Income tax is a necessary part of being a citizen in any country, but it can also be confusing and overwhelming. In this blog, we will be discussing income tax from 2020 to 2023. Specifically, we will focus on certain business expenses of reservists performing artists and fee-based government officials, as well as tax software example problems to help with wealth preservation and tax preparation.
To begin, let’s take a look at an example scenario. We have a single filer, Mr. Anderson, with no dependents and a W-2 income of $100,000. After taking the standard deduction of $12,550, his taxable income is $87,050. Using tax software, we can calculate his tax liability to be $14,774. Withholdings of $15,000 will bring his tax liability down to $2,226.
Now, let’s focus on certain business expenses of reservists performing artists and fee-based government officials. These individuals may have deductions that can be taken on their income tax returns for expenses incurred in the course of their work. To do this, we can attach Form 2106 to our tax return. For example, if Mr. Anderson is a military reservist, he may have unreimbursed travel expenses that he can deduct on his tax return. We would enter these expenses on Form 2106, and they would be transferred to Schedule 1, page 2.
It’s important to note that these deductions are considered above-the-line deductions, which means they can be taken even if the taxpayer does not itemize their deductions. This can be beneficial for lower-income taxpayers who do not typically itemize their deductions. Additionally, taking these deductions can lower the Adjusted Gross Income, which can impact the phase outs of deductions and credits.
In addition to the above-the-line deductions, taxpayers may also be able to take itemized deductions on their tax returns. These deductions can include things like charitable contributions, mortgage interest, and state and local taxes. Tax software can be a helpful tool in determining whether it is more advantageous to take the standard deduction or to itemize deductions.
Overall, income tax can be a complex and confusing topic, but by using tax software and taking advantage of available deductions, taxpayers can work to preserve their wealth and prepare for tax season.