Understanding Taxes with BTS
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Questions and Answers

Which type of income is classified as passive?

  • Rental income from real estate (correct)
  • Profits from a business
  • Interest from savings (correct)
  • Earned income from a paycheck

What is the primary purpose of a tax deduction?

  • To provide a direct cash refund
  • To increase taxable income
  • To reduce the amount of income subject to tax (correct)
  • To increase the amount of tax owed

Which of the following is an example of a refundable tax credit?

  • American Opportunity Tax Credit
  • Earned Income Tax Credit (correct)
  • Premium Tax Credit
  • Standard Deduction

What does the standard deduction offer taxpayers?

<p>An automatic tax deduction applied to taxpayers (D)</p> Signup and view all the answers

Which of the following is a characteristic of itemized deductions?

<p>They must be selected in place of the standard deduction. (B)</p> Signup and view all the answers

What type of income is generated from selling assets that have appreciated in value?

<p>Capital gains (C)</p> Signup and view all the answers

Which form is used by employers to report annual employee compensation?

<p>Form W-2 (A)</p> Signup and view all the answers

Which type of dividends are taxed at the same rate as net capital gains?

<p>Qualified dividends (D)</p> Signup and view all the answers

Which income type requires the taxpayer to hold the stock for more than 60 days during a specific period to qualify for the maximum tax rate?

<p>Qualified dividends (B)</p> Signup and view all the answers

What must a taxpayer report taxable interest received from?

<p>1099-INT (A)</p> Signup and view all the answers

Which of the following is NOT considered a common category of income by the IRS?

<p>Gift income (B)</p> Signup and view all the answers

What is the category of income derived from business profits?

<p>Earned income (C)</p> Signup and view all the answers

To qualify as ordinary (taxable) dividends, the payment must be made from which source?

<p>Corporate earnings and profits (A)</p> Signup and view all the answers

Which income type generally requires continuous time and effort to generate?

<p>Active Income (A)</p> Signup and view all the answers

What type of benefits must employees include in their reported income if received from a welfare fund?

<p>Sick pay benefits (B)</p> Signup and view all the answers

Which of the following is NOT considered income for tax purposes?

<p>A personal gift from a friend (D)</p> Signup and view all the answers

Which form is used to report rental income on an individual tax return?

<p>Schedule E (D)</p> Signup and view all the answers

Which income type is included based on the value of non-cash tips like tickets or passes?

<p>Tip Income (D)</p> Signup and view all the answers

What is considered passive income?

<p>Rental income from real estate (B)</p> Signup and view all the answers

Which of the following is a form used for reporting business rental income?

<p>Form 8825 (C)</p> Signup and view all the answers

Which type of income requires a singular event for generating income gains?

<p>Dividend income from stocks (D)</p> Signup and view all the answers

Which of the following is classified as active income?

<p>Profit from a business (A)</p> Signup and view all the answers

Fringe benefits are included in income as compensation unless what condition is met?

<p>The employee paid fair market value (B)</p> Signup and view all the answers

What must taxpayers include in gross income when providing childcare services?

<p>Payments received for services (C)</p> Signup and view all the answers

Which of the following types of income must U.S. citizens report on their tax returns?

<p>Income from sources outside the U.S. (D)</p> Signup and view all the answers

What form should employers use to report back pay awarded in a settlement?

<p>Form W-2 (C)</p> Signup and view all the answers

What is true about severance pay according to the information provided?

<p>It must be included in income amounts (D)</p> Signup and view all the answers

Which income is categorized as a fringe benefit?

<p>Healthcare coverage provided by an employer (D)</p> Signup and view all the answers

Under what circumstances should sick pay be reported?

<p>If received while an employee is sick or injured (B)</p> Signup and view all the answers

What does the term 'foreign income' encompass?

<p>Wages, interest, dividends, and capital gains from sources outside the United States (B)</p> Signup and view all the answers

How should taxpayers report payments for babysitting services?

<p>On Schedule C if they are not employees (B)</p> Signup and view all the answers

What must be included in gross income regarding gifts for opening financial accounts?

<p>Gifts must be $20 if the account is more than $5,000 (A)</p> Signup and view all the answers

Which of the following grants tax exemption at state and local levels?

<p>Treasury bills and bonds (A)</p> Signup and view all the answers

Flashcards

Income

Economic benefit in the form of money or other assets.

Dividend Income

Distribution from a corporation's earnings or profits to shareholders.

Earned Income

Income from work, such as a paycheck.

Rental Income

Income from renting out property.

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Capital Gains

Profit from selling assets that increased in value.

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Form W-2

Document reporting annual employee compensation

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Ordinary Dividends

Common type of corporate dividend; taxable as income

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Interest Income

Income from savings, bonds, or lending activities

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Treasury Bills, Notes, Bonds (tax-exempt)

Certain investments, like bonds, exempt from state and local taxes.

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Childcare Provider Income

Payments received for childcare services, regardless of location, are considered gross income for tax purposes.

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Foreign Income Reporting

US citizens/residents must report income earned outside the US, unless exempted by law.

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Back Pay

Income from a settlement or judgment, including damages, unpaid life insurance, etc.

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Severance Pay

Payment received due to job termination or contract cancellation; taxable income.

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Sick Pay/Disability Income

Income received from an employer during sick leave or disability; part of your earned salary or wages.

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Schedule C

Tax form for reporting non-employee childcare service income.

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Schedule H

Tax form for reporting household employee compensation and taxes.

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1099-INT

Document reporting taxable interest income (e.g., interest from accounts or tax refunds).

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Gifts over $10

Accounting treatment for gifts over a certain threshold for opening financial accounts.

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Sick Pay Benefits

Income received from welfare funds, state disability funds, employer/employee associations, or insurance companies for sickness or injury, when the employer paid for the plan.

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Disability Income

Income received due to personal injury or illness covered by an employer-sponsored accident/health plan, where the employer pays the premiums.

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Fringe Benefits

Employee benefits received from an employer related to their work, but only included if the employee didn't pay fair market value. Excluded if specifically excluded by law.

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Tip Income

All tips, including direct tips, employer-charged tips, and tips from tip-splitting or -pooling arrangements, and non-cash tips (tickets, passes, etc.)

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Rental Income

Money earned from renting investment property, whether short term (like Airbnb), long term, or from a real estate fund.

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Active Income

Income generated through ongoing effort and participation over time.

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Passive Income

Income generated from an event or investment that requires little or no ongoing effort.

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Form 1098

A tax form that provides information about mortgage interest paid during the year.

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Schedule E

A tax form used to report rental income and expenses.

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Form 8825

A tax form used by businesses reporting business and rental income.

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Earned Income

Income from work, such as a paycheck.

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Passive Income

Income from investments, like rental properties or royalty earnings.

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Deduction

An amount subtracted from income when calculating tax liability.

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Standard Deduction

An automatic tax deduction based on filing status.

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Tax Credit

An amount subtracted from the tax owed or a refund you can receive.

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Study Notes

Income Defined

  • Income is an economic benefit, in the form of money or assets.
  • The IRS identifies several categories of income.

Common Categories of Income

  • Dividend income from stocks
  • Earned income from a paycheck
  • Rental income from real estate
  • Royalty income from intellectual property (e.g., inventions)
  • Capital gains from selling assets that have increased in value
  • Profits from a business
  • Interest from savings, bonds, or lending activities

Wages

  • Wages, salaries, constitute employee compensation.
  • Employers report annual compensation on Form W-2.
  • Employees should attach Form W-2, Copy B to their tax return.

Dividend Income

  • Ordinary dividends are the most common dividend distribution.
  • Corporations pay them from earnings and profits.
  • Shareholders report dividends as ordinary income.
  • Qualified dividends are subject to 0%, 15%, or 20% maximum tax rates, typically equal to net capital gains.
  • The dividends must be from U.S. or qualified foreign corporations.
  • Taxpayers must hold the stock for over 60 days during a 121-day period before the dividend date.

Interest Income

  • Taxpayers generally report taxable interest from Form 1099-INT.
  • Partnership, S corporations, estates, or trusts use Schedule K-1.
  • Taxable interest includes bank, savings, loans, and credit unions.
  • Interest from U.S. Treasury bills, notes, and bonds is exempt from most state and local income taxes.
  • Interest received on tax refunds is taxable.
  • Gifts exceeding 10(or10 (or 10(or20 for accounts over $5,000) for opening accounts are taxable income.

Childcare Providers

  • Payments for childcare, regardless of location, are included in gross income.
  • Taxpayers who are not employees report payments on Schedule C, and complete Schedule 1
  • Similar rules apply for babysitting, even if only periodic or for relatives.
  • Household employees must file Schedule H and have their employee withhold payroll taxes.

Other Earnings & Additional Income

  • Foreign income (must be reported unless exempt by U.S. law).
  • Back pay and severance pay (include damages, unpaid insurance).
  • Sick pay and disability income (from welfare funds, state sickness/disability funds, employer plans, insurance companies).
  • Fringe benefits (compensation unless fair market value is paid or excluded by law).
  • Tip income (includes direct, charged, tips, and tip-pooling).
  • Rental income (investment property, filing Schedule E, form 8825 for individual tax returns and business).
  • Business income.

Foreign Income

  • U.S. citizens and resident aliens report income from foreign sources.
  • Foreign income may be earned or unearned (including wages, interest, dividends, and capital gains).

Back pay and Severance Pay

  • Back pay (awards for back pay) is included in income.
  • Severance pay (any payment for cancelled contract) is included in income.

Sick Pay and Disability Income

  • Sick pay (from employers) is considered part of salary or wages.
  • Employee must include sick pay benefits from welfare/disability funds, employer plans/insurance companies, etc..
  • Disability income is any amount received for personal injury or sickness.

Fringe Benefits

  • Fringe benefits, connected to service performance, are part of income as compensation unless fair market value is paid or excluded by law.

Tip Income

  • All tips received, charged tips from an employer, and tip arrangement income is included in income.
  • Non-cash tips (tickets, passes, etc.) are also considered as income based on value.

Deductions

  • Deductions subtract from income, lowering the tax liability.
  • Standard deductions are automatic.
  • Itemized deductions (medical/dental expenses, taxes, mortgage interest, charitable gifts, casualty/theft) are alternatives to standard deductions.

Credits

  • Credits subtract from total tax owed.
  • Refundable credits can result in a refund.
  • Earned Income Tax Credit (EITC) for low-to-moderate income workers.
  • Premium Tax Credit (marketplace health insurance).

Business Income-S-Corp

  • Items are separately stated depending on the shareholder.

Active vs. Passive Income

  • Active income requires continuous time and effort, typically from a job or business.
  • Passive income is generated from an event, without ongoing activity (e.g. dividend, interest, capital gains).

2024 vs. 2025 Standard Deductions

  • The standard deduction amounts vary by filing status.

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