Income and Wages Overview

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

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.