 Income tax 2023-2024, HSA, health savings account, moving expenses, deductible part of self-employment tax, and self-employed SEP, simple and qualified plans, tax software example. Get ready and some coffee because the only thing certain about life is death and taxes. And the only thing certain about death is more taxes. 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 crunching numbers is my cardio product line. Now, I'm not saying that subscribing to this channel, crunching numbers with us will make you thin, fit, and healthy or anything. However, it does seem like it worked for her. Just saying. So subscribe, hit the bell thing and buy some merchandise so you can make the world a better place by sharing your accounting instruction exercise routine. 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 a certain 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 forms, schedules, and instructions at the IRS website, irs.gov, irs.gov, starting at our standard point. We have our taxpayer Adam Taxman, just trying to avoid a dang tax man, living in Beverly Hills 90210. So we have the single file to start off with, no dependence. We're going to start with W2 income of 100,000 standard deduction at the single $13,850 to get taxable income $86,150, which we can mirror in our income tax formula in Excel, $100,000 income $13,850 standard deduction to get to the taxable income $86,150. Tax calculated by the software starting at $14,266 on page 2, there's the $14,266. Okay, let's go back to page 1. We're now looking at those adjustments to income, which you might still call the above the line deductions, or possibly now Schedule 1 deductions is possibly more appropriate these days. And then we can contrast that to the standard deduction or itemized deductions. Itemized deductions being reported on Schedule A, which need to exceed the threshold of the standard deduction generally to be useful. That's not the case for the adjustments. We still might get a tax benefit if we qualify for the adjustments or above the line or Schedule 1 deductions, even if they are not greater than a standard deduction. They can be found on the Schedule 1, which is additional income and adjustments. And we want to go to page 2, which is going to be part 2 of Schedule 1. We're now looking at lines 13, 14, 15, and 16 are the ones that we might just at least touch on. So we have the health savings account deduction. This can be going to form 8889. Now, this one you can think of most people I think would most easily compare this to what happens with an IRA deduction, which we'll talk about later, but we touched on when we thought about the income side of things, meaning when you put money into something that has a taxed advantage account to it, meaning you're still putting stuff money into usually an investment tool like a mutual funds or a checking account or stocks and bonds. But they're under the umbrella of some kind of IRA tool that's given you a tax benefit, such as a 401k plan or an IRA, or in this case we're talking about the health savings accounts. The questions that always come up if you're putting money in something investment tool that is under a tax umbrella of some kind is, do I get a benefit when I put the money in? Meaning, do I get to reduce my income when I put the money into the system? With a 401k plan, we saw that you could get a benefit by the employer reducing your income, which we can see on the W-2, the 100,000 here W-2 income might be impacted or reduced by the amount that was put into like a 401k plan that would be reported on the form. Similarly, with an health savings account, if it's through the employer, it might be something that is taken care of on the W-2 form and you'll see it in the documentation of the W-2 form, box one then, which we're representing here of the 100,000 would already take into account the deduction and therefore it would be a pretty easy data input. But if we have a situation where the employer was not the one that set up the health savings account in a similar way if the employer did not provide a 401k plan or retirement plan, then we might be able to set up our own version of it. In the case of a retirement plan, it would be an IVRA, right? And so then we would have to actually take the deduction ourselves because it wasn't reduced out of the W-2 income and therefore we would have to put it here in the above the line or adjustments to income Schedule 1 deductions. Similarly with the health savings account, if it wasn't taken out by the employer and we set up our own, it would have to go here. Now, when might you be able to set this up? Typically, you have to have that high deductible plan, which isn't usually the best plan because you have that high deductible, but for healthy people that could work well and when you combine the high deductible with tax benefits like a health savings account, then it still might be a good cost-effective way of dealing with your health care even though you have that deductible, a high deductible type of situation. So that's the general idea of it. So let's just take a look at the data input. If I jump to the data input over here, I'm going to say that the type of coverage, we usually have the two types, the family or the sole plan only or self-only. And then I'm going to give it the max contribution. So let's say I want the max contribution and we're going to say it was for 12 months. I'll assume that it's qualified. So notice it puts a max contribution of 3,850. That's going to flow through to the bottom line and flow through the first page of the form 1040. We can also see it on form 8889. This is the health savings account, the HSA. So we have it checked off as the self-only versus the family. We have the maximum amount that is being taken here. I won't go through each line item, but if you want to look at it in more detail, you can look at each line item. In essence, that's pulling in, of course, to the schedule one, page number two, which is pulling in then to the form 1040. And we can see it here on the adjustments to income bringing the 100,000 down to 96,150. And then we're going to take the standard deduction, 13,850 bringing the taxable income to 82,350. We can also see that on our worksheet over here. Let's add a line item to our worksheet. We want an adjustment to income. So I'm going to go to the adjustment to incomes category. Let's pull the total down a bit, pull that down. And we're going to say that this is going to be a health, health savings account deduction. And then I'll just put the amount that was savings account. I'll put the amount that was in there to do it. And let's just say it's going to be black and white because I only need really one category. And then I might put on the end the max for single and family and the maximum contribution is 38503850 for single, I believe. So I'd say, okay, it was a single, they had a max contribution. Let's make this blue and bordered, bordered and blue. And then maybe I'll pull this out to the right. I'll put it right there because we only need one cell. And let's make this black. Okay. And then I'll sum it up. So I'll add my sum goes down to here. So there's the 3850 pulling into the first page 100,000 minus 385096150 minus the 13850 gets us the taxable income 82300. So there, so if I see that over here, 82300 page number two tax is now at the 13419 13419 on the tax. Now, if we had a family plan, then I can go back on over and say it was we qualify for a family plan, even though it's a sole proprietor here. But we'll say, so you'd be more likely to have a family plan. Maybe if it was head of household or marriage, you would think, but I'm going to say family plan. So if I pull that out over, let's see if it lets me do that. We're going to say then the page to contribution is at 7,750. If I look at form 8889, you can see it's checking the family plan. Boom, boom, max contribution 7,750. I could put that on my worksheet over here. Say the adjustments 7,750 is the max. So I could take either one of these and see if they max out their contribution that pulls into the first page. So then that pulls into the schedule one page number two 7,750 pulling into the form 1040. And we see the adjustment to income bringing the adjusted gross income to 92250 standard deduction 13850 taxable income, the 78400. We see that here, 92250 minus the 13850 brings us to the 78400. All right, let's go back on over to the schedule one. And now let's take a look at the next one page number two. I'm going to jump to that one. Let's remove it and go to the next one. Get that out of here so we could focus. And then I'm going to open this back up page number two on the next one. So now we're on the moving expenses and we would attach form 3903. So this is the one where it used to be that if you switched jobs, then you might be able to deduct your moving expenses to try to facilitate the ease of people's kind of moving from job to job. That was the argument, but they removed it except for the armed forces. So you would say that well, that's usually what will come up as people will ask if they can do that because they're remembering an old rule. And usually the answer is no because they changed it. But if they're in the armed forces, there could be an exception. However, if they got reimbursed for the moving expenses, then which armed forces often I think do, then you might not, you know, you're not going to get a deduction if you got reimbursed for it. And that's the general idea. But if we jump to it, if you have someone that's in the armed forces armed forces move to permanent change of station, I'm going to say boom. And so miles from old home, so then you can get into, you know, the costs of the move. I'm not going to get into it in detail, but I'm just going to, I'll just put the lodging and travel for now since it doesn't come up too often. But just to get the idea of the cost of the move, and which we talked about the things that could be included in the prior presentation, but that's pulling in from form 3903. So here's the 3903 moving expenses, boom. And so we have that checked off the travel is being added up and then we're going to pull that to the schedule one line or page two. There it is here. That pulls into the form 1040. And we see it down here on the 1000. Now I can mirror that in my worksheet on this side. And we could say let's say adjustments and then I'll say moving expenses, basically armed forces just to remind ourselves that that's fairly rare that we would have that calculated at the 1000. Let's make this black to and let's make this bordered and blue. And I'll just add this up and delete this one. So that's gone now. So 1000 pulling into the first page. 100,000 minus the 1099,000 minus the standard deduction 13,850 gets us to the 85,150. So we have the 85,150 over here as well. Okay, so let's do the next one. I won't change the tax calculation because I think it's pretty straightforward. Let's jump to this one and say I'm going to jump to that and remove the moving expenses. And let's go to the next one forms and then schedule one page two. And then I'm going to the deductible part of self employment tax. Now we'll go into this in detail more later. We touched on it before just looking at the changes that happen when you have a schedule C type of situation. So remember if you have someone that has W2 income, they might also have some schedule C or sole proprietor business income. And if it's not their primary source of income, there might be less complications with it with other things. But if it is their primary source of income, then you have more planning things that often take place just to basically keep that in mind. But let's first start off and say, well, what if he just made another like 20,000 in self employed income on the side? So I'm going to say, all right, let's go to the income and go to schedule C. And so now I'm going to say that we had income, let's say the income was 50,000. And I know I'm not populating everything else up top. I'm just looking at the income statement. But then they had expenses of 30,000 for 20,000 of income. So if I go over to the forums, what's going to happen? We're going to say, OK, schedule C has been populated 50,000 minus 30,000. These are basically business expenses, right? Gets us to the 20,000. Now if you had income, then you're going to have that's going to pull in and you're going to pay taxes on it. So clearly that's going to pull in. We can see it on the schedule one, the 20,000 pulls into the form 1040. The income is going up from 100 to 120. But we also see this adjustment. Where did that come from? Notice on page two, we also see an added tax. So that's another issue that we have to kind of consider whenever you have income that might be subject to self employment tax. So why is this the case? For example, if I go to the W2 income, your W2 has the wages, federal income taxes, but it also has social security and Medicare, which was paid by your employer in the form of payroll taxes. So it's already been taken care of, but you've already paid it and the employer basically handled it. So this is usually more just informational information as opposed to something that we need to have a tax implication on the form 1040, which then can primarily focus just on the income tax, not on social security and Medicare, the FICA taxes. But if you're a sole proprietor, then the government wants to take your social security and Medicare. Now notice the social security and Medicare, if you work for another corporation, another business, they are going to pay you the 100,000 and pay your own taxes on your behalf, getting a deduction for your wages. They also have to pay their half of social security and Medicare. So that's another cost to them, but they get to deduct that half of social security and Medicare. So the IRS wants to mirror that situation on the sole proprietor side of things. How do they do that? Well, if I go to the forums, Schedule C, the net income down here, they want to treat you as though you are both the employer and the employee of yourself, therefore that 20,000 being subject to both the employee and employer portion of social security and Medicare, which we can see calculated on the form self-employment tax, Schedule SC. Now it's not exactly that because there's a little bit of a chink in here, a little bit of a weird calculation. But basically it's like double the rates of what you would do if you were a W-2 employee. So here's the calculation of the total tax that you have to pay. And so we can see that on page 2 of the Form 1040. You can see that populating here. But you would think that you would get half of that as a deduction because that would mirror what happens on like if you were a W-2 employee, you should give to deduct half of it if you were the corporation with employees. But you can't deduct it on the Schedule C because that would create a circle reference because that's how you got to this number to figure out the amount of the tax in the first place. Therefore, we're going to go to the Schedule C and we're going to take this half of it that we got a deduction for and we're going to pull that up to the Schedule 1 and page number 2 and that's where this number is pulling from. So that's where that is and that goes to the Form 1040. And then the Form 1040 now has the 120,000 minus that 1,013 gives us the adjusted gross income. Also, we have the standard deduction. We also have this qualified business income deduction, which is another kind of strange thing that happened a few years ago when they were trying to simplify the code and they kind of used this as a plug. So we might talk about that more when we get to the Schedule C. But for now, that's where that deduction comes from on the Schedule 1. Self-employment tax usually when someone has a Schedule C. Alright, let's remove that and let's do the next one. We're going to say, let's go to the Forms and then back into the Schedule Number 1, Part 2. Alright, the next one is the self-employed, simple and qualified plans. Now, this is another one that has to do with usually self-employment businesses and usually this would be more likely to be the case if someone's entire income was from self-employment. So let's first imagine if I go back to my Form 1040, we've got 100,000 W2 income. Instead of us having gig work on the side, let's imagine that we're going to have all of our incomes come from a Schedule C type of business because if we had a W2 business or if we were a W2 employee, we might have some benefits related to that with the employer, like a 401k plan, for example. And that would be reflected if I go back on over here into the data input screen. That means that you can take money oftentimes out of your wages if there's a 401k plan set up, put it into the retirement plan and the employer might match it even and they will then account for it in the W2 by reducing box one your wages for federal income tax purposes and then you'll have to pay possibly taxes on Social Security Medicare, which is why box one is different than box three sometimes and then box five, right? But let's say, well, if I don't have that, let's delete this and let's add that Schedule C business again and go, so now I have a Schedule C business and it's like, okay, now let's say I had 120,000 of income and then we had 20,000 of expenses. So if I go back to my forms, now we have the Schedule C 120 income advertising expense, so we have 100,000 of the taxable income. So now in this situation, you're like, well, wait a sec, I don't have access to my 401k plan anymore because I'm not an employee. So how can I want to put money away? Because that's a huge benefit to at least defer taxes. And it's like, okay, well, you could, if I go back to the Schedule 1, just put money into an IRA over here. Yeah, but it's like, well, wait a sec, the amount I could put into an IRA is way less. I don't have the matching and all that kind of stuff. So that doesn't seem as good. So then the question is, well, could I set up my own 401k plan would be the idea because then I want to put more money into the 401k plan so I get a tax benefit similar to maybe I would in an employee or employee situation, in which case you can typically put more money into the 401k plan, then you can put into like an IRA. So then you might say, well, yeah, but 401k plan is too complex to set up oftentimes because it takes high administration services to make sure that you're in compliance with it and whatnot and setting it up is a little bit complicated. But you could try a simpler thing like a SEP or a simple, right? That would be the general idea. So these are two things to try to give people that are self-employed best of both worlds a more simple kind of plan, but also one that allows them to put more money into it and give a benefit to possibly their employees. Now it gets complicated because then you have to think about if you have employees, you know, what's going to be the impact of the employees as well. So you want to compare these two plans as well as possibly a 401k plan. I won't go into that now. We talked a bit more about that in the prior presentation, but the next thing that would come up would be, well, if I get a deduction for it, where does that deduction go? Does it go on the Schedule C? And you can say, well, you have to say, well, it's not going on the Schedule C. Why is this part of the deduction going on the Schedule 1 and not the Schedule C? Remember, if you did put it on the Schedule C, what would happen is it would reduce your taxable income here, which would be fine for federal income taxes, but it would also have an impact on your Schedule SE, the self-employment taxes. So this is a deduction, well, typically, that you get to reduce your federal income taxes, but not your self-employment taxes in a similar way as you see in a W-2 form when you put money into a 401k plan, which reduces box one federal income, but not the income possibly for boxes five and three, which are subject to Social Security and Medicare. So we can't put it there. We've got to put it on the Form 1040 page number two for your contributions, right? So that's going to be in here. So in any case, for your contributions into it, right, for your own retirement plan. And so you kind of have to think about that and also take into considerations if you have employees, what the employee situation is going to be like. Okay, so let's jump to it. Let's first get rid of this. Wait, that's good. Let's go to this one. And we're going to say that this is going to be a profit, just let's say it's a SEP. I'll just do a SEP for the purposes of here, and we'll say it's going to be a maximum contribution. So notice the self-employed SEP has 25% maximum contribution. And so that comes out to 18587, which is a lot higher than an IRA. Obviously to take advantage of that, you have to have cash flow to be able to put money into it. But that could be a huge benefit if you had the cash flow to put the money into it. So then that's going to flow into the first page of the Form 1040. So we have 100,000 of the sole proprietor business. The adjustments to income are at $25,652, which includes half of the self-employment tax and the amount that we put into the SEP, which is a huge deduction, getting us to the adjusted gross income of $74,348, and then the standard deduction. And then we also have this qualified business income deduction that we're not going to dive into at this point at this time. So your questions on that one, as we talked about before, then is if someone has a sole proprietor business, if it's their main source of income, you might have more planning questions that come up, such as do they want to set up some kind of retirement type of plan, like a 401k plan, but possibly a more simplified one like a SEP or a SEMPL so they can put more money in and possibly get a deduction there. You also have questions about their health care spending, which we'll possibly talk about more in the future. Possibly being able to set up a health savings account could also be linked to some degree with a sole proprietor business as opposed to being an employee, because an employee is more likely to have their health care linked possibly to their employer. You also, when you're comparing these plans, want to think about the idea of when do I have to make this contribution because notice that I just calculated this 18-587 based on my current tax situation after having done my taxes, which I'm not going to fully know until I do my taxes, which for tax year 2023 isn't going to happen until 2024. So what you would like to do is similar to an IRA, be able to do your taxes and top off at least your payment to the SEP at the end, the last thing that you're going to do so that you can maximize the amount of money that you're going to put into that account, which also means that you would like to advise yourself or your clients to have some extra cash at the time that you're going to prepare the taxes to put into the SEP or the SEMPL or the SEP because that's the last bit of tax planning that could be significant that you could do, which takes cash flow in order to do. So again, you can compare these different plans in more detail. I won't go into that now. It's a whole other thing in and of itself, but that's the general idea of how it will be populated and flow through on the returns.