 Income tax 2022-2023, tax line 16, tax software example. Let's do some wealth preservation with some tax preparation. Here 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 single filer Mr. Anderson Living Beverly Hills 90210. We've got the W-2 income at the 100,000 to start off with. We've got the standard deduction at the 12,250 for the single filer bringing us to the taxable income of 87,050. And our point of focus then is to look at page number two, the tax calculation, line number 16 at the 14,074. Now note, we have generally been relying on the tax software to do this tax calculation. It's great the tax software can do that but by being reliant on the tax software, we often kind of lose sight of what the actual calculation is, which makes it difficult for us to do projections out into the future and be able to explain the tax calculations as well as think about and plan on differences in taxes that could be a result of different tax treatment for things like capital gains, for things like qualified dividends. So remember that once we get to the actual tax, if we have an 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. Come tax type of system, we can often verify to some degree this number here, the 87,050, recalculating most of the line items to get to that number, which I think is a useful thing to do because that allows you to give kind of a double check to make sure you didn't do a data input error or something like that which is quite possible to do given the fact that we're not using a double entry accounting system here, we're just doing data inputs. We don't have that double entry accounting to kind of catch some of the errors. So having a double check putting it into two data inputs having someone else do the data input would be even better to kind of see if you come to the same number. And then page two oftentimes people don't recalculate the actual tax from this point, but let the software do it. But again, you kind of want to have a good understanding of what's taking place so that you can do projections into the future. We're then saying that we had 15,000 that was withheld and that gives us our 225, our 226. Now also note that this 14774 then is usually going to be based on a, it's going to be based on a progressive tax system, multiple tax rates being applied to the tax, taxable income. We might use tax tables to do that. That's one way you can, you can get that numbers, look at the tables, but you want to envision it as a progressive tax system, multiple tax rates being applied. That will give you some understanding. If I go to my tax worksheet of what it means to be a marginal tax rate and an effective tax rate, or in other words, the average tax rate versus the highest tax rate, which is important for planning purposes. Also note that we have a completely tax different tax structure for income that could come from capital gains. Usually that would be indicated by having a schedule D attached, as well as dividend income, which oftentimes would be indicated possibly by having a schedule B for dividend income. Alright, so let's kind of do some calculations over here and think about what this looks like in our worksheet. So we've mirrored the tax to do our double data input, so we can kind of check our taxable income, 100,000 income coming from the W-2 income. Then we have the 12,950 standard deduction coming from our table down here. That gets us to the 87,050, which we can easily verify. I can't just multiply that by a rate, I'm instead backing into this average rate. This is the average rate, not the marginal rate of the progressive rate, because I picked this number up relying on the software for that number. That's what I would normally do, but you might say, hey, let's do a worksheet to kind of see if we can get a concept, an idea of what that number is to double check it. It may not be perfect because I'm going to hit the plus button, because we're not going to be using the tax tables and they kind of round things off sometimes, but we can get a general idea using the tax brackets, which I think conceptually make the most sense. So what I'm going to do, add a new sheet. I'm going to call this the tax calc sheet. And I'm going to select the whole thing with a little triangle, right-click, and we're going to format the cells. Let's make it currency, negative numbers bracketed, and no dollar sign, I'll get rid of the decimals for now and add the decimals as needed. I'm going to scroll in a little bit. I'm just zooming in. You can do it down here as well. Going back up to A1. Now, when we think about the tax rates, I'm going to pull up my tax rate stuff here. These are basically the tax rates in the form of a progressive tax structure. So you can see that as the income goes up, we're basically applying different rates to different tiers of the taxes. Now, this gets more complicated because you have a single filer rates, then you also have different rates for married filers and head of household and possibly married filings separately. So, but I'm just going to look at the single filers now, and you can apply the same concept if you wanted to to other filing statuses. Then we have different tables for capital gains rates. So if we have long-term capital gains, they might have favorable rates to the ordinary income rates, and we might have different rates for the dividends. So the dividends that are qualified dividends might have favorable rates as well. So if I was to say, okay, let me see if I can understand. Understand? And what is happening here, I can go back on over here and say, okay, let's do my tax, I'll call this tax calculation. I'm going to make this a little bit larger. I'm going to make the whole thing bold. So hopefully it'll stand out. I'm going to make this home tab font group black and white. And then I'm going to bring in my, let's start with total income. Total income from all sources, which I'm just going to bring from page one of the 1040. So my total income is, or my taxable income, I should say is this number. I'm just going to bring that in. I'll say this is taxable income. And then I'm going to pull out of that number. I should pull this up a little bit. I'm going to pull out of that the qualified dividends and then qualify and then capital gains, which I'll deal with later. I'll just say that those are things that I might have to pull out of this taxable income to get the, the ordinary, ordinary income. So this is a general, just a general calculation. It's not going to be a perfect. There could be nuances within the calculations just to get a general idea here. I'm just going to try to reconstruct this. So we're going to say the 87,050 minus this minus this, there's nothing in there right now. So I'll just put zeros. We might go back to that in a second. And this would be my ordinary income. So then we got the single. So let's say ordinary income single calculation that'll have down here. And let's make this like black and white. Okay. So I'm going to put the percent of each tier over here, 0.1%. I'll put it down here because I want to leave some room for a header. Home tab number group percent on that. And then I'm going to say that that is going to be there. And then I'm just going to pull down my ordinary income just so it's kind of clear. I'm going to call this or and then income. I'm going to make that centered and black and white. I'm just going to pull this number down so we could see it. And then I'm going to compare that to the cap. I'm going to call this the cap. Cap per section per category, however you want to call it per row. And that is coming from our table. So the first cap for a single filer is the 10, 2, 7, 5. So I'm going to say, all right, 10, 2, 7, 5. And then I'm going to say take the lesser of, I'll call it say less so of, I might be able to get better headers here, but I'm just trying to get a general idea centering that black and white. I'm going to use the trustee men function equals the men of these two numbers. So I'm taking the lesser of those two numbers because I need to apply the tax on the lesser of those two numbers. I'm going to leave a little bit of space because the second tier is going to be a little bit more confusing. We'll have to figure it out. Hold on a second. I'm going to say this is going to be equal to the 10% times that number, the 10, 2, 7, 5. So that comes out to that. Notice that's the number that they use as the baseline for the 12% if you're in that bracket on the tables. So in other words, if I was to reconstruct this and say, okay, what if I'm also going to be taxed at the 12% because my income was above the threshold cap of 10,275? Well, then I got to tax some of it at the 12% too. So I'm going to say, all right, let's take the ordinary income again. And the cap for this one, this level goes up to the 41775. So I'm going to say, all right, 41775. And then now I'm going to take the lesser of equals the min function of those two. I'm taking the lesser of those two. But now I have to subtract out what the 10,000 that I already took last time. Now, the easiest place to do that on is on the cap, because if I'm over the cap, then the last section capped out at the cap. So I'm going to say this is going to be equal to that 41775 minus what I already taxed at the prior level, which is that 10,75. And that's going to be the taxable amount. So that's going to be tax amount per column or row. Let's make that like this. And let's over here just to make this consistent, I'm going to bring this one over this side. And so that the tax is always applied on the taxable amount. The taxable amount is this times that. And then I can have my running balance. So this is the tax per tier. Is that how you spell tier? I don't know. Maybe I'm crying. I don't know. Just bear with me. I'm not a speller guy over here. You could I'll fix the spell, check it later, spell, check it later. Then I got the running balance. And so let's make that black, white and center it. So the running balance is going to be that. And this is going to be equal to this plus this. So now the tax that we're at is the 4808, right? And so there's and that you could check that because that's the starting point for the next bracket in our little table calculation. So let's go. All right, let's go up to the 12. Let's go to the point two, two. And so I'm going to make that a percent. Same ordinary income. The cap here is at 89075. And I'm going to take the lesser of equals the sum. I'm sorry, not the sum equals the men of these two. And so now now this one is the men now. So this is the my marginal tax rate. This is my top tax rate, right? So now I'm going to say, OK, then we'll say this is going to be then the this amount minus the cap from the prior time frame. The 41 775 is what's going to be taxed at the 22 highest marginal rate, which is the 45 275, the tax per tier, the 22% times that 45 275. The running balance is the prior balance plus the current balance. There's the 14 7 765 68 is that close to what they calculated here 14 14777 14774 14768. Now, I don't it's not exact because we're basically using. We're not using the tax tables, which kind of which kind of those kind of take like brackets because they're trying to put every number on like a table. But we get a general idea. So they're saying the amount that I got from from here 14774 is this minus this at $6 different. So we get the general idea. Let's raise the income so that I can go all the way down to some of these higher tax brackets. Let's let's raise it to like 300,000 and and so I can see some of those other tax brackets. So let's or we can raise it all the way out to to 600,000. Let's say just so we can see the whole table. So let's say 600,000 making bank man. So then we're going to say, OK, then let's go to the 22. So now you got the 600 pulling down. Let's go to the 24.24%. Let's put some brackets on that. This is the same. I'm going to I'm going to say the cap thing of the 24 is 17050. Take them in which I can copy down the lesser of those two is going to be the cap the the amount of tax. I'm going to copy that one down, which is this minus this. So I'm going to tax the 800975 at the tax rate of 24 pulling that formula down. And then the running balance is at the 3035648. I can kind of double check that because that number what happened that number should be like 34647. 34648. Yeah, there it is. So then let's do the next tax bracket is 0.32%. So I could say, OK, 0.32% pulling these down. This is the same. The highest highest income there is 215950. So there we have it. It took the lesser of those two, the men. Then I'm going to take this is the taxable amount, this minus this. Multiply that times the rate. That's how much is going to be taxed at that level. And this is my running balance to where at 49335. So we basically recalculated this number 49335. And then let's do it again. This is going to go to 30.35. You can see how this is fairly complex to kind of think about, right? It's easy for a computer to do. But if you're trying to conceptually project into the future, this does complicate things greatly. Anyway, I won't get into my stories. This is copy this down and then multiply these out. Let's copy these two down. Boom, boom. And then there's the 162. So we recalculated this number. And then let's just do it one more time. So then I can say this is going to be the 0.37. Make that a percent. Bring this down. This is going to be... There is no cap now. So the cap is infinity at this point in time. So anything above this amount, we could put like a real... So this is going to... This one isn't really the lesser of... It's just going to be the... Like I could put a really big number here just to... Or I could just say the lesser of... It's not going to be the lesser of. It's just going to be this number. And then this is going to be the taxable amount, which is going to be this minus the prior cap, right? This is my prior cap. And then I pull this down and that would be the tax. Hopefully I did that right on the tax, on the last tier. Let's kind of double check that. Let's pretend I did that on my software over here. And I said that we earned 600,000. 600,000. Boom. And page 2, 180, 164. So 180, 164. Bam. Schlam. Schlackamam. So there we go. So I could put some brackets. Surround that. So you can see it does get quite complex to kind of double check that number. Now, if I bring this back down again, let's see if my formulas get messed up. So if I say... Let's say I'm going to go back on over here and say this is back down to 100,000. 100,000. And so then notice that the cap actually stops right here. So it would be at the 14 because then it goes negative. So really to make this work properly, we should have like if then functions. So it should be like if this number minus that number is greater than zero and blah, blah, right? So like let's try it equals if this number minus this number. And I got to put brackets around that maybe if that minus that bracketed is greater than zero then comma take take this number minus this number. But if not comma then put a zero there. Boom. Close up the brackets. Yes, please. Pour favor. And then I can copy that down. And so now it now you can see it kind of closes out right there. And that 14768 is still right. Am I right? Am I right? Am I wrong? No, you're not wrong. You're just an idiot. 14774. So that was the one that was kind of close but 1477. It's not perfect because they used different methods but they used the tax tables and we did the calculation. But you get the general idea. Okay. So you could do that same process for the married, you know, make a little table for married filing joint and then the head of household and you can do a little double check of the tax calculation that the software is doing. And what you'll often find is if you add something like dividend income it's going to mess things up, right? So let's do that. Let's mess things up and see what happens. So I'm going to save this thing and let's go over here and say, let's say they had like dividend income, but it was special dividends that were qualified. So now we're going to say dividend income. So we're going to say stock one and we'll say that we had, let's make 10,000 of dividends so I can remember 10,000 of dividends and they're qualified dividends. So boom, we can check my income is now at the 110 for the tax, for the income minus the standard deduction. If I went over here and double check my data input, I would just say, okay, income, we had dividend income. That's no problem. That's on the schedule B where there it is dividends, schedule B and I'm just going to say we had 10,000. They were all qualified. So we get the, and then pull that over. So there it is. We're at 110, 12,950. We're at the 9750. I could double check that number. No problem. Let the software do the calculation, 16274 and just say, alright, 16274. But does that make sense in my little worksheet over here? If I do my tax calculation, because now I'm going to say that I had the 9750. If I just use that number and I don't pull out the qualified dividends, then I'm going to say I come out to this number versus what I got on the tax did, which was this number. And you can see I have a fairly substantial difference of 857, 857. And that's because I need to pull out the dividends. So if I pull out the qualified dividends and I say, okay, let's pull out the qualified dividends. What did I put the schedule B? Idiot. Can't you? Okay. Relax. Relax. It's going to be down. I'm going to sum it up down here. We'll sum this up down here equals the sum of those. So there's the qualified dividends. So now I can say, yeah, we pulled out the qualified dividends. So that would be like my ordinary income. And then I'd have to calculate my capital gains. Now the capital gains, like we could do a whole another table on the, because it has like a progressive rate of, you know, 0, 15 or 20%. So I could, I could do a whole another little table and try to, and say if it's in here, but generally this is a little bit easier of a table. You can usually get an idea of what the tax is based on the income level, because the rate, the rate that they're going to get should always be favorable, right? So if their highest rate is 22%, you would think that, that the favorable rate would be like, would be at the, you know, the lower rate of that, which would be the 15% or something. And that is indeed the case here. So I'm going to say, so I'm just going to multiply this times 15%. Just kind of want to build a whole another table because it'll take too long. You could do that if you want though, but I'm going to say this is going to be this times this. So now my total tax, so now my total tax is going to be something like what I got from here, plus that number and that is at least a lot closer. It may not be perfect because of the table usage is soft by that $6 again. So that looks about right, right? And so then I might also have capital gains, which can throw a loop, throw a loop in this stuff. So I can go back on over here and say, well, what if I had capital gains? And I can say, I sold some stocks, man, because I sell low by low sell high. That's my motto. And I came away with some hefty profits by low sell high. Where's, where do I, where's my, where do I put it in here? Where's my schedule D? There it is. So let's say I sold some stocks. And I'm just going to say company a date 060622 date acquired negative 020000 sales price. I'm going to say our 20,000 cost 5,000. So I've got a $5,000 profit. Boom. Cool. I mean a $15,000 profit coming away with a cool 15. Playing a little bit of the stock market, you know, you know how it is. So then I'm going to go into the long term stock sales over in my, my, if I was doing my data input to double check the income. I would just say, say the sales price, sales price was 35. Was 20,000 cost 5,000 capital gains coming out to the 15,000. It's long term. And that pulls into my skit, my page one. So page one, I can double check it pretty easily now. I can say, all right. Now I've got the 100,000 up top. I've got the dividends that are included. And then I got the capital gains, which comes up to the 125. I mirrored that in my worksheet, double checked it. Everything's cool. And then I've got the 12,950, 12,950. And the bottom line taxable income, 12,50, 12,50. Good. I'll let the software do the tax. 19,828. So I'll put that in here. 19,828. But it's complicated. It's complicated because now you've got these two things. It's not just using the tax tables because now you've got these two things that have these different calculations. You can look at the worksheet here if you want to dive into it. But if I wanted to kind of double check myself and say, oh, does that make sense? Let me see if I can break, look at my worksheet and see if I can get a wrap my mind around what happened here. So if I was to just look at this item, I'd say there's that. This comes from this numbers from the tax formula. Hold on a second. I put them in here at short term somehow. Short term. I got my dates backwards. Okay. The date acquired is negative 020200. I sold them on 061522. Then we've got long term capital gains. Okay. That makes sense. And now, but my income is the same. Over here. Okay. So 11250, 11250. Double check that here. Sorry about that. 11250. Okay. So then if I go back to my tax calculation, I could say, okay, there's the 11250. I broke off the 10,000. And then there's the difference. But here's what I have here. And this is coming from. And then I'm going to put this number that was calculated is now the tax is now 18524. There it is. So there's the difference. So 18524. And so if I bring that over to my tax worksheet, so now I'm off because I need to say I get a beneficial rate for my capital gains. I'm going to say this equals from my capital gains worksheets, which is my capital gains long term capital gains is that number. I'll pull that out. So now this is the number that's being taxed at ordinary income. This is being taxed at my favorable rate for the dividends. And then my capital gains rates, you have a similar kind of situation on the capital gains. So the similar idea that you would think the rate would be favorable. So meaning if I'm at a marginal tax rate once again of 22, you would think that this would be like the 15 or something like that. But so I'm just going to make it uneasy. I'm not going to do a whole another table for these. I'm just going to say, let's do that. And this is this times this. So now my tax calculation is going to be this plus this plus this. And so now I come up to something that's close to that. It's off by that $6 again. So, you know, so you can, so you can get a general idea of how that tax is calculated. The reason that's important is you can double check the calculation. You can talk to your clients and be able to tell them, tell them, yeah, this is what the qualified dividend impact is. It's in this calculation. This is what the capital gains rate does. It's in this calculation. It's important. And then when you do tax planning going forward, you can understand the importance of the different tax rates that have applied to different income sources like qualified dividends and capital gains and so on. And you can also understand what the tax rates are going to do from a marginal tax rate perspective when you start increasing income. For example, projecting out into the future.