if you report something different on your tax return than the IRS says then you could quite likely get a letter about it because the IRS's computer will just pick that up. They'll be able to see that because they have the information. So obviously you still want to report the correct number on your tax return but it could cause a problem if it's not matching what's on the 1099. How do you fix that? Well typically you can't go to the IRS or that's the last place you want to go. What you want to do is go to the issuer of the 1099 in this case the state and say hey you messed up the 1099 or there's something wrong. They might say hey someone stole your ID and they took the money. It's like okay well now that was wrong someone stole it we have to figure that out and then issue me a new 1099 because I didn't get the money or whatever it is. What you want to do is try to fix the 1099 that went to the IRS so that the IRS has a 1099 that matches the proper amount which is what you want to put on the form 1040 so the 1040 doesn't get delayed and doesn't mess up your refund or anything like that. Now there was a big issue with this kind of stuff with these unemployment 1099 forms. There's less issues typically with W2 forms and other 1099s although there are still issues. The same concept basically applies. The IRS has that information. You want to report the proper amount on your return but if you report the proper amount which is different than the reporting form the IRS will most likely have a problem with that. It could slow the refund and cause delays to not do that. Your best bet is typically to deal with the person who issued the form, the 1099, the W2 and get them to fix it because the IRS is not going to be the one that's really good at fixing it. But that was a last resort. Alright so if you made contributions to the governmental unemployment compensation program or to a governmental paid family leave program and you aren't itemizing deductions reduce the amount you report on line 7 by those contributions. If you are itemizing deductions see the instructions on form 1099G. If you received an overpayment of the unemployment compensation in 2023 and you repaid any of it in 2023 subtract the amount you repaid from the total amount you received enter the result on line 7. Also enter quote repaid end quote and the amount you repaid on the dotted line next to line 7. So now you have a situation where you basically you know you repaid it so you have to deal with that you know how you can account for that this is kind of the simplest way you would think to deal with that situation. So if in 2023 you repaid more than $3,000 of unemployment compensation that you included in gross income in an earlier year the repayments see repayments in publication 525 for details on how to report the payment.