 Income tax 2023-2024, other income part number two. Get ready and some coffee so we can do some tax interpretation with 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 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 cords 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 accountants 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. 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 1 income. Remember in the first half of the income tax formula is basically a funny income statement. Most of the time income statement having income minus expenses resulting in net income. Here we have income minus various deductions resulting in taxable income. We typically want for taxes income to be as low as possible, therefore looking for things that could be excluded from income. Sometimes certain income items might have more favorable tax rates as well, such as the qualified dividends possibly and capital gains or long-term capital gains. Looking at the first page of the Form 1040, we're looking at line number 8, additional income from Schedule 1 line 10. Here is the Schedule 1 additional income and adjustments to income that would feed into that first page. We're looking at line number 8 where it's listing out various other items which possibly aren't as common and therefore grouped under other income. So we're continuing on with those looking at line number 8 in section 951A inclusion. So section 951 generally requires that a U.S. shareholder of a controlled foreign corporation include in income its pro-rata share of the corporation's subpart F income and its amount determined under section 956. Now this is typically going to be more of a complex situation possibly in areas where you're dealing with people who have a lot of possibly foreign income or more wealthy individuals. So this is another area where you ask the question, what kind of specialty do I want to be working in on? Do I want to be taking on more complex kind of tax returns or do I want to be specializing in a certain area or section of the tax preparation? Noting that most people when they make investments like normal investors are investing possibly not even in individual stocks oftentimes or although even if they are it will be on publicly traded stock exchanges usually but most people are investing in like mutual funds and ETFs which are a way to kind of pool the investments together and further most people are often using tools such as a 401k, an IRA and so forth. So in any case enter on line 8n from your form 5471 the sum of any amounts reported on schedule 1 lines 1a through h and line 2 remember to attach copies of your form 5471 to your return. Line 8o section 951a inclusion so section 951a generally requires that a US shareholder of a controlled foreign corporation include in income its global intangible low tax income GILTI which again is often something that you wouldn't see for normal type of investors to have a controlled foreign corporation somewhat of a specialty area that you can do further research on if you want to be focusing in on those types of returns you can enter online 8o from your form 8992 the sum of any amounts reported on part 2 line 5 remember to attach copies of your form 8992 you can obviously look at the instructions for form 8992 to drill down on more research there line 8p 461i excess business loss adjustment enter the amount of your excess business loss from form 461 line 16 so section 461i this section of the internal revenue closed was introduced as part of the tax cuts and job act therefore relatively recent and imposes limitations on the ability of non corporate taxpayers to deduct expenses to excess business losses now you'll recall that the IRS is going to have more skepticism about people taking losses the IRS is thinking of the taxpayer as though they are the silent partner of the taxpayer the money that you earn the IRS wants part of it but if you lose money they don't want to be responsible for that because that would be them paying you and so they're going to be skeptical of the losses side of things typically so excess business losses what is that an excess business loss occurs when the total deductions attributable to a taxpayer's trade or business exceed their total gross income and gains attributable to those trades or businesses plus a threshold amount so what's the threshold amount for tax year 2023 the threshold amount for single taxpayers is 262,524,000 for married taxpayers filing jointly any losses exceeding this threshold are considered excess business losses now the general idea of taking losses you would say well if there's a loss on something I should be able to get that loss against future income we discussed this before that makes kind of sense because like if I had to expend money this year I actually lost money then you would think that if the IRS doesn't want to allow the loss this year maybe I can take the loss against like future income would be one way to think about it or you might be able to take the loss in the current year against other income so if you had W2 income and business income then you think you might be able to take the loss but if the loss is quite large the IRS is going to becoming more and more skeptical about the deductibility of the losses and this is going to become a political issue as well because you will often hear people saying well this person or this corporation didn't pay any taxes what often is really happening in those situations is they had a loss in a prior year or something like that and they're taking the losses against the income and so on but any case limitations on deductions section 461 I limits the taxpayers ability to deduct excess business losses in the current tax year instead of being fully deductible these losses may be subject to limitations and carried forward to future tax years which is typically the case if you're basically denied the loss in the current year then the next question would be well could I still get a benefit from the loss taking it against basically future income so reporting on line 8 P line 8 P of the income tax summary likely involves reporting any adjustments made for the excess business loss under section 461 I for tax year 2023 this adjustment may impact the taxpayers taxable income alright then we have line 8 Q taxable distributions from an able account distributions from this type of account may be taxable if a they are more than the designated beneficiaries qualified disability expenses and B they are not excluded in a qualified rollover so you can see publication 907 for more information so we have another kind of tax favorable type of tool being used here and the typical thing to compare these types of tools to would be like an IRA right because that's what most people kind of understand an IRA or 401k plan where the IRS is trying to incentivize us to to and invest for our retirement and they possibly could give tax advantages of some way shape or form such as not allowing us or not having to include the income when we put the money into that fund or having growth of it be tax free meaning if you get dividend and interest of being tax free the general questions of course whenever we have these kinds of tools are what's going to be the tax implications when I put money into the account and what's going to be the tax implications when that money grows hopefully that will grow with like dividends and interest for example and what are the tax consequences when I have to take the money out do I have to include it in income and what are the penalties if I don't spend it on the things that the that the iris is basically trying to get us to spend it on right so caution you may have to pay an additional tax if you received a taxable distribution from an able account so that's where our point of focus is here on the pulling the money out because the question is is it something includeable in income or not right so see the instructions for form 5 3 2 9 for more detail there so let's just give a little bit of a summary able accounts so able accounts are taxed advantaged savings accounts for individuals with disabilities that allow them to save and invest money without jeopardizing eligibility for certain means tested government benefits such as Medicaid and supplemental social security income SSI so we want it so the idea when we you deal with some of these benefit programs one of the concerns is will it impact other benefit programs which are often means tested or tested in terms of how much income someone has and it unfortunately there's a negative incentive to actually have low income once you once you get into this kind of range of area because once your income goes up then it will possibly disqualify you for other types of benefits so in any case tax free growth contributions to able accounts are made with after tax dollars and any earnings and growth within the account are typically not subject to federal income tax when used for qualified disability expenses remember the points in time when we have these kind of tools that the iris is providing one is there a tax advantage when you put the money in two is there a tax advantage on the growth of the money as it hopefully increases in value from dividends and interest capital gains and then three what's the tax is there a tax implication when you take the money out do you have to record it in income we have contributions to able accounts are made with after tax dollars and any earnings and growth within the account are typically not subject to federal income tax tax when used for qualified disability expenses so there's the restriction to catch what we have to use them for so taxable distributions generally distributions from an able account are tax free if they are used for qualified disability expenses such as education housing transportation healthcare assistive technology and other approved expenses related to to the designated beneficiaries disability non qualified distributions so if distributions from an able account are used for non qualified expenses such such expenses the earnings portion of the distribution may be subject to federal income tax and possibly 10% additional tax penalty so clearly when these tools are set up they are then potentials for abuse where people will try to abuse them so the iris is going to say if you don't do that then they're going to be subject to tax and then you might get hit with that 10% penalty in a similar fashion as we saw with like pulling money out early from like an IRA reporting taxable distributions so taxable distributions from an able account are reported on the beneficiaries federal income tax returns the earnings portion of the distribution is reported as taxable income on the appropriate line of the tax return so form 1099Q if taxable distributions are made from an able account during the tax year the financial institution managing the account will typically issue a 1099Q to report the total distributions made during the year so when you see that 1099 obviously the iris the typical idea they're going to go after the one paying the money they're going to say you need to you need to give the information to the recipient in the form of a 1099 or W2 or whatever it is as well as to the IRS so this form will indicate the amount of earnings distributed that may be subject to income tax exceptions some exceptions may apply to the taxation of distributions from an able accounts such as rollovers changes in the designated beneficiary and other special circumstances so similar with the IRA you end up with these funny situations oftentimes for people are strapped for cash they have the cash but it's under one of these accounts like an able or an education or an IRA or 401K there might be certain circumstances where you can pull the money out and a rollover is a common scenario where you're going where you're putting the money into another account which would you would think would typically be under the same types of restrictions generally okay so taxpayers should refer to IRS guidance and consult with tax officials obviously with regards to setting those up line eight are scholarship and fellowship grants grants not reported on form W2 enter the amount of scholarship and fellowship grants not reported on form W2 however if you were a degree candidate include online eight are only the amounts used for expenses other than tuition course related expenses for example amounts used for room board and travel must be reported online eight are we'll talk about education benefits a little bit more in future presentations but right now we're looking at the income line item and saying when might we have to include an item in income so for tax year two thousand twenty three scholarship grants are subject to specific income tax reporting requirements generally these amounts are tax free that's the good news right that's the general rule because the government of course is trying to incentivize education if you are a candidate for degree at an eligible educational institution and the funds are used for qualified educational expenses for those expenses generally tuition fees books supplies equipment required for your courses however amounts used for incidental expenses like room and board travel and optional equipment must be included in gross income so that's the thing we're kind of looking at here you didn't use the money for the right thing and therefore it's might have to be included in income in those situations whereas it would not be if it was spent on like tuition perhaps so the IRS publication nine seventy provides detailed guidance on the tax treatment of educational assistance including scholarships fellowship grants grants and tuition reductions so we'll talk about some of those items in future presentations including credits for education for example certain non tuition fellowship and stipend payments not reported on form w two are treated as taxable compensation for ira purposes this publication also explains that emergency financial aid grants under acts like the cares act the coronavirus response and release supplemental appropriations act two thousand twenty one and the american rescue plan act two thousand twenty one are not included in your gross income all right let's take a look at line eight T pension or annuity from a non qualified deferred compensation plan or a non-governmental section four five seven plan enter the amount that you received as a pension or annuity from a knowledge non qualified deferred compensation plan or a non-governmental four five seven plan this may be shown in box eleven of the form w two so if you get the w two again this is an area which is somewhat unusual but hopefully it'll be driven by the pay or in this case possibly the employer will get the w two two indicating the information in box eleven and can further our research for the data input in the software from there so if you receive such amount but box eleven is blank contact your employer or the pay or for the amount received so non qualified deferred compensation plans so these are contractual agreements between an employer and employee where part of the employees income is paid out at a later date from when it was earned so notice that for taxes we typically are taxed kind of on a cash based system when we receive the money but the assumption is that we receive the money in the same period or approximately the same period that we earned it you can imagine people trying to manipulate the tax code might just adjust the point in time that we get paid if it was a pure cash based system and they can manipulate you know when they would have to record income so the iris is going to create rules to basically stop people from doing that kind of tax planning strategy by just manipulating when payments are going to be paid to people so income is thus deferred and is usually designed as a form of long term compensation or retirement plan this kind of plan does not have to comply with the employee retirement income security act guidelines that apply to qualified plans like a 401k plan so they offer greater flexibility but also some with higher risk as deferred compensation is typically unsecured so the 401k plan is kind of like the standard but it's more complex and you have less flexibility with it so that's when you might have this non qualified deferred compensation plan which could have more flexibility but then comes with more risk because it's less standardized and so on so this means that if the company faces financial trouble employees may not be able to claim the deferred compensation this becomes a problem if all your money is in the retirement plan we saw this with like Enron way back when and then the company goes bankrupt and your investments are in such a format that you can't pull the money out so you might have this kind of income if you're an executive or other high earning employee who has elected to defer part of your compensation to a future date often to manage tax liabilities or plan for retirement so it's usually for higher income more complex returns non governmental section 5457 plans similar to NQDCs these are plans that allow employees of non profit organizations and some governmental entities to defer income taxation on retirement savings the funds are contributed to the plan pre tax and can grow tax deferred until withdrawal so these are often used by employees and tax exempt organizations to augment their retirement savings one key feature is that these plans are required to remain unfunded meaning the assets are not set aside exclusively for beneficiaries but remain part of the employers general assets and could be subject to creditors claim if the employer became insolvent so again that's a characteristic of the type of plans so these income types are generally subject to tax when the compensation is received or made available to the participant rather than when it is first deferred they offer ways for individuals especially those in higher income brackets to manage their current and future income tax situations more strategically alright line 8 U wages earned while incarcerated so enter the amount that you receive for services performed while an inmate in a penal institution so if you're doing taxes or have to do taxes as a member of a penal institution you're basically in jail then you can you can take a look at that for more detail so you may receive form W2 or 1099 in that situation line 8 Z other income use line 8 Z to report any taxable income not reported elsewhere on your return or other schedules list the type of income amount and income so now we're just have the most generic line other income I couldn't put it anywhere else now note that if you find income that you can't put anywhere else then often the question is going to be is this income subject to self employment tax or something like that in which case it might go on a schedule C or something or if not subject to self employment tax in which case you want to make sure that you're not paying self employment tax social security and Medicare which is like the equivalent payroll taxes alright list the type and amount of income if if necessary include a statement showing the required information for more details see miscellaneous income in publication 525 which you can find on the address website explains of income to report online 8 Z include the following so reimbursement or other amounts received for items deducted in an earlier year such as medical expenses real estate taxes general sales tax or home mortgage interest so this is that situation for example where you got a deduction last year and it's similar to the to the to the state tax deduction where we saw what what if you overpaid the state tax then you get the deduction when you paid it in the current year and the following year you get a refund well if you got a refund you shouldn't have taken the deduction right so what do you have to do do I have to amend the prior year return where I got the deduction because they refunded the money to me that would be too complex the easy thing to do would be to say well if you got a deduction last year you have to include it in income this year so you're going to deal with the taxes but you don't have to amend the prior return similar idea with other types of things that you might have got a refund for if you got a tax benefit on last year then instead of amending the return then maybe you can include it in income in the current year to even things out so reemployment trade adjustment assistance RTAA payments these payments should be shown in box 5 of form 1099 G so you should get a form for that loss on certain corrective distributions of excess deferrals see retirement plan contributions publication 525 dividends and insurance policies if they exceed the total of all net premiums you paid for the contract so dividends and insurance policies if they exceed the total net premiums so so now you've got you know the premium the pay came out that's higher than the premiums okay recapture of charitable contribution deductions relating to the contribution of a fractional interest in tangible personal property in publication 526 for more detail there recapture of a charitable contribution deduction if the charitable organization disposes of the donated property within three years of the contribution so in other words that you don't fulfill the requirements in a certain type of contribution and so now you took again the deduction in the prior year what do you do amend the prior year return or possibly you can fix it in the current year taxable part of disaster relief payments see publication 525 to figure the taxable part if any if any of your disaster relief payment is taxable so taxable distributions from a coverdale education savings account this is another one of those tools you can think of as kind of similar to like an IRA right where we have the situation we're putting our money into this tool and the question is is it taxable when I put the money and do I get a tax benefit is the growth of the money taxable when I take the money out is their tax implication at that point in time okay so a coverdale savings account or a qualified tuition program distributions from these accounts may be taxable if so that's what we're looking at here the distribution the money coming out because the question is is there an income tax thing that you have to include on the income line item a and the case of distributions from a QTP they are more than a qualified higher education expenses of the designated beneficiary in 2023 so you got the money out you're supposed to use it for in this case education you got more money than you use for education therefore you know you would think you would have to include it so in the case of distributions from an ESA they are more than the qualified education expenses of the designated beneficiary in 2023 and B they were not included in a qualified rollover so you will recall if we just rollover the money it's still under kind of the umbrella you would think and therefore shouldn't be a taxable event but might be having to be reported so non taxable distribution from these accounts don't have to be reported on form 1040 or 1040 SR this includes rollovers and qualified higher education expenses refunded to a student from QTP that were re-contributed to a QTP with the same designated beneficiary generally within 60 days after the date of refund so for more information about that you can see publication 970 non taxable income don't report any non taxable income online 8Z examples of non taxable income include the following you have the child support so remember these are things that are excluded from income everything is included in income unless the IRS says otherwise that's their general idea child support is typically something that's going to be a payment from one person to the other it's not alimony child support not typically included in income alimony as we talked about before oftentimes is also not included for later years but there's that cutoff year payments you received to help you pay your mortgage loan under an FA an HFA hardest hit fund or the homeowner assistance fund so payments you received to help you pay your mortgage which would you would think would be kind of like an assistant program or you can think of it kind of as a forgiveness of debt in some ways or something like that but again because of insolvency in programs might not be something subject to tax and therefore not included or excluded from income so any pay for performance success payments that reduce the principal balance of your home mortgage under the home affordable modification program life insurance proceeds received because of someone's death other than from certain employer owned life insurance that's one that comes up fairly often a life insurance program if it's a normal setup process in a family situation husband dies work to death life insurance is there so so usually the life insurance is not something included in income although there are exceptions for certain employer owned life insurance so gifts and bequests so you may have to report information on your gifts or be or bequests bequeasts on form 3520 part number four if you received a gift or be bequests bequeased from a foreign individual or foreign estate including foreign persons related to that for an individual state totaling more than 100,000 or amounts totaling not more than 18,567 from a foreign corporation or foreign partnership including foreign persons related to such foreign corporations that you treated as gifts now remember the whole gifts thing is complicated because it's tied to the estate tax so the general idea is we have an income tax we tax people when they earn the income so so then the question is well what if someone dies well if someone dies then we shouldn't you would think we wouldn't tax them when they die because because the income had already been taxed when they earned it but they're going to give that money to somebody else meaning the inheritance right so the inheritance you could think of the inheritance as income to the recipient although again they didn't really earn it it's a gift right it's going from the dead person to the other to the to their inherited their children oftentimes but the IRS of course wants a piece of that so they have the death tax or a state tax now the estate tax means that that they're actually going to tax the balance sheet instead of income so when someone dies they pile all their money up into a pile and then they rake away you know certain part of it for taxes and whatnot so so obviously to get out of a state tax is if the government's going to do that they're going to try to give all their money away on their deathbed and the IRS doesn't want them to give all the money on the way on their deathbed because then when they die they won't be able to pick their pockets so that means that they have to tie together gifts and a state taxes which is kind of again a more wealthy individual state planning type of tax situation. All right we also have the form 1099 K loss reporting so if you sold a personal item at a loss either report the loss on form 8 9 4 9 or report it online 8 Z so if you report the loss online 8 Z into the amount of the sale proceeds from form 1099 K online 8 Z so 1099 K is a type of 1099 you might receive and then again the question would be if you received it where am I going to basically report that is it something to report on form 8 9 4 9 or possibly on other income line 8 Z so in the entry space next to line 8 Z right form 1099 K personal items sold at a loss and also into the amount of the sale proceeds for example you bought a couch for 1000 and sold it through a third party vendor for $700 which was reported on form 1099 K in the entry space next to line 8 Z you would write form 1099 K personal items sold at a loss $700 see the instructions for line 24 Z now the issue there is that you had a loss but you're going to have a 1099 so the 1099 went to the IRS the IRS has it if you don't put it somewhere on your return then the IRS is going to assume that you had income that you didn't report so you have to put it somewhere so the IRS can recognize it so incorrect 1099 K this is became an issue if they're getting better at it but the IRS is trying to hit the best person to issue the 1099 which is getting complicated because you can see the normal process is usually they look at the payer of the 1099 the employer for example or the person that paid in a in a contractor situation but with gig work for example it becomes complex because the platforms are the are not really an employer or a contractor in the same kind of sense so then the question is who has to pay the money is it is it or send the 1099 is it the gig work platform which is really just a communication hub which would really bog things down or is it the PayPal people of the world the intermediary intermediary transfers the credit card companies and those kind of financial institutions so the part of the problem is you might get a wrong 1099 or you might get to 1099s in which case it would double your income how do you fix that well you can't go you don't want to go to the IRS unless that's the last resort you want to fix it at the issue were of the 1099 because you need to get them to get the proper amount to the government so that you can match it on your end so that the IRS doesn't question you about it right so if you receive a form 1099 K that shows payments you didn't receive or is otherwise incorrect and you can't get it corrected enter the amount from form 1099 K that was incorrectly reported so now we're saying I tried to fix it I tried to go to the issuer they won't fix it so what I'm going to do is again I'm going to tell the IRS hey look here's the amount of the 1099 I want to show you it so that you recognize it but it's wrong so in the entry space next to the line eight Z right quote incorrect form 1099 K and also enter the amount that was incorrectly reported to you so for example if you received a form 1099 K that was incorrectly showing $800 of payments to you you would enter $800 on line eight Z and in the entry space next to line eight Z you would write incorrect form 1099 K $800 C instructions for line 2024 Z for more information