Shmuel Eagle
Lead Tax Instructor
Co-founder of BlueLink with 15+ years in tax preparation and office management.
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.
Shmuel Eagle
Instructor
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.
What you'll learn in this unit
- Form W-2 & Wages (Class 3): Read and enter every box, understand why Box 1 taxable wages differ from paystubs due to pre-tax 401(k) and health deductions, decode Box 12 codes and Box 13 checkboxes, and address multi-state and remote work.
- Other Items of Income (Class 4): Apply the December 31, 2018 alimony rule, calculate taxable state refunds under the Tax Benefit Rule, determine HSA distribution taxability (20% penalty vs. tax-free medical), evaluate Coverdell ESAs (CESAs) and 529 plans (including SECURE 2.0 529-to-Roth rollovers), and report unemployment, disability, workers' comp, bartering, and military income.
- Adjustments to Income / Above-the-Line (Class 5): Calculate 2026 Traditional and Roth IRA limits ($7,500 / $8,600) and phase-outs, utilize SEP IRAs ($72,000 limit) and SIMPLE IRAs ($17,000 limit) for small businesses, claim the 100% self-employed health insurance deduction, and deduct student loan interest up to $2,500.
- The Standard Deduction & Medical Expenses (Class 6): Apply 2026 standard deductions ($16,100 Single/MFS, $24,150 HOH, $32,200 MFJ/QSS), calculate additional amounts for elderly (65+) and blind taxpayers plus the 2025–2028 $6,000 Senior Bonus, calculate reduced deductions for dependents, compare standard vs. itemized deductions (bunching), and calculate Schedule A medical deductions above the 7.5% AGI floor.
- Investments, Social Security, Retirement & Capital Gains (Classes 7–10 Preview): Report taxable vs. state-exempt Treasury interest, calculate Social Security provisional income (0%, 50%, or up to 85% taxable), evaluate 1099-R distributions via Box 7 codes, and report capital transactions on Form 8949 and Schedule D ($3,000 annual loss limit).
Unit 2 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
2026 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.
Course Prerequisites & Target Audience
- Prerequisites: Completion of Unit 1 (Filing Statuses & Dependents).
- Target Audience: 1040 tax preparers, new practitioners, and BlueLink Academy students preparing returns for the 2026 tax year.
- Next Steps: Review each class sequentially, complete the end-of-class Knowledge Check quizzes, and complete the Unit 2 Practical Exercise and Unit Comprehensive Quiz.
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
Class Curriculum
Class 3 — Form W-2 & Wages 10 lessons
-
Welcome and What is a W-2 3 min
-
The Preparer Mindset 3 min
-
Box 1 & Box 2 2 min
-
Social Security & Medicare Boxes 2 min
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Tips, Dependent Care, Nonqualified Plans 2 min
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Box 12 Codes 3 min
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Box 13 and Box 14 2 min
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State & Local Wages 2 min
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Missing or Incorrect W-2 3 min
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Client Questions, Mistakes, Recap & Closing 3 min
Class 4 — Other Items of Income 9 lessons
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Welcome & Alimony 4 min
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State Refunds & Tax Benefit Rule 3 min
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HSA Distributions 5 min
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Coverdell Education Savings 5 min
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529 Plans 5 min
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Unemployment Compensation 2 min
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Disability and Workers' Compensation 3 min
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Bartering and Military Income 3 min
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Recap and Closing 3 min
Class 5 — Adjustments to Income 9 lessons
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Welcome & What Are Adjustments 4 min
-
Traditional IRA Limits & Deductibility 5 min
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Roth IRA Eligibility & Planning 5 min
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SEP IRAs for the Self-Employed 4 min
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SIMPLE IRAs & Small Business Plans 5 min
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Self-Employed Health Insurance 5 min
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Student Loan Interest Deduction 5 min
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Other Above-the-Line Adjustments 3 min
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Recap & Closing 5 min
Class 6 — Standard Deduction & Medical Expenses 10 lessons
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Welcome and What is Standard Deduction 4 min
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2026 Amounts and Key Rules 4 min
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Elderly & Blind Additional Deduction 4 min
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Reduced Deduction for Dependents 5 min
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Standard vs. Itemized Strategy 4 min
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Introduction to Medical Expenses 4 min
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What Counts as a Medical Expense 5 min
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Who Can You Deduct For 4 min
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LTC Insurance and Medical Mileage
-
Common Mistakes, Recap & Closing 5 min
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