 Income tax 2022-2023, income reporting forms, concepts and overview. Let's do some wealth preservation with some tax preparation. Looking at our income tax formula, we're focused on line one, that being income. Remembering that the first half of our income tax formula is in essence an income statement, which makes sense. This being an income tax, although a strange income statement, normally an income statement has income, minus expenses is net income. Our goal is to maximize net income, so typically we would like to see income increase and expenses decrease in order to maximize the net income. With taxes, everything is flipped on its head. We still have income minus expenses, but the expenses are basically called deductions now to get us down to not the net income, but the taxable income. Unlike with normal net income, our goal with a taxable income is to be as low as possible. Therefore, we want to be able to decrease our income, the lower the income the better, and we want to be able to increase the equivalent of expenses or deductions, because that will also result in a lower taxable income. So that's the general goal. Now obviously in practice, what we really want to be able to have is to have income, support accounting instruction by clicking the link below, giving you a free month membership to all of the content on our website, broken out by category, further broken out by course, each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files, and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it that we actually get, but which were not required to legally report as income on the taxes, right? So we want to have our reportable income to be as low as legally possible, and our reportable deductions or expenses to be as high as legally possible. Now the second half of the equation down here is going to be the actual calculation of the tax based on the taxable income. Then we have the other credits and taxes such as self-employment taxes. And then we've got the payments that we're going to have to deal with. We'll get into that in future presentations. Right now we're really going to focus in on this income line. Now the general rule for the income line with regards to the internal revenue service code is that everything has to be included in income unless the IRS says otherwise. So even if you found like a hundred dollars on the ground, you would think okay that's got to be included in income unless you can see the IRS code in essence saying that it doesn't need to be included in income. So we can have a huge discussion in terms of what kind of stuff are going to be included in income, what kind of stuff doesn't need to be included in income, and we'll start going through all of the typical items one by one within this huge category of just basically the income line. So this one line looks deceptively skinny here because we can have a whole endless discussions on what includes income and how to report these different things in income and we'll start to dive into that in future presentations. For now we want to think about the general concept of what the IRS is going to be providing and the documentation that we're typically going to be getting when we think of the income line. And for that I want to introduce just the general concept of an income tax. The natural type of deduction for an income tax is generally going to be those things that you needed to consume in order to generate the income. Now that's the general rule we kind of want to keep in mind and when we think about a business transaction there's always going to be two sides of any business transaction. One's going to be the one getting income, the recipient of the income, the other one's going to have an expense who's paying for the goods and services. So keeping those in mind then the IRS actually has to leverage within the transaction on the one that's paying for the goods and services on the deduction side of things because if they want to get a tax benefit of having a deduction or expense that they can record which will lower the taxable income then the IRS has some pressure on them and saying well you need to then give us information such as W-2s, 1099s and so on and possibly have withholdings and whatnot paying us directly for the people that you are doing business with. So that's generally how things are set up and how we're often driven when we're doing our taxes by the income tax forms that's where they're coming from, the W-2 forms, the 1099 forms and so on. Remembering that the government doesn't just want those forms so that they can provide that to you so that you can self-report those forms are also going to the government. So we've got to remember that the government is holding on to these forms as well that's basically their goal they want to get to the point in essence or it seems like where they can basically create the tax return by themselves by having the documentation that they're getting from the payer side of the business transactions. Now that becomes a little bit more difficult to see when you look at non-business kind of deductions because when we look at like itemized deductions, charitable contributions and things like that home mortgage interest and that kind of stuff those are not natural kind of business deductions or tax deductions that you would expect in an income tax system. You would expect deductions in a business kind of setting where anything that you had to expend in order to generate revenue would be a natural income tax deduction. Many of the other deductions like charitable deductions for example the government is trying to incentivize us to behave in a certain way and they're using the tax code to do that deductions for like saving for retirement IRA deductions 401k plans again those are weird kind of deductions where the where the government is trying to manipulate our behavior through incentives through the tax code. So it's good to have this general understanding of how things are going to basically be working as we start going through these line items and thinking about where these forms are coming from like the W2s and the 1099s. To understand this let's take a look at a normal business transaction see how the government the IRS taxes might fit within that transaction. Now the first thing that we need to understand is that every business transaction has at least two entities involved in it one of the entities generating revenue for goods or services that they provide the other entity generating an expense which possibly could be a deduction for goods or services that they paid for. So in our case we've got like a lawyer on the left hand side and a lawyer you're a lawyer providing legal services let's say the small business on the right hand side is paying for those legal services. So then the question is well how does the IRS how do taxes fit into the situation what might the IRS's concerns be if you were for example the IRS from the IRS perspective we have an income tax therefore the person that is generating revenue the person getting paid for the goods and services that they are doing the IRS is going to want to make sure that they report that income on the taxes so that they're going to have to pay taxes on it. The one that's paying for the goods and services the IRS might be concerned that they overstate possibly the expense. Now from a tax standpoint who's the one that's got that's actually benefiting from a tax standpoint you call this a tax return. On this transaction the one that's actually paying is the one that gets a tax benefit the one that's getting paid of course is making money generating revenue that's good for them but for taxes remember everything is flipped on its head it's actually bad for taxes because they're gonna have to report that as taxable income most likely and pay taxes on it. Taxes I don't pay no damn taxes. The one that's paying gets to report it as an expense for taxes expenses are normally good for but for tax I mean normally bad but for taxes they're good so the IRS actually has to leverage more on the person that is paying so they might go to the person that is paying then and be able to say hey look if you want that deduction on your taxes oh my tax deductions are crying. What we want from you is to tell us who you paid so see how this you can see what the tax law and where the iris starts to insert themselves where they have leverage on the payer the one that might get a benefit from the deduction so how might that look of course well then you'd say well if this if this person was employer of the employee they might and the iris might actually kind of force this situation to happen they're going to say look this lawyer is working exclusively for you and you're telling them exactly what to do or something like that therefore we think that they are characterized as an employee not a contractor so starting now I'm an employee so you might not have a whole choice on that but if they are an employee then of course the the iris has like a lot of leverage on the person that's paying the employee they want you not only to report the income that you paid to the employee but they also want you to withhold that money and not ever even give it to the employee but instead give it directly to the government directly to the iris and of course they want you to report the w2 income which shows the the gross pay as well as the withholdings giving that form not only to the employee but also to the government remember that's the key point the government really is the one that wants the w2 form so obviously from a iris standpoint they're going to frame it as though they're forcing the employer to be nice and give the employee the information that they need to file their taxes just because the government's trying to look out for you but obviously what really the of the government wants is for the employer to do the job of being the tax collector and the one that's reporting the income and actually take the income and report on their behalf so that's where there's kind of the most leverage and that's our most normal form that we expect to see that of course being the w2 form now what if there's a situation where the person on the left is a contractor and the person on the right is paying them as a contractor well then there's less leverage but you have a similar situation and the choice as to whether someone is a contractor or an employee is is not totally freely up to these two individuals right you have to you have to see if you if you qualify as a contractor or an employee but let's say that they're a contractor and so now now the iris would still have the leverage on the person on the right they're saying hey if you if you want to deduct that on your business report on your schedule c or whatever your your income tax then we still we won't make you actually take the money from the contractor before you pay them and pay them on our behalf with withholding but we still want you to give us some kind of form 1099 so that we know who that you paid and when the person on the left then files their taxes if they don't record income say on a schedule c that is at least equivalent to the 1099 reportings then they will most certainly get some kind of of letter saying from the irs saying that they have under reported so that's where the leverage is that's the general idea that's why the businesses basically uh are doing what they do that's where we get these major forms that we use to construct our taxes the iris is putting the leverage where they have the leverage on the payer side of the transaction to get those forms not only to you but principally in their mind of course from the iris's perspective to them so that they so that they have the information now you can imagine a situation where the system doesn't work for the iris to kind of be able to double check the income of a business so for example if this person on the right was not a business but an individual that was hiring a lawyer for their personal purposes then the iris is not going to have that same kind of leverage to force this individual to give the lawyer sole proprietor for example a 1099 in that case because they're hiring the lawyer for personal purposes and therefore they wouldn't get any deduction for it so the iris wouldn't have any leverage and many businesses that are like cashed based you have the same kind of problem you've got the hair salons you've got restaurants you've got nail salons and now those types of businesses where the end person is going to be the actual customer paying for personal goods and services then the iris cannot go to the person that got their haircut or something like that for example and say hey look we want you to give us a 1099 for the person the sole proprietor the contractor that cuts your hair why because the iris has no leverage in that situation because you don't get a deduction for getting your haircut and more recently we see businesses that are going to be in the gig economy where we have similar kind of situations where a platform is linking people together so that you have these small businesses that we couldn't have before it's kind of like a new silk road where now you have people that want goods and services and people that can create a business providing the goods and services by having the silk road this new technology connecting the two together which are these basically uh platforms that can connect people together you can see how the iris would be skeptical of that situation because once again they have no place to say I want someone to issue me the 1099 I want someone as the iris would be saying to give me the withholdings in this transaction and you can see what they're going to try to possibly do in those kind of cases they might try to make the platforms uh hire the people that are using the platforms as employees instead of having letting them create their own business or they might go to the payment processors the pay pals of the worlds and the credit card companies and force them to somehow issue the 1099s and this is like a big issue going forward that I think a lot of people aren't very well aware of because the income tax system used to be something that that was checked and verified through more like random audits so you you were basically filling out your tax return and it would be similar to a situation legally as you driving on the freeway the the cop the policeman could pull you over on the freeway for speeding but that would probably only happen like one out of 20 times that you're speeding but you know that if you get a ticket it's going to be quite a costly experience therefore you don't speed that was the general concept with regards to the tax code as well you file your own taxes you get audited from time to time if you get caught in an audit not doing what you're supposed to do with filing the taxes then uh you get hit in the audit with a penalty that should be large enough that you will be in compliance in the future but more and more the government is going to these more intrusive policies where they actually track what everybody is doing all the time and so this is I think uh something that's also gonna possibly decrease our overall GDP possibly because now you have these you have to comply with these kind of rules and regulations which are going to be more intrusive if you put these rules and regulations and gig work or you put them in these small businesses and whatnot and and you restrict what they can do it's going to make them less productive some of the business models that they could have worked in the past might not work in the future and it's going to entrench some of the larger businesses because the laws and regulations act as a barrier to entry so I I feel like this is a big topic that people don't really fully understand uh and it's it's kind of an interesting you know side note and in any case that means that the major forms that we're going to get to record income the main one we know of is going to be the W2 form that's where it's coming from that's why the company does it they do it because they're compelled to do so because the iris has the leverage on the employer to not only give you the W2 but also get the withholdings the interest income the 1099 interest so they have the leverage on the bank side of things in order to to issue the interest form which is going to be the income that you get for the money that's in like a bank account royalties you've got the 1099 miscellaneous dividends 1099 dividend from the financial institutions distribution from retirement plans 1099 are gain on sale of investment 1099 be business income 1099 in ac that used to be a while ago a few years ago 1099 miscellaneous so this one is probably one of the more prevalent ones these days and one of the newer ones social security benefits ssa 1099 gambling winnings w2g so these are just a list of some of the forms that we can expect now if you get any of these forms obviously you have to report that on your taxes as it shows on the form unless the form is wrong because if you don't the iris will almost surely you know give you a message saying hey you you messed something up because they don't need like a person to do that the machine can check those numbers oftentimes so you just want to make sure if there's something wrong with one of these forms then you typically want to go to the issuer of the form to have them fix it and say hey look you've got to fix that if you give me a wrong 1099 form and i didn't actually earn income from from you in that way you need to fix that with the iris otherwise if i don't report it as income the iris is going to cause me problems if you don't do that if you can't get it fixed in that way you still want to report the proper amount of income but you can expect that the iris is going to cause you problems and you can have to get in an argument with the iris because the issuer of the 1099 is wrong now just remember also that if you do not get one of these forms it does not mean that you have something that you do not have to record as income necessarily so that you still have to record everything as income that's required to be recorded as income and everything should be income unless the iris code says it's not income is what their general rule is as the iris and the government get more intrusive and they start to have these forms for every type of income the general thought process is well if i didn't get a form for it i don't have to report it that's just a natural response to this this kind of system it's not exactly true though because for example uh with the 1099 forms down here if you have a schedule c business it's quite likely that you do business for some people that don't give you a 1099 and some people that do so the way that's going to work is on your schedule c your income must be equivalent to or greater than the amount of the combined 1099 forms that you received or the iris will almost certainly give you a give you some kind of letter however the fact that that some businesses didn't give you a 1099 doesn't mean that you shouldn't be reporting the income that you got from those businesses as well just means that the iris doesn't know about those that income but still a self-reporting kind of system that you should be reporting because you might still get an audit situation but again the general tendency of the iris these days is actually seems to be moving away from an audit kind of structure uh in order to to and more into a more intrusive structure where they actually want to monitor what everybody's doing and and be able to track you know double check on almost every transaction seems like the tendency that we're going to which is there's a capacity to do that with possibly the new technologies the question for us i think going forward is that the direction do we want to go or is that that more intrusive way of doing things to intrusive number one and possibly decreasing our productivity our GDP being less than it otherwise would due to the increased you know regulations