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?

An automatic tax deduction applied to taxpayers Signup and view all the answers

Which of the following is a characteristic of itemized deductions?

They must be selected in place of the standard deduction. Signup and view all the answers

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

Capital gains Signup and view all the answers

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

Form W-2 Signup and view all the answers

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

Qualified dividends 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?

Qualified dividends Signup and view all the answers

What must a taxpayer report taxable interest received from?

1099-INT Signup and view all the answers

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

Gift income Signup and view all the answers

What is the category of income derived from business profits?

Earned income Signup and view all the answers

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

Corporate earnings and profits Signup and view all the answers

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

Active Income Signup and view all the answers

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

Sick pay benefits Signup and view all the answers

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

A personal gift from a friend Signup and view all the answers

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

Schedule E Signup and view all the answers

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

Tip Income Signup and view all the answers

What is considered passive income?

Rental income from real estate Signup and view all the answers

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

Form 8825 Signup and view all the answers

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

Dividend income from stocks Signup and view all the answers

Which of the following is classified as active income?

Profit from a business Signup and view all the answers

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

The employee paid fair market value Signup and view all the answers

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

Payments received for services Signup and view all the answers

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

Income from sources outside the U.S. Signup and view all the answers

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

Form W-2 Signup and view all the answers

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

It must be included in income amounts Signup and view all the answers

Which income is categorized as a fringe benefit?

Healthcare coverage provided by an employer Signup and view all the answers

Under what circumstances should sick pay be reported?

If received while an employee is sick or injured Signup and view all the answers

What does the term 'foreign income' encompass?

Wages, interest, dividends, and capital gains from sources outside the United States Signup and view all the answers

How should taxpayers report payments for babysitting services?

On Schedule C if they are not employees Signup and view all the answers

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

Gifts must be $20 if the account is more than $5,000 Signup and view all the answers

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

Treasury bills and bonds Signup and view all the answers

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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