Income tax season can be overwhelming, especially if you’re not familiar with tax forms and regulations. In this blog, we’ll walk you through an example of how to prepare your tax return using Lacerte tax software for the 2022-2023 tax year.
Let’s start with a single filer, Mr. Anderson, who has no dependents and earned $100,000 in W-2 income. With the standard deduction of $12,009.50, Mr. Anderson’s taxable income is $70,550. This information can be entered into the software to calculate the tax owed. In this example, the tax owed is $15,000, and $2,526 has been withheld.
Now, let’s move on to other income. According to the IRS, all income must be included in your tax return unless you are explicitly exempt. If there is no specific form for the income, it is likely that you’ll need to include it in the “other income” section of Schedule 1.
When reporting other income, it’s important to be mindful of the type of income and whether it is subject to self-employment tax. For instance, scholarships and fellowship grants that are not reported on a W-2 may be exempt from taxation if used for qualified expenses other than tuition and course-related expenses. However, amounts used for room and board or travel must be reported on Schedule 1, line 8.
In the example, let’s say Mr. Anderson received a scholarship of $15,000 for qualified expenses. This amount can be entered into the software and will be added to his taxable income, bringing it up to $85,550.
Another example of other income that may need to be reported is wages earned while incarcerated. If an individual has earned wages while incarcerated, those wages would need to be reported as other income.
As you go through the list of items on Schedule 1, if you find something that is included in income but there is no specific location for it, you may need to report it on line 8 of Schedule 1.
By using tax software like Lacerte, you can easily populate the necessary forms and calculate your tax owed. However, it’s important to understand the types of income you have and whether they are subject to taxation. By doing so, you can preserve your wealth and minimize your tax burden.