 Income tax 2023-2024. Other adjustments to income tax software example. Get ready and some coffee because although the best things in life are free, you know that eventually the government will find a way to tax them, which means we have to be ready 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, trust me, I'm an accountant product line. Yeah, it's paramount that you let people know that you're an accountant because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep complex and nuanced questions. 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 LASERT 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, instructions at the iris, website iris.gov, irs.gov. Looking at our standard starting point where we have Adam Taxman. Just trying to avoid a dang tax man. Living in Beverly Hills 90210, single filer W2 income starting at the 100,000. We've got the standard deduction 13,850, getting to the taxable income, 86,150, we can mirror that in our income tax formula in Excel, 100,000, 13,850, 86,150 taxable income, then the tax calculated at the 14266, which we can see on page two of the form 1040. Alright, let's go back to our first page. Let's look at our point of focus this time, which is on line 10, adjustments to income from schedule one. Let's look at the schedule one, which is the additional income and adjustments. We want to see page two, which is also part to the adjustments to income. We're down here on lines 24. So you can see line 24 being called other adjustments, meaning that these are probably not the items that are going to be most commonly used. However, they are used from time to time, and some of these other items have their own individual line items from A down to Z, and we can see that Z, of course, is where we might put the items that don't have any other line item applied to them. Okay, so then let's start off with the first one where we have the jury duty. Where was it? There it is, 24A. So we have a jury duty situation. The jury duty, you're going to get income, and we saw that on the income line up top. So we'd say, okay, well, what happens if you had a jury duty situation and you had income from it, but you're already getting paid by your employer, for example, and because the employer is paying you your normal salary while you're at jury duty, they say that they want you to give them the jury duty pay, right? Because otherwise, you're getting paid twice for the same thing. So if that was the case, you might get a 1099 for jury duty pay, which means you'd have to include it here. And so we'd go, okay, jury duty, let's imagine it was $1,000. And I'm going to go back on over and say then that we have the $1,000. That would pull into page one of the form 1040. There's 1,000, but then we're saying, hey, wait a second, I shouldn't have to pay for that $1,000 because I had to give it to my employer because they're already still paying my salary would be the scenario. Why don't I just remove this 1,000 and not include it? Well, I can't do that. Why? Because the jury duty might have given a 1099 to the government. And if I don't include it on my taxes, then the government's going to say that you got money from jury duty that you didn't report. So how can we get to the same point so we have the income at the same place or at least the adjusted income? Well, we can also go to the schedule one page number two and say I'm just going to take it back out here jumping to the jury duty. And so now we're going to say boom, 100 or 1,000, I should say. So now if I go back on over, we could see it went out here. So it went in on page one as income and then we took it back out and that's going to show up on the first page of the form 1040, increasing income to 101,000. But then we reduced it again by 1,000, getting us back to the starting point of 100,000 and back to our same basically taxable income that we had over here. This is a common technique that you want to keep in mind because the underlying foundational idea you want to have in mind is if I get a reporting document from somebody like a 1099 or W2, I have to report it on my return generally. Otherwise, the IRS will almost surely cause me a problem because the people that gave me a 1099 or W2 also gave it to the IRS. That's the important part. The IRS is trying to act like they're helping you out, but that's not what they're really doing. They're trying to get the person who is paying the money to rat the person who received the money out to the government with the form 1099. So if they have the form, then if it's wrong, what am I going to do about it? Well, I have to either get it fixed by the issuer of the 1099 if there was an error and or in certain situations I might be able to show the IRS what happened like we're doing here. Hey, look, IRS, there's the 1,000. I put the 1099 information on here, but I shouldn't be taxed for it because I had to pay it back and therefore I'm just going to remove it back out so you can see it for informational purposes, although it doesn't have an impact on the tax calculation. Alright, next one, let's go back on over to the Schedule 1 and remove that and say, okay, I see what's happening there. Let's get that out of here and get back to our starting point if we could. I won't do that in Excel because I don't want to think it's pretty straightforward. So we'll go back on over and say, okay, next one, what if, let's look at this one, deductible expenses related to income reported online, 8I from rental or personal property engaged in for profit. So now we have a situation, let's go to the first page where we say it was on 8L, I'm sorry, I keep on saying I, 8L because it's lowercase, income from the rental or personal property if you engaged in rental for profit but we're not in business of renting such property. Now this one might not come up all that often but I think it really is a good indication of what we have to keep in mind with regards to different types of income. In other words, if something comes in, we get a 1099 or something like that and it's something that was subject to business income, meaning it's earned income, then we might have to put it on the Schedule C, noting that if I put it on the Schedule C, I have an income statement but it will also be subject to taxes possibly. So you want to make sure that if you're dealing with the Schedule C, you could have basically taxes related to the calculation. So let me just show you that if I was to say, okay, if it was an income, a self-employment type of situation, then it would be subject to self-employment tax. So if I had income of, let's say, we sold some 10,000 side job gig work and then we had advertising of 7,000, then we have income of the 3,000 but notice all the other things that are affected here. It's not just that that 3,000 is going to be included in income. We're also going to have the self-employment tax. These are the estimated payments, hold on. The self-employment tax is here calculated. So we have this impacted. So that goes up to the form 1040. So now we have the added 3,000 but we also have an impact for the adjustment because half of the self-employment tax is deducted. We have this qualified business income deduction situation and page two, we have this added tax for the self-employment. So you have to say, I'm not subject to self-employment in some types of income. So if I'm not subject to self-employment, then I don't want it on the schedule C. The other thing would be, well, what if it was subject to capital gains similar to like selling stocks and bonds? Well, in that case, we saw that you could have favorable tax rates. So if there was a disposition of something that we sold subject to capital gains, it was property that we sold and we sold it over a year old. We're going to say it's going to go from 010100 to 013123 and we sold it for 10,000 and we bought it for 7,000. Notice then, if I go back on over, now we have a schedule D situation, long-term capital gain, which is rolling into the form 1040 and so that rolls in and you're like, okay, that makes sense, but if I go to page two, then that's going to be taxed possibly at favorable tax rates because it's a long-term capital gain rather than ordinary income tax rates. So you have to think, okay, would that be the right place to put it because capital gains could have a significant impact if it's subject to capital gains because long-term capital gains could have a better tax rate and losses are going to be limited to the amount of income, right? And then if it's not capital gain rates, I'm going to delete that and say if it's not capital gain rates and it's not subject to self-employment, then you would think the income might go somewhere in the schedule one, right? So then I'd go, okay, it doesn't go there. It goes into the schedule one and we're looking for, in this case, income from rental or personal property jumping to that and we're going to say 10,000 and then if I jump back on over, that's going to be included and then the other side we're putting here and we're going to say to line number 24 deductible expenses related to income reported on line 8L, I keep on saying I, from the rental. So if I right click and jump to that, we're going to say that this is the 7,000. So now we have the income on the schedule one, the 10,000 and then the deductible expenses related to income reported on 8L from the rental personal property engaged for profit that pulls into the 1040. So there we have it and the 7,000 then pulling in here. Let me check that again. Wait a second. Did I put 7,000 income prior year? Yeah, that's right. Sorry about that. I've got the 100,000 plus the 10,000 brings me to 110,000 and then the 7,000. So the net of the 10 and the 7 is 3,000. So you can see the net change to our adjusted gross income is 103,000 and we still have the standard deduction of the 13,850 tax income at 89,150 page 2 calculating the tax, but now we just have the normal progressive tax rates. So that probably is not going to come up, that specific case might not come up that much but you might have situations where people get like a 1099 for something that's not really their business, right? And it might be some income you have to report and the question, it comes up in terms of what category of income is it? Is it subject to self-employment tax? Is it subject to favorable capital gains rates for capital gain income or is it some other income that needs to be reported that isn't subject to self-employment tax and should be taxed at ordinary income rates? Okay. All right, let's go back on over and check that out again. So I'm going to go back and let's remove those. So that makes sense, hopefully. They'll delete this and then go back on over and say, what's the next scenario? These are interesting scenarios right here. Wait a second. Page 1. Okay, I've removed it now. Next one. We've got the non-taxable amount of the value of Olympic and Paralympic medals, USOC prize money reported on line 8M. So again, probably not one that you see often, but conceptually I think it's useful to just take a look at. So now we're going to say that we have the Olympic and Paralympic medals. So if you have a client that's a medal winner, then normally prizes are something that you're going to have to pay taxes on and again, you might get a form for it like a 1099 or something that shows you that amount which the IRS has and therefore you're going to have to record it in income. But there might be an exception for whether you have to include it in income for adjusted gross income. So what we're going to do there is include it once again here and then if I can exclude some of that income, I'm going to report it in the non-taxable amount down here and that will net out in a similar way as we saw with the prior example. I won't do it this time because we've seen it before and this is a less common example, but that's the general concept of it and obviously we want to give our Olympic athletes the benefit of tax benefits as an incentive to win. We tax the losers. Okay, I'm not going to get into that again, but let's go down to the last one here. Z is where the other adjustments are. So obviously if you have some kind of income, remember the general rule from the IRS is everything is income unless there's an exception. So you can come up with a lot of different scenarios where you might have other cases of income that don't have their own line item, but which technically should be recorded in taxes and then you could basically include them down here. Now we also have this scenario with these 1099Ks which remember the 1099s is a situation where the IRS is trying to get a stranglehold on the economy and they'll probably be starting to choke out certain businesses like gig work, for example, which often consist of basically middle platforms that aren't really hiring people like a contractor or an employee. They're really connecting two people together, usually small businesses. So a lot of the gig work platforms, one person's going on it to provide a good or service and another person is being able to find them because of the platform. The platform is really just kind of like the Silk Road, the trading path that allows the two people to get together. Well, the IRS is going to have limited capability to tell the person who's going to issue the 1099. Is it the person who's getting the job through the platform, which would be very detrimental to the functioning of the platform because you'd have small businesses subject to these 1099 rules through the platform, or is it the platform itself, which is detrimental to the platform because it's supposed to, it's just really acting as a connecting tool, or they can go after the pay pals of the world, the financial institutions that are facilitating the transactions. So as they try to hit these different people to try to stranglehold on the taxes, then sometimes you might get like two K-1s or schedule K-1s or something or 1099s, one from the financial institution possibly and one from the platform or one from the other one you're doing business with and you'll have to correct that, hopefully going back to whoever issued it to you to tell them to fix it, but if you can't get it fixed, then you have to again deal with the idea that you might have to report it to show it to the IRS and show that there was an error in it or something like that. So we have an example also that looks kind of like this that they have in the instructions. Online 24Z, you would enter $700 and in the entry space next to line 24Z, you would write form 1099K personal items sold at a loss. So we have the situation in the entry space next to line 24, write form 1099K, sold at a loss and also enter the amount for the sales proceeds. So for example, you bought a couch for $1,000, sold it through a third-party vendor for $700, which was reported on your form 1099. So now you have a 1099 for 700. Again, the questions are, is that something that should be reported subject to self-employment tax, schedule C, or subject to capital gains, schedule D, or possibly over here, not capital gains and not self-employment tax and on the other section. So we have the same scenario with two other calculations where we might say, all right, well that means I have other income from the sale. So we could say, dude, and I'm going to say other and we had a sale, a sale of couch at a loss or something like that and we got the proceeds of $700 and so I'm going to pull that on over and say there's the 700 on the income side and then we're going to have to go back on over here and say it was sold at a loss though, so I'm going to basically pull it back out on this side, jumping over and saying something like, it was 700, it was a, and we say form 1099K, that's not a K, personal item sold at a loss and then I'm going to put the loss up to just the $700 so it matches what's on the other side so if I go back on over and so we're just taking the loss up to basically the income amount because it was a personal item sold, that's the general idea so once again, we have the $700 of income and then on page two, we're taking it back out, same concept here so that if I go to the first page of the 1040, $100,700 has been included telling the IRS, hey look, there it is, you got a 1099 for this but possibly it shouldn't be included in income because I sold it at a loss and I'm just going to put the amount up to the loss to remove it so that I'm back down to just my standard $100,000 again so similar kind of concepts that we've seen here being mindful of the reporting of the 1099s that are not only going to us but are going to the IRS as well now we have a similar kind of remedy that you might put in place if you had an incorrect 1099 so let's say the 1099 was just flat wrong you got $700, you shouldn't why because maybe you got two 1099s because two people issued you the 1099 one was the financial institution one was the gig work platform or something like that well then we're going to, once again, we could try to go to the issuer of the 1099 and say hey, you need to fix this because the IRS is going to think that I got double my income because two people issued me the 1099 but sometimes that can be difficult to do so the other option would be to say hey look IRS, here's the 700 I got and in the statement you would say something like it's an incorrect 1099 over here and then on the second page or the adjustment we would put here that we have an above the line adjustment to income once again telling the IRS hey look this is me negating the income I put up top just to show you the thing that matches your 1099 was incorrect here's my rationale for it so the IRS has the audit trail in essence of it going in on line 8 and then back out bringing us back to the $100,000 so one of the main takeaways of this whole section is that these things might not come up all that often hopefully they don't where you have an error in the 1099 you probably don't have that many Olympic athletes or whatnot but it emphasizes the fact that I think could come up in scenarios and at least with discussions with clients about documentation and how you're going to basically need to communicate with the IRS to cause as little friction as possible to communicate well so that the tax returns don't get delayed in whatnot in the refunds and that's basically going to be able to recognize what the IRS has they have the 1099s and whatnot so you have to communicate with them in a way to recognize the information that they have and what they don't have they don't know the information was incorrect or anything like that so you can have to deal with either fixing the 1099 or trying to find some way to show the IRS and match what they have on their side and then correct it so that they can see the audit trail of that correction