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?

0.5% Signup and view all the answers

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

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

What type of income is received from stocks?

Dividend income Signup and view all the answers

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

Copy B of Form W-2 Signup and view all the answers

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

Qualified dividends Signup and view all the answers

What is considered rental income?

Income received from leasing real estate Signup and view all the answers

What form should taxpayers use to report taxable interest income?

Form 1099-INT Signup and view all the answers

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

Eligibility for qualified dividends tax rates Signup and view all the answers

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

Capital losses 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?

Sick pay benefits Signup and view all the answers

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

Any benefit related to service performance Signup and view all the answers

Which type of income is classified as passive income?

Rental income from real estate Signup and view all the answers

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

Included in taxable income Signup and view all the answers

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

Schedule E Signup and view all the answers

Which of the following is NOT considered taxable rental income?

Rental of personal property for occasional use Signup and view all the answers

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

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

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

Passive income Signup and view all the answers

Which of the following represents active income?

Salary from a job Signup and view all the answers

Which of the following sources of income is considered passive?

Rental income from real estate Signup and view all the answers

What does a tax credit do?

Subtracts from the tax owed or increases a refund Signup and view all the answers

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

Standard deduction Signup and view all the answers

What is the primary purpose of a deduction?

To lower the amount of income that is taxed Signup and view all the answers

Which tax credit is fully refundable?

Earned Income Tax Credit Signup and view all the answers

Which of the following is classified as active income?

Profits from a business Signup and view all the answers

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

Charitable contributions Signup and view all the answers

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

Years of higher education completed Signup and view all the answers

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

Net rental income 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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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.