Income and Wages Tax Overview

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.

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.