Income and Wages Tax Overview
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Questions and Answers

What is the maximum percentage of unpaid taxes that can be imposed as a failure to pay penalty?

  • 10%
  • 20%
  • 25% (correct)
  • 15%
  • How is the failure to file penalty calculated for each month that the tax return is late?

  • 6% of the unpaid taxes
  • 3% of the unpaid taxes
  • 4% of the unpaid taxes
  • 5% of the unpaid taxes (correct)
  • What happens to the failure to file penalty if both penalties are applied in the same month?

  • The Failure to Pay penalty is ignored.
  • The Failure to File penalty is reduced by the Failure to Pay penalty. (correct)
  • Both are added together.
  • The Failure to File penalty is increased by the Failure to Pay penalty.
  • What is the failure to pay penalty rate per month on unpaid taxes?

    <p>0.5%</p> Signup and view all the answers

    What occurs after 5 months if the tax remains unpaid regarding the failure to file penalty?

    <p>It reaches its maximum limit but doesn’t change.</p> Signup and view all the answers

    What type of income is received from stocks?

    <p>Dividend income</p> Signup and view all the answers

    What should employees attach to their tax return when filing a paper return?

    <p>Copy B of Form W-2</p> Signup and view all the answers

    Which type of dividends is subject to a maximum tax rate that applies to net capital gain?

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

    What is considered rental income?

    <p>Income received from leasing real estate</p> Signup and view all the answers

    What form should taxpayers use to report taxable interest income?

    <p>Form 1099-INT</p> Signup and view all the answers

    What is the benefit of holding stock for more than 60 days prior to the ex-dividend date?

    <p>Eligibility for qualified dividends tax rates</p> Signup and view all the answers

    Which of the following is not categorized as income according to the IRS?

    <p>Capital losses</p> Signup and view all the answers

    Which of the following types of income must be reported as taxable income when received through an employer-paid accident or health plan?

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

    What constitutes fringe benefits that must be included in income as compensation?

    <p>Any benefit related to service performance</p> Signup and view all the answers

    Which type of income is classified as passive income?

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

    What is the correct classification of income received from tips under a tip-splitting arrangement?

    <p>Included in taxable income</p> Signup and view all the answers

    Which form is used to report rental income from investment property?

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

    Which of the following is NOT considered taxable rental income?

    <p>Rental of personal property for occasional use</p> Signup and view all the answers

    What type of benefits would be exempt from being included in income?

    <p>Benefits received that were paid at fair market value by the employee</p> Signup and view all the answers

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

    <p>Passive income</p> Signup and view all the answers

    Which of the following represents active income?

    <p>Salary from a job</p> Signup and view all the answers

    Which of the following sources of income is considered passive?

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

    What does a tax credit do?

    <p>Subtracts from the tax owed or increases a refund</p> Signup and view all the answers

    Which of the following is NOT an example of an itemized deduction?

    <p>Standard deduction</p> Signup and view all the answers

    What is the primary purpose of a deduction?

    <p>To lower the amount of income that is taxed</p> Signup and view all the answers

    Which tax credit is fully refundable?

    <p>Earned Income Tax Credit</p> Signup and view all the answers

    Which of the following is classified as active income?

    <p>Profits from a business</p> Signup and view all the answers

    Which item is typically separately stated for S-Corp shareholders?

    <p>Charitable contributions</p> Signup and view all the answers

    What criteria does the American Opportunity Tax Credit (AOTC) use to determine eligibility?

    <p>Years of higher education completed</p> Signup and view all the answers

    What kind of income is categorized as passive but is derived from business ownership?

    <p>Net rental income</p> Signup and view all the answers

    Study Notes

    Income

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

    Wages

    • Wages, salaries, and employee compensation are included in income
    • Employers report annual compensation to employees on Form W-2
    • Employees must 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 distribution from a corporation
    • Corporations pay ordinary dividends from earnings and profits
    • Shareholders must report dividend payments as ordinary income
    • Qualified dividends are subject to the same maximum tax rate as net capital gain (0%, 15%, or 20%)
    • To qualify for maximum rate, dividends must be paid by a U.S. or qualified foreign corporation; and taxpayer must hold the stock for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date

    Interest Income

    • Taxpayers must report taxable interest from Form 1099-INT (or Schedule K-1)
    • Examples of interest income include: bank accounts, savings accounts, loans, certificates of deposit, U.S. Treasury bills/notes/bonds (exempt from state and local taxes), and loans made to others

    Childcare Providers

    • Childcare payments are included in gross income, regardless of location
    • Taxpayers who are not employees must include payments on Schedule C and complete Schedule 1
    • Rules apply to babysitting, even if it is only periodic and for relatives or family members
    • Household employees are required to file a Schedule H and have their employee withhold payroll taxes

    Other Earnings & Additional Income

    • Foreign Income
    • Back Pay and Severance Pay
    • Sick Pay and Disability Income
    • Fringe Benefits
    • Tip Income
    • Rental Income
    • Business Income

    1099-DIV

    • Form used to report dividend income
    • Includes data like total ordinary dividends, qualified dividends, capital gain distributions, and other relevant information

    1099-INT

    • Form used to report interest income
    • Includes data like interest income, early withdrawal penalty, interest on U.S. Savings Bonds/Treasury obligations, and other relevant information

    Business Income - S-Corp

    • Separately stated items for tax returns depending on shareholder situations
    • Items included: charitable contributions, interest income, capital gains/losses, dividend income, royalty income, net rental real estate income (loss), other net rental income (loss), Section 179 deduction, foreign transactions, alternative minimum tax item, and items affecting shareholder basis

    Deductions

    • Deductions are amounts subtracted from income to reduce tax liability
    • Standard deduction is automatically applied to taxpayers
    • Itemized deductions include medical/dental expenses, certain taxes paid (personal property and state/local), home mortgage interest, gifts to charity, casualty and theft losses, and certain miscellaneous deductions

    Credits

    • Credits reduce the amount of tax owed or increase the refund
    • Refundable credits can result in a refund even if no tax is owed
    • Examples of refundable credits include: Earned Income Tax Credit (EITC), Premium Tax Credit
    • Examples of partially refundable credits include: American Opportunity Tax Credit (AOTC), Child Tax Credit (CTC)
    • Nonrefundable credits include: Child and Dependent Care Credit

    Active vs. Passive Income

    • Active income requires continuous time and effort to generate income
    • Passive income requires one event to occur to generate income
    • Examples of active income include earned income, profits from a business
    • Examples of passive income include dividend income, rental income, royalty income, capital gains

    Extensions

    • Deadline to file an extension is same as the original filing deadline
    • Different deadlines exist for partnerships, S-corps, individuals, and C-corps

    Paperwork, Paperwork, Paperwork

    • This section implies a large amount of paperwork involved in the process

    Failure to File Penalty

    • Applies if tax return is not filed on time
    • Penalty is a percentage of the unpaid taxes for each month or part of month the return is late
    • The maximum penalty may not exceed 25% of the unpaid taxes

    Failure to Pay Penalty

    • Applies if tax is not paid on time
    • Penalty is a percentage of the unpaid taxes based on length of time the taxes are unpaid
    • Maximum penalty is 25% of the unpaid taxes

    Levy

    • IRS levy permits legal seizure of property to satisfy tax debt

    Liens

    • Federal tax lien is the government's legal claim against your property when you neglect or fail to pay tax debt
    • A lien secures the government's interest in your property when you don't pay your tax debt
    • A levy actually takes the property to pay the tax debt

    Criminal vs. Civil Penalty

    • This section is about differentiating criminal penalties from civil penalties related to taxes

    Payment Plans & Installment Agreements

    • This section is about payment options for individuals and corporations to pay off taxes over time

    Return Due Date

    • The due date of tax returns varies based on filing status and type of entity.

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    Related Documents

    Understanding Taxes PDF

    Description

    This quiz covers essential concepts related to income, wages, and dividend income for taxation purposes. It explores categories of income recognized by the IRS, including earned income, rental income, and capital gains. Additionally, it explains how wages are reported and the differences between ordinary and qualified dividends.

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