Income and Wages Overview

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Questions and Answers

Which type of income involves profit from selling appreciated assets?

Dividend income

Rental income

Royalty income

Capital gains (correct)

Which of the following statements is true about ordinary dividends?

They are tax-exempt income.

They originate exclusively from foreign corporations.

They are automatically qualified dividends.

They are reported as ordinary income. (correct)

What must be true for dividends to qualify for the maximum tax rate of 0%, 15%, or 20%?

They must be paid by a U.S. corporation or a qualified foreign corporation. (correct)

The stock must be sold before the ex-dividend date.

The taxpayer must hold the stock for less than 60 days.

They must be received within the first 60 days of stock purchase.

Which document must a taxpayer report taxable interest income from?

Form 1099-INT Signup and view all the answers

What type of income is specifically earned from employment?

Wages Signup and view all the answers

What is the failure to pay penalty rate per month if you have an approved payment plan after filing your tax return on time?

0.25% Signup and view all the answers

Which of the following statements accurately distinguishes between a lien and a levy?

A lien protects the government’s interest, while a levy takes the property to satisfy a tax debt. Signup and view all the answers

What is the deadline to file an extension for Individual and C-Corp tax returns?

April 15th Signup and view all the answers

What consequence occurs if you do not pay your tax within 10 days after a notice from the IRS?

The failure to pay penalty increases to 1% per month. Signup and view all the answers

Which of the following actions can an IRS levy take regarding personal property?

Garnish wages. Signup and view all the answers

Which of the following is considered earned income?

Profits from a business Signup and view all the answers

Which type of income is classified as passive income?

Interest from bonds Signup and view all the answers

What is the primary purpose of a tax deduction?

To lower the taxable income Signup and view all the answers

Which of the following deductions can a taxpayer claim in place of the standard deduction?

Charitable contributions Signup and view all the answers

What differentiates refundable tax credits from non-refundable credits?

Refundable credits can result in a refund even with no tax owed Signup and view all the answers

Which of the following is a partially refundable tax credit?

American Opportunity Tax Credit Signup and view all the answers

Which item is separately stated in an S-Corp income?

Royalty income Signup and view all the answers

Which expense is NOT allowable as a deduction for casualty losses?

Loss from regular household damages Signup and view all the answers

What type of income must U.S. citizens and resident aliens report from sources outside the United States?

Foreign income Signup and view all the answers

Which of the following types of payments is NOT required to be included in gross income?

Gifts over $10 for opening financial accounts Signup and view all the answers

What form must household employees file to report their income?

Schedule H Signup and view all the answers

Which of these is considered taxable income?

Severance pay Signup and view all the answers

What is the correct way to report sick pay received from an employer?

As salary or wages Signup and view all the answers

Which income type is not exempt from reporting on tax returns?

Fringe benefits Signup and view all the answers

Back pay awarded in a settlement must be included in income for which of the following reasons?

It compensates for past lost wages Signup and view all the answers

Which option accurately describes rental income for tax purposes?

It should be included in gross income Signup and view all the answers

What is the maximum failure to pay penalty on unpaid taxes?

25% Signup and view all the answers

How is the failure to file penalty calculated for each month the tax return is late?

5% of the unpaid taxes Signup and view all the answers

What happens if both failure to file and failure to pay penalties apply in the same month?

The failure to file penalty is reduced by the failure to pay penalty. Signup and view all the answers

What is the failure to pay penalty rate per month for unpaid taxes?

0.5% Signup and view all the answers

What is the minimum failure to file penalty if the return is more than 60 days late?

100% of the underpayment or a specified minimum amount, whichever is less Signup and view all the answers

How does unpaid tax get defined when calculating penalties?

Total tax required to be shown minus amounts paid through withholding and adjustments Signup and view all the answers

After how many months does the failure to file penalty max out?

5 months Signup and view all the answers

What is the objective measure for calculating the failure to file penalty?

5% of the unpaid taxes for each month the return is late Signup and view all the answers

What is the maximum refundable amount of the Child Tax Credit (CTC) per qualifying child?

$1,400 Signup and view all the answers

Which tax credit is specifically designed to offset the costs of care for dependents under age 13?

Child and Dependent Care Credit Signup and view all the answers

Which of the following credits is aimed at promoting clean energy investments?

Residential Clean Energy Credit Signup and view all the answers

What is the primary purpose of tax credits compared to tax deductions?

Lower tax balance Signup and view all the answers

Which tax credit is aimed at individuals pursuing higher education?

American Opportunity Tax Credit Signup and view all the answers

What do pass-through entities allow shareholders to treat differently on their individual tax returns?

Charitable contributions and interest income Signup and view all the answers

If a taxpayer fails to pay their tax when due, what penalty may apply?

Failure to pay penalty Signup and view all the answers

Which tax credit is designed specifically for individuals maintaining health insurance?

Premium Tax Credit Signup and view all the answers

Study Notes

Income

Economic benefit in the form of money or assets
Common income categories identified by the IRS:
- Dividend income from stocks
- Earned income from a paycheck
- Rental income from real estate
- Royalty income from intellectual property (inventions, etc.)
- Capital gains from selling assets that have appreciated in value
- Profits from a business
- Interest from savings, bonds, or lending activities

Wages

Wages, salaries, and other employee compensation are included in income
Employers report annual employee compensation on Form W-2
Employees should attach Copy B of Form W-2 to their tax return when filing a paper return

Dividend Income

Ordinary dividends are the most common type of dividend distribution from corporations
Corporations pay ordinary dividends from their earnings and profits
Shareholders report dividend payments as ordinary income
Qualified dividends are subject to the same maximum tax rate as net capital gains (0%, 15%, or 20%)
- Dividends must be paid by a U.S. corporation or a qualified foreign corporation
- Taxpayer must hold the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date

Interest Income

Taxable interest is reported on Form 1099-INT (or Schedule K-1 for partnerships, S corporations, estates, and trusts)
- Bank, savings, and loan accounts, credit union accounts, certificates of deposit
- U.S. Treasury bills, notes, and bonds (exempt from state and local income taxes)
- Loans made to others
- Gifts more than 10(10 (10(20 if the account is over $5,000) for opening financial accounts
- Interest received on tax refunds

Childcare Providers

Payments for childcare, regardless of location, are included in gross income
Taxpayers who are not employees must report payments on Schedule C and complete Schedule 1
Similar rules apply for persons babysitting, even if only periodically and/or just for relatives
Household employees are required to file a Schedule H

Other Earnings and Additional Income

Foreign income
Back pay and severance pay
Sick pay and disability income
Fringe benefits
Tip income
Rental income
Business income

Foreign Income

U.S. citizens and resident aliens must report income from sources outside the U.S. (foreign income) on their tax return unless exempt by U.S. law
Foreign income can be earned or unearned income (wages, interest, dividends, capital gains)

Back Pay and Severance Pay

Amounts awarded for back pay (in settlements or judgments) are included in income
These include payments for damages, unpaid life insurance premiums, and unpaid health insurance premiums
Employers should report on Form W-2
Severance pay (due to contract cancellation) must be included in income

Sick Pay and Disability Income

Pay received from an employer for sickness or injury is part of salary or wages.
Employees must include sick pay benefits received from:
- Welfare funds
- State sickness or disability funds
- Employers' associations or employee groups
- Insurance companies (if the employer paid for the plan

Fringe Benefits

Fringe benefits received in connection with services are included in income as compensation unless the employee paid fair market value for the benefits, or the benefit is specifically excluded by law

Tip Income

All tips received (directly, charged by employer, or in tip-pooling arrangements) are included in income
Non-cash tips (tickets, passes) are also considered income, valued as per the tip's worth

Rental Income

Taxpayers receive rental income from investment property
Taxpayers file their individual tax returns (Schedule E) and business returns (Form 8825)
- Short-term rentals (Airbnbs)
- Long-term rentals (renting a home)
- Limited partners who invested in real estate funds

Mortgage Interest Statement (Form 1098)

Mortgage interest received from a payer is recorded
Outstanding mortgage principal is shown
Mortgage origination date and mortgage acquisition date are detailed
Refund of overpaid interest, mortgage insurance premiums, and points paid on purchase are reported
Address of property securing the mortgage is noted

Supplemental Income and Loss (Schedule E)

Income or loss from rental real estate or royalties is reported
Information for each property is listed out
Fair rental and personal use days, property type, and other details are listed

Rental Real Estate Income and Expenses (Form 8825)

Rental real estate income and expenses of a partnership or an S Corporation are reported
Type and address of the property are listed
Fair rental days and personal use days, properties information are listed
Related expenses are listed and categorized

Active vs Passive Income

Active Income requires continuous effort to generate income.
Passive Income is generated by a single event or occurrence.

Credits (Tax Credits)

Credits reduce the amount of tax owed
Earned Income Tax Credit (EITC) is for low-to-moderate income workers
Premium Tax Credit helps cover health insurance costs through the Health Insurance Marketplace
American Opportunity Tax Credit (AOTC) and Child Tax Credit (CTC) encourage education and family care
Nonrefundable credits include childcare credits

Deductions

Deductions reduce taxable income
Standard Deduction is an automatic tax deduction available to taxpayers
Itemized Deductions are specific deductions that can be used in lieu of the standard deduction (medical and dental expenses, taxes paid, home mortgage interest, gifts to charity, casualty and theft losses, etc.)

Failure-to-File Penalty

Penalty for not filing tax return on time
5% of unpaid taxes for each month or part of a month the return is late (up to 25%)
Reduced penalty if both failure-to-file and failure-to-pay penalties occur in the same month
- If return not filed in 60 days, minimum penalty is the lesser of 100% of underpayment or the amount shown

Failure-to-Pay Penalty

Penalty for not paying taxes on time
0.5% per month or part of a month the unpaid tax remains unpaid, up to 25% maximum
Reduced if filed the return on time
Includes interest

Levy

Legal seizure of property to satisfy tax debt
Can include garnishing wages, taking money from bank accounts, seizing vehicles, and property

Liens

Government's legal claim against property if a taxpayer neglects or fails to pay a tax debt
Protects government's interest in property
A levy takes property to pay the tax debt; a lien secures the government's property interests in a property

Civil vs. Criminal Penalties

Descriptions of different types of penalties (civil and criminal)

Payment Plans & Installment Agreements

Options for setting up payments to pay off tax debt

Extensions

Deadlines for filing tax extensions

Paperwork

Information on the paperwork needed for several circumstances

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Description

This quiz covers various types of income as defined by the IRS, including earned income, dividend income, rental income, and more. Additionally, it addresses how wages and salaries contribute to overall income and the reporting requirements for employees. Test your knowledge on the intricacies of income classification and taxation.