 Income tax 2022-2023, IRA deduction. Let's do some wealth preservation with some tax preparation. Most of this information comes from the Form 1040 Instructions Taxure 2022 Instructions for Schedule 1, Additional Income and Adjustments to Income, Adjustments to Income section, which you can find online at the IRS, website irs.gov, irs.gov. When looking at the income tax formula, we're focused online to adjustments to income. Remembering that the first half of our income tax formula is in essence an income statement, but a weird one in which we've got income minus the equivalent of the expenses being the deductions gets us to the equivalent of net income being taxable income, but everything is flipped on its head with regards to the objectives because we want taxable income to be as low as possible as opposed to normally where we want net income to be as high as possible. When we're looking at the adjustments to income, we can think about them as deductions on the way down to get to that taxable income bottom line of the income statement part of the income tax formula or as a contra income account, an adjustment to income, where we have income minus the adjustments to income to get to the AGI or adjusted gross income and important subtotal because that's the one that the phase outs are usually gonna be based on when we phase out deductions and expenses based on income level as incomes go up. Also remember that the 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 then 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. Adjustments do not have that kind of limitation or that hurdle that needs to be cleared, such as the itemized due with regards to the standard deductions in order to take the deduction if they qualify for it. So that's that and also realize that you might call them above the line deductions. You might hear them called schedule one deductions. Okay, so where are they located on first page of the form 1040? They're down here or grouped together in the adjustments to income line 10 when looking at the schedule one, we're focused this time on the IRA. So the IRA deduction, so this is probably one of the most common adjustments to income. So when you think about the above the line deductions, this is probably the first one to come to mind for many different reasons. One is that it's a quite common deduction, but it's also the one that you might have some last minute kind of tax planning that you can do because unlike most other deductions you generally have up until the point of filing the return or the due date of the return, not including extensions to take advantage of this last tax planning tool, which is really, really good because oftentimes you don't know how much you might be able to put into an IRA until you actually do the tax return. So let's just give a quick recap of this. Remember that if you're the normal kinds of deductions that you would expect in an income tax type of system are those kind of deductions for expenses that you had to consume in order to generate the revenue which we can most clearly see on a schedule C where we have an income statement, income minus expenses, expenses being business deductions, necessary to generate the revenue and we're taxed on the net income in essence as opposed to the gross income. With W-2 employees then we don't usually have those kinds of deductions so much because it's assumed that the employer is providing the expenses necessary, therefore most of the deductions we work with when we're not looking at business tax returns are strange from an income tax standpoint. Their attempts for the government to kind of influence us or try to have our manipulate our behavior a little bit to invest for retirement, for example, more or they are trying to get us to put money into charities or something like that. And so with the retirement plans that of course is what is happening here. They're trying to say, hey, look, we're not that good at long-term planning as individuals, although individuals, people, human beings are good at short-term planning typically. So the idea from the government is that we're gonna manipulate the incentive structures so that people will have an incentive to put the money in at this point in time by having these IRA accounts, the 401Ks, the IRAs and so on. So you can kind of think about these investment accounts together in some ways, and then you gotta think about the differences between them. If you're employed at a W-2 employee, then it's possible your employer might provide you a benefit program such as a 401K plan that you can put money into, which is great benefit because then you could put a significant amount of money into the 401K plan and you might have matching related to it. From a tax standpoint, then you don't have to do much either because the W-2 will reflect the money that was put in by removing it from box one of the W-2, so it's not taxable. So that means the number that reaches the tax return here has already been reduced by the amount that you put into a 401K plan, so you already basically deducted it from income. However, what if you're in a situation where you don't have the capacity to put money into a 401K plan possibly because you're self-employed or something like that? In that case, then you might be able to put money into an IRA because the government would still like to incentivize people putting money into a savings account. So of course, because you're not gonna get a W-2, you can't really deduct it in the same way on the W-2, reducing it on box one of the W-2, but instead we do the above the line deduction as we can see here. So that's the general concept. Also note, there's differences between a normal IRA and a Roth IRA. When you put money into a normal IRA, the idea is I'm gonna get the benefit today reducing my taxable income today that's usually thought of as the standard way to do it when you're in your high working years, right? Because if I'm earning a lot of money, the idea is that I'm gonna be at higher tax brackets because it's a progressive tax system and when I pull money out in retirement, hopefully I'll be able to pull maybe money from multiple sources. So even though I'm living on say 100,000 at that time because inflation will go up or whatever, then maybe I'm pulling only 50 out from a taxable account and 50,000 out from a non-taxable. So I might be in lower tax brackets or maybe I just won't need as much money at that point because I won't have the family needs and the mortgage and whatnot and all that kind of stuff. So that's the general thought process. We get the benefit now and that'll be the best for taxes but you might not be earning a lot of money now or you might think that the government's out of control spending is gonna lead to skyrocketing tax brackets at some point when it hits the fan, which is right when we retire, most likely given our luck, right? So if that's your thought process, then you might say, well, I would rather take a Roth at this point in time so that I pay the taxes now and when I pull the money out, I don't pay taxes at that time and I get the growth and the Roth IRA should be a non-taxable event. So that's the two kind of incentive plans but most of the time people are thinking about a standard retirement type of plan, a standard IRA. Now the other thing to note with an IRA is that you can't typically put as much money in an IRA as you can in a 401K plan. So that's another kind of issue that we need to keep in mind if you have a small business, that's why we talked about before, you might set up a 401K plan for your business but that's complicated. So you might set up a more simple, like SEP or a simple, which is a kind of retirement plan that will allow you to put more money into the retirement plan. And so it's also a little bit more complicated when you think about a retirement plan that you have with work, if you have say access to a retirement plan through your work, but you don't take advantage of it, you don't maximize it out, then the question is, could I still put money into an IRA? If you have a 401K plan, in other words, you typically have to put the money in during the year, in this case, 2022, before December. But you don't calculate how much you have to put into an IRA until the date you file the tax return, like April 15th or 18th or whatever, not including extensions. So that means that you can do that last minute kind of tax planning. And the amount that you could put into an IRA will be dependent upon your ability to put money into like a 401K or some other type of retirement plan and possibly your ability of your spouse to put money into a retirement plan. So it's great to have that last minute tool, that last minute question doing the calculation and seeing if I can get the last minute tax planning benefit from seeing if I could put money into an IRA. Okay, so line 20, IRA deduction. If you made contributions to a traditional IRA for 2022, you may be able to take an IRA deduction, but you or your spouse, if filing a joint return, must have had earned income to do so. So for IRA purposes, earned income includes alimony and separate maintenance payments reported on schedule one, line 2A. If you were a member of the U.S. Armed Forces, earned income includes any non-taxable combat pay you received. So in other words, you're getting a deduction from the IRA. So obviously, if you don't have earned income, if you don't have any income, then you're not gonna get like a tax benefit from it, because earned income is usually the taxable income, although you could also have other kinds of passive income like dividend income and interest income. So if you were self-employed, earned income is generally your net earning from self-employment. So if you're self-employed, that's still gonna be earned income. You're still paying, you can kind of think of the rule that you're paying Social Security on it, or you're paying Medicare and Social Security in the format of either the W-2 wages or with self-employment, although again, there's some other exceptions here with alimony and whatnot. But in any case, if you were self-employed, earned income is generally your net earnings from self-employment if your personal services were a material income producing factor. So for more details, you can see publication 590A. A statement should be sent to you by May 31st, 2023 that shows all contributions to your traditional IRA for 2022. Use the IRA deduction worksheet to figure the amount, if any, of your IRA deduction, but read the following list before you fill in the worksheet. Number one, you can't deduct contributions to a Roth IRA. So the Roth IRA is the one you don't get the benefit today on. It's kind of reversed. You're putting money into the Roth IRA because you don't get as high a benefit today possibly as you think you're gonna get later. So you're gonna report the income now and get the benefit of the growth, dividends, income, capital gains that hopefully will not have a tax impact when you take the money out. So but you may be able to take the retirement savings contribution credit. So there's a savers credit. So we might go into that in more detail later. So the investment, so see the instructions for schedule three, line four for that. Number two, if you are filing a joint return and you or your spouse may contributions to both a traditional IRA and a Roth IRA for 2022, don't use the IRA deduction worksheet in these instructions. Instead, see publication 590A to figure the amount, if any, of your IRA deduction. So here's where it gets messy because most of the time people say, well, how much can I put into an IRA? What's the cap? And then it gets messy in terms of, well, what if I have my spouse puts money into an IRA? Can I put money into a Roth IRA and an individual IRA? What if I have an IRA and I have access to a 401K plan? What if I have an IRA and my spouse has access to a 401K plan? And that's where it gets messy in terms of how much you can put in. Obviously software helps you to kind of drill down on those scenarios. The general rule would be, you know, you want to know that if you don't have access to anything else, you can put money into an IRA, although the cap is going to be lower than it otherwise would be. And there will be complications if you had access to other retirement plans and you want to put money into a Roth and that kind of stuff. And luckily we have the capacity to do some last minute planning possibly with the software in many cases because you don't have to put the money into the IRA until April 18th with the filing of the tax return not included in extensions. Three, you can't deduct elective deferrals to a 401K plan, 403B, section 457 plan, simple plan or the federal fifth thrift savings plan. These amounts aren't included as income in box one of your form W2. So these are the other plans that are similar in structure or have a similar idea or design as an IRA but they're happening through work typically and therefore the employer is kind of calculating them and they'll already be removed from the wages on the W2 like we talked about. So number four, if you made contributions to your Roth in 2022 that you deducted for 2021 don't include them in the worksheet. Number five, if you received income from a non-qualified deferred compensation plan or non-governmental section 457 plan that is included in box one of your form W2 or in box two, one of form 1099 NEC, that's when you're a sole proprietorship you often get those, don't include that income on line eight of the worksheet. The income should be shown in A box 11 of your form W2, B box 12 of your form W2 with code Z or C box 15 of form 1099 miscellaneous if it isn't contact your employer or the payer for the amount of the income. So six, you must file a joint return to deduct contributions to your spouse's IRA enter the total IRA deduction for you and your spouse in line 20. So here's the another situation where you've got two people got married and so now you would think that there are one taxable entity but you still have certain rules that are kind of applied per person per social security number in essence and one of those of course is the IRA. So if you have a married couple, neither of them have the capacity to put money into a 401k plan or any other kind of retirement plan then each of them can put money of course into the IRA as you would most likely suspect. Number seven, don't include rollover contributions in figuring your deduction instead see the instructions for form 1040 or 1040 SR lines for A and for B. So you can't, if you have like an IRA in one financial institution and then you go to another financial institution and you wanna put the money from one institution to the other institution you wanna make sure that you do so without pulling the money out otherwise you'll have a taxable event possibly subject to tax and possibly penalties that we talked about before and therefore you want to roll it over. We talked about these when we looked at the income side for the 1099R distributions from an IRA. So you wanna mark it as a rollover and what you cannot do of course is say well I put money into my new IRA account and therefore I get a deduction for it but you didn't really put money into it you just rolled it over from the other account, right? You didn't put more money into the retirement account you just rolled it over from one account to another account and that highlights one of the problems with these savings accounts the government is trying to incentivize us to save but oftentimes it really helps out wealthier individuals because clearly you can only put money in there physically to take the tax benefit if you have the cash flow to do it if you're living paycheck to paycheck then of course you can't do it and it's kind of an interesting debate when they talk about increase in the 401K plans and the matching and all this kind of stuff because obviously that helps more wealthy individuals they market it like it's helping lower income individuals but the lower income individuals don't have the money to put in these massive amounts into the 401K plan because they're spending the money but in any case number eight don't include trustees fees that were billed separately and paid by you for your IRA number nine don't include any repayment of qualified reservists distributions you can't deduct them for information on how to report these repayments see qualified reservists repayments in publication 590A number 10 if the total of your IRA deduction online 20 plus any non-deductible contributions to your traditional IRAs showing on form 8606 is less than your total traditional IRA contributions for 2022 see publication 590A for special rules tip so if you made any non-deductible contributions to a traditional individual retirement arrangement an IRA for 2022 you must report them on form 8606 so notice when you put money into say an IRA account remember the idea of investing for retirement would of course be there if the government told you that you had to invest or kind of forced you or nudged you or not meaning if they didn't have an IRA they didn't have these tax benefits for a 401K you'd still put money you'd want to put money away for retirement usually in the form of mutual funds is one of the great tools to use now so if you put money now if you're forced when you put money into an IRA you would never put money into an IRA generally unless you got a tax benefit because if I was saving for retirement I don't want to have to lock it away if there's an emergency I would still like to access the money so I could save for retirement and still have the capacity to pull it out in the event of an emergency if it was outside of a retirement account so I wouldn't really lock it under and let the government force me to have it under the format of a retirement account unless they gave me a benefit, a tax benefit for doing so which typically for a traditional IRA or 401K is a reduction of the income when you put the money in but also the increase of the value in terms of dividends, interest, capital gain increase and the value of the stocks is deferred until you pull the money out so you can think about contributions and say well what if I maxed out the con what if I put money into an IRA more than I got a tax benefit from meaning I didn't get to enter the adjustment it still might be something that would be beneficial if you're allowed to do that because you still are deferring possibly the increases in terms of capital gains, interest and dividends until you pull the money out so tip, you no longer need to be younger than age 70 and a half to take a deduction for your contributions to an IRA tip you must receive at least a minimum amount from your traditional IRA for each year starting with the year you reach age 72 so the general idea with the IRA is you're putting money into the IRA and then the government is deferring the tax that you're gonna be charged on the IRA until you pull the money out and that means that the government wants you to pull the money out before you die otherwise they're not gonna get their piece of the income unless they can take it from your corpse with an estate tax or a death tax so that means that when you hit 72 they're gonna start to force you to take the money out so that it'll trigger a tax event at that point in time and it's kinda messy when that happens because now your tax planning is kinda weird at that point in your life because now you're trying to minimize the taxes you're gonna pay by trying to reduce the amount that you're forced to take out of an IRA cause then you're gonna have to pay taxes on it and it gets kinda strange so if you don't receive that minimum distribution amount in the year you became age 72 you must receive that distribution by April 1st of the year following the year you became age 72 if you don't you may have to pay a 50% additional tax on the amount that should have been distributed so the IRS is quite aggressive with that 50% tax so for details including how to figure that minimum required distribution you can see publication 590B so were you covered by a retirement plan? So in other words, we're talking about an IRA now the question is well what if you had access to a 401K plan? Can you still put money into an IRA? You know, it depends and so if you were covered by a retirement plan qualified pension, profit sharing including 401K, annuity, a SEP, a simple, et cetera at any work or through self-employment your IRA deduction may be reduced or eliminated so but you can still make contributions to an IRA even if you can't deduct them in any case the income earned on your IRA contribution isn't taxed until it is paid to you so in other words, these other kind of retirement plans that you get through your work like a 401K plan if you have access to that and you're putting money into that that could limit how much you can put into an IRA which the software can really help you calculate because you don't have to put money into the IRA until you file the return not including extensions which is a great tool so you can say yeah that could have an impact we'll check it out, we'll file the tax return and we'll do that last minute tax planning as long as you get the tax filed before the cutoff date and you wanna make sure that the clients are advised them to have the money if they can to put money into an IRA in order to get that last minute tax planning notice they mentioned here you can still make contributions to an IRA even if you can't deduct them why would I do that you might say because that means that the earnings you're not gonna get a benefit from the deduction when you put the money in but if you'd still get the earnings of it would be tax deferred until the point that you take it out so the quote retirement plan in quote box in box 13 of your form W2 should be checked if you were covered by a plan at work even if you weren't vested in the plan you are also covered by a plan if you were self employed so that means the box 13 of your form W2 will have a check box saying you had access to the 401k plan so you will also have covered plan if you were self employed and had a set simple or qualified retirement plan so if you had a schedule C self employment business you might set up your own simple plans a set plan or a simple plan which is kind of like a simple 401k plan so that you could put more money in than you otherwise would be able to for an IRA note that a simple a set plan for example also I believe gives you the capacity to put money in after the year of 2022 so you can do some planning otherwise you wouldn't know how much money to put into it until you do the taxes oftentimes so if you were covered by a retirement plan and you file form 2555 or 8815 or you exclude employer provided adoption benefits you can see publication 590A to figure the amount if any of your IRA deduction married persons filing separately so if you weren't covered by a retirement plan but your spouse was you are considered covered by a plan unless you lived apart from your spouse for all of 2022 so even if your spouse is covered by the plan you could still have an impact on you when married so tip you may be able to take the retirement savings contribution credit see the schedule 3 line 4 instructions we'll get into credits at a later point