Classes › Tax Preparation

Unit 2: Income Essentials

Income is the engine of every return. This unit covers the forms and rules behind every major income item — from Form W-2 wages and other income items to above-the-line adjustments and the standard deduction — turning gross income into taxable income for the 2026 tax year.

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13 Enrolled 92 Lectures
Shmuel Eagle

Shmuel Eagle

Instructor

Unit 2: Income Essentials

What Will You Learn

  • Report Form W-2 wages, federal withholding, Box 12 codes, and Box 13 plan checkboxes.
  • Apply 2019+ alimony rules, the Tax Benefit Rule for state refunds, and 1099-G reporting.
  • Determine taxability for HSA, Coverdell ESA, and 529 Qualified Tuition Program distributions.
  • Classify taxable unemployment, disability benefits, workers' comp, and bartering income.
  • Calculate Traditional/Roth IRA, SEP IRA, and SIMPLE IRA contribution and deduction limits.
  • Deduct 100% self-employed health insurance and up to $2,500 in student loan interest.
  • Apply 2026 standard deduction rates ($16,100 Single, $24,150 HOH, $32,200 MFJ).
  • Calculate additional deductions for age 65+, legal blindness, and the $6,000 Senior Bonus.
  • Calculate reduced standard deductions for dependents claimed on another return.
  • Calculate Schedule A medical deductions subject to the 7.5% AGI floor and mileage rates.

About This Class

Course & Unit Overview: Income Essentials (Classes 3–10)

Welcome to Unit 2 of BlueLink Academy’s 1040 Income Tax Preparation Course. Income is the engine of every return, and this unit covers the forms and rules behind every major income item — from Form W-2 wages and other income items to above-the-line adjustments and the standard deduction — turning gross income into taxable income for the 2026 tax year.

The Preparer's Mindset

This is the longest unit in the course, and for good reason — income is where most of the dollars on a return live, and it's where the questions you ask, or forget to ask, change the outcome. Income looks like data entry, but it's really listening. The preparer who works every box and asks one more question is the preparer who files an accurate return and earns a client for life.

Unit Curriculum Architecture

CORE ROADMAP

The Flow of Income on Form 1040

1. Gross Wages Form W-2 · Boxes 1–14
2. Other Income 1099-G · HSA · 529 · Alimony
3. Adjustments IRAs · SE Health · Student Loan
4. Deductions Standard vs. Schedule A

Total Income → Adjusted Gross Income (AGI) → Taxable Income

Unit Quick Reference Table

Category / Item 2026 Figure / Rule
W-2 Wages (Box 1) Federal taxable wages (may be lower than gross pay due to pre-tax 401(k) / health)
Post-2018 Alimony Not deductible by payer; not taxable to recipient
State Refund (1099-G) Taxable only if taxpayer itemized deductions in prior year & received a tax benefit
IRA Contribution Limit $7,500 under age 50 · $8,600 age 50 and older (combined Traditional + Roth)
SEP IRA Maximum Up to $72,000 (≈20% of net self-employment income)
Student Loan Interest Up to $2,500 above-the-line deduction (Form 1098-E; phased out by MAGI)
Standard Deduction $16,100 Single/MFS · $24,150 Head of Household · $32,200 Married Filing Jointly
Elderly / Blind Additional $2,050 per condition (Single/HOH) · $1,650 per condition (MFJ/MFS)
Senior Bonus (65+) $6,000 additional deduction per taxpayer (phases out above $75k Single / $150k MFJ)
Schedule A Medical Floor 7.5% of AGI (only expenses exceeding 7.5% of AGI are deductible)
Medical Mileage Rate 20.5 cents per mile
Golden Rule of Tax Preparation

When a document looks wrong, never change the numbers on official forms yourself. Explain the rules to the client, verify facts, and request corrected documents (such as Form W-2c) when needed. Details and documentation protect both the client and you as the preparer.

Requirements
  • Completion of Unit 1: Filing Statuses & Dependents (Classes 1 & 2).
  • Basic understanding of Form 1040 layout and taxpayer intake interviews.
  • Access to a standard calculator or professional tax preparation software.
  • Reference to 2026 inflation-adjusted tax tables and IRS deduction limits.
  • No prior CPA license or advanced accounting degree required.

Frequently Asked Questions

Why might W-2 Box 1 be lower than the client's final paystub?
Pre-tax deductions (e.g. traditional 401(k) deferrals under Box 12 Code D, pre-tax health/HSA premiums) reduce taxable Box 1 wages below gross earnings. This is normal. Never alter the form; explain the difference or request a Form W-2c if genuinely erroneous.
When is a state income tax refund reported on Form 1099-G taxable?
Under the Tax Benefit Rule, a state tax refund is taxable only if the client itemized on Schedule A in the prior year and received a real tax benefit from deducting state taxes. If they took the standard deduction, it is 0% taxable.
How is alimony taxed under current rules?
Agreements executed on or after January 1, 2019 are non-taxable to the recipient and non-deductible by the payer. Pre-2019 agreements follow legacy deduct-and-report rules.
If one spouse itemizes on a Married Filing Separately return, what happens to the other?
Under the MFS consistency rule, both spouses must itemize. If the other spouse has no itemized deductions, their standard deduction becomes $0.

Meet Your Instructors

Shmuel Eagle

Shmuel Eagle

Lead Tax Instructor

Co-founder of BlueLink with 15+ years in tax preparation and office management.

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