 Income tax 2022-2023, HSA moving expenses, deductible part of self-employment tax and self-employed SEPs, Simple and Qualified Plans, tax software example, let's do some wealth preservation with some tax preparation. 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. We are in our example Form 1040 populated with LASERT tax software. You don't need tax software to follow along, but it's a great tool to run scenarios with. You can also get access to the Form 1040 related forms and schedules at the IRS website irs.gov, irs.gov, starting point as usually we have the single filer, Mr. Anderson, no dependence, W2 wages 100,000. We've got the standard deduction 12,950 bringing us down to 87,050 taxable income. We're mirroring that over on our income tax formula Excel worksheet 100,000, 12,950, 87,050 page to calculate in the tax. There's the tax calculation 15,000 withholdings getting us to the 226 refund which is mirrored over here on our tax formula, but our main focus is up top on the tax calculation for page one for the taxable income and we're focusing now on the adjustments to income, which are on schedule one line 26. So let's open up schedule one line 26. So there's the schedule one and I'm going to go to page two of schedule one, which is our focus and we're going to start here with the health savings deduction. So we've got 13 line 13, the health savings account deduction. So we might dive into just the the ins and outs of the health savings account in a future presentation, but the bottom line is that you might be able to get a deduction for it if you have basically a qualified plan for the health savings account. And then the question is, is the health savings account being accounted for by your employer in which case they may account for it on the W2 form? If not, then you might have to use then the schedule here form 8889, which will then pull on to schedule one. Let's take a look at the form 8889 and here we have the health savings account. And then box one, you got check the box to indicate your coverage under a high deductible health plan. So you have to get into the ins and outs of what a high deductible health plan is, which once again, we might dive into the topic in more depth in a future presentation, but just so we can see the links in the software for now, we're going to say it's a self only versus a family plan. And then we had line two HSA contributions you made for 2022. We're going to say it's a 3,650. We maxed out what we could here. And then that pulls down to the bottom line HSA deduction. And this is going to be pulling into the schedule one. I'm going to unclick this and go to the schedule one line number two, which is pulling into line 13 now, scrolling back down that pulls into line 26, which is going to go on to page one of the form 1040. And we have it right here, the 3,650. Now we could mirror that in our software on this side. We could say, OK, in our worksheet, these are the adjustments to income. So I'm going to say adjustments to income. And let's add a couple lines here, insert. I'm just going to insert. And let's just call this one an HSA and I'll just make it a nice quick and easy one and say that the max here we had was the 3,650. Now you could get more complex in terms of the amount, but I'm just going to make it like one line item. And let's actually put it on the outside here. So it just goes directly into our outer column calculation. I'll put some borders around it. And where's my borders? Borders there, borders here. And then I'll just sum that up, boom. And that pulls into page one. So there is our adjustment of the 3,650 to get us the 96,350. And if I go back on over, I also decreased the income to 30,000. So I'm going to decrease the income here to, let's say, 30,000. For this example, I'm pulling over. That gets us to the 26,350. So there's the 26,350 standard deduction at the 12,950 gets us to the 13,4. So there's the standard deduction. 12,950 gets us to the 13,4. I'm not going to complete the bottom of it, but move on instead to the moving expenses. So let's go back to the original numbers. So now we're back to the 100,000 and the 12,950. And then let's go then to our scheduled one page number two. And we've got our moving expenses for members of the armed forces. Now remember, we're severely restricted to the moving expenses. You can't just do it for the job. It's more restricted to the armed forces. And even then, you would possibly need to look up and see whether or not they are reimbursed. So a very specific type of scenario will not come up as often as it was. You're more likely to get questions about moving expenses than to have the capacity to deduct them oftentimes. But let's look at the 3906 just to check it out. So here's 3903, I should say, moving expenses. And so you've got your information on down below. So let's populate this one. Now I'm not going to go through every step here, but the general rule with the general concept with this software is we're going to be marking it off that it's for armed forces move due to permanent change of station. That's when it would be applicable. And then you've got this kind of similar framework that you might have seen when we had the moving expenses that were allowable for normal moves for the job, miles from the old home to the new workplace, miles from your old home, and so on and so forth. Can you deduct lodging and travel and whatnot? I'm just going to pull that over just so we could see the calculation on this form and see the connection of the forms. And then you could dive into this form in more detail if you have this situation come up. So we have the calculation. By my calculations, where? This then pulls in to the schedule one. So I'm going to go back to the schedule one, page number two, and there's then our moving expenses that are pulling in. That of course populates down to the bottom here and that pulls into the form 1040. So on the form 1040, we have our moving expenses taking our total income down by the 3,000 to the adjusted gross income, 97,000. I'm not going to go on to the Excel worksheet on this one. Just want to give a general idea of the links. It's a pretty straightforward type of situation there as well because I want to move on to the next one, which is the deductible part of self-employment tax, which gets a little bit confusing. So let's go back to the original scenario. So we're back to just this 100,000. Now, when I go back here and I look at my schedule one, line two, we've kind of touched on the concept of the self-employment tax deduction. Which is line 15 here, I'm on. Deductible part of self-employment tax because we touched on it when we thought about adding income to like a schedule C, another type of income. And then we had to look at the idea of all the other things that are impacted. So remember when you're thinking about income, if it's W2 income up top, then you're still paying social security and Medicare through payroll taxes, which are withholded from your W2. So it's all kind of taken care of and we don't really have to do anything on the form here. So we could just focus on the income tax. But if you have other kinds of wages that didn't have payroll tax related to it, no social security and Medicare withheld, then the question is, are those kinds of income subject to social security and Medicare? And which is a big deal because if they are, then you can have a significant other tax that would be applied that you have to deal with. And so the common form there would be the schedule C, business income. So let's add business income and just see all the changes that happen to this form again, one of them being that we get to deduct half of the self-employment tax. So let's get a feel for that. I'm just gonna go back on over to the income and say we have a schedule C. We've got basically just an income statement for the schedule C. Let's say the income was 50,000 and we had expenses, let's say advertising of 20,000, bringing us 30,000 of income. So if I go back to my forms then, now I have a schedule C. So another added income, which is an essence and income statement. So I'm just gonna say 50 minus to 20, which is the 30,000. That's the bottom line. I've already deducted some of the expenses because these expenses are basically business deductions. These are the most common and normal kind of deductions for an income tax system because they are the ones I needed to deduct in order to generate the revenue would not be fair to tax me on gross income. It would only be fair to tax me on the net income. Otherwise I'd be favoring certain types of businesses that have fewer expenses in order to generate revenue and so on. And so this amount, as we would expect, we'll pull into the income, schedule one income line from the schedule C and then we'll pull into the form 1040 here. So we have it there. That makes sense. But we also have this situation with the equivalent of payroll taxes because the IRS back to the schedule C wants to say if you're self-employed, then we want to not only hit you with the federal income tax, we wanna hit you with the social security and Medicare tax. And they'd probably say it like this. We wanna allow you to participate in social security system for your own benefit. So that's gonna be the idea. So we're gonna have to pay the social security and Medicare paying into that kind of system. Now they're trying to mirror that with what happens in a corporation. With a corporation, what happens is that we as an employee get withheld from our paycheck by the employer, social security and Medicare, which are the payroll taxes as well as our federal income tax. And then it's all kind of taken care of already. So we don't really see it when we do our form 1040. But for, so that means on our end, but we also have the employer that has to also match the social security and Medicare. So part of it's paid by the employee, part of it's paid by the employer. But the employer also gets to deduct the wages of the employee and their payroll taxes. So they wanna mirror that on our side saying, okay, there's the 30,000. We're gonna calculate the tax for social security and Medicare equivalent to payroll taxes here in essence, but charge you both the employee and employer portion on your net income. And so there's that, that pulls into the 1040 page number two, which is going to be here. So now we've got other taxes, 4,238, in addition to the income tax. And then we also have to say, but wait, the company gets to deduct part of those taxes. So I should be able to deduct some of that, half of it on the schedule C, but I can't deduct half of it on the schedule C to mirror what happens on the corporation because I had to get to that 30,000 in order to calculate the tax. And that would be a circle reference. So that's kind of why you get half the deduction. As you can see here, calculated half the deduction, which pulls on to the schedule one page number two. And so there's that deduction that we get. We'll dive more into that deduction when we get into the schedule C itself, but just remember that if I go back to the schedule C, we have a lot of more complexity just with a very simple schedule C that we put into play. So just remember that if you're doing tax returns, think about what clients that you want to be taking on, do you want to be taking on business clients or not? Do you want to do less complicated tax returns with less bookkeeping work and less of these laws that are related to business, income, social security and that kind of stuff. And that means you'll have lesser profit margins and you'll do more tax returns, most likely, or more complex return, which might have more bookkeeping and whatnot, which means you do less tax returns but have a higher profit margin. And then you got to stick to whatever plan you have because the clients will try to job creep you, they'll try to, you know, you'll end up working for nothing if you don't be careful. So, but also just note that you've got this other qualified business income, which is another kind of complication on it. Now, the next thing we'll take a look at is another area that's kind of subject to if you're a business situation. So the schedule one, page two is gonna be the SEP and the symbols and whatnot. So if you have a Schedule C business, then you might be saying, hey, look, I would like to get as much tax benefit as I can for my retirement plan. So if you have a W-2 income here, then you might have a retirement plan like a 401k or a 403b provided by your employer, which is a great tool to invest in because the idea is you're gonna be putting money into these accounts and getting the tax benefit when you put the money in. And then when you take the money out, that's when the tax happens, so you get to defer the tax. But the 401k plan has usually a very high dollar amount that you can put in to the 401k plan and you might have matching and whatnot with a 401k plan. If you have a sole, if you're sole proprietorship, then you might say, well, I wanna set up a 401k plan for myself. So at least I can put more money in to the 401k plan. But the 401k plan is complicated to do, to manage. So you might say, well, that's not worth my time. So then you're, you could say, well, I'll just put money into an IRA. So we'll talk about an IRA later. But if you put money into an, you can put money into an IRA, which is kind of similar to putting money into a 401k plan. Remember that if you put money into a 401k plan, then if I look at my form 1040, that money will not be in box one of the W-2. And therefore it's already kind of been deducted. I don't see the deduction happening on the tax return. It's just not included in my line one, a box one of the 10th of the W-2 form. So it's already been deducted before it even reaches the tax return in essence. It's the general idea. If you don't have someone else taking the deduction out of your W-2, then we have to deduct it ourselves. And that's kind of what the IRA does. So it acts kind of like a 401k, but we have to make the deduction, which means it's going to be deducted as an above the line deduction here. Now the problem with an IRA though, is there's very severe limitations in terms of how much money you could put into an IRA. And you don't get like a matching thing or anything like that with the IRA. So then you might say, well, I can't really set up, I'm a sole proprietorship. I can't put money into, I could put money into an IRA, but I'm limited. So what else could I do? I could set up something similar to a 401k plan that's more simplified, which will allow me to put more money into it than I would be able to put money away with an IRA. But I also have, which could be a benefit or a detriment, right? I also have to apply that to whoever my employees as well. So if I have employees, then the question is, if I set up a SEP or simple, it's kind of like a general retirement plan that I have to set up for everyone. So you have to take that into consideration. So then you're going to think, do I want to just put money into an IRA or do I want to set up a 401k plan, which is possibly too complex for a sole proprietorship? Or do I want to set up a SEP or a SEP so I can put more money into it if my business starts doing well and I have the capacity to put money in and possibly help out my employees by giving them at least some retirement plan that may be more beneficial for them, then simply putting money into an IRA. Okay, so if that was the case, then I can say, let's jump on over and say we're going to go to the SEP. And I'm just going to say that we're going to maximize the SEP. Now, some things that are nice about, say, a SEP, for example, and maybe we'll talk about this separately when we get to a Schedule C, is that most of the time when you put money into a 401k plan, it's the money is on a cash-based system. You have to put it in before the end of the year. In this case, 2022. So you don't really have that last minute tax planning because you don't really know. And so you have to put the money in beforehand in accordance with the rules of like a 401k plan with a fairly high threshold. But if you have your own business, then you might not know how much you can put into like a SEP, for example, which is restricted in part on how much earnings you have on the Schedule C. So you would like to have a plan and you may be able to with like a SEP, for example, put the money in later after the cutoff, after 2022, so you can actually do your tax return and then figure out how much you can put into the SEP and try to maximize the SEP calculation as I did here. I just said maximize my calculation so I could already do the tax return and then say, tell me how much I could put into the SEP and then if I have the cash flow, possibly I can put that money in at that point. Otherwise it's confusing to know how much you could put into the SEP because you don't know how much income you're gonna make. And so that's a kind of a nice tool. With the IRA, you have a similar tool in that you could put money into the IRA up until I believe the point that you file the tax return, not including extensions is the general rule. So at least you have a little bit more time to determine past year in whether you can put money into an IRA and then take the action even after the year has ended, but you're severely limited with an IRA. You can put more money oftentimes into a SEP depending on how much income you have. Like if I had my, like this number will go up, for example, if I go back to my Schedule C and I said that my income was, let's say 700,000, or 7,000, let's make it 90,000 here. And then I'm gonna go back on over. So now I can put into it 13,240, which is more than you can put into an IRA generally. It acts the same way, of course, here. We're gonna sum it up down below. That pulls into the 1040 as an above the line deduction and so there we have that. So I won't do that on the Excel worksheet again. Just note, for now I just wanna kind of list out these items and see how it all kind of links together. Remembering that if we apply a Schedule C to our tax return, that opens up a lot of different components on the tax return just in terms of a data input standpoint. And it also opens up a lot of opportunities for us to think about where we can, where we might be able to benefit from more planning type of situations such as setting up like a SEP, for example.