24 Questions
What type of income is earned from personal services?
Earned income
What is the total gross income of Mary Moore?
$95,750
What is an example of unearned income?
Interest from a certificate of deposit
What type of income includes social security benefits?
Unearned income
What is the main difference between earned and unearned income?
The source of the income
What is included in taxable income?
All income received, including social security benefits
What is the definition of gross income?
The total amount of income received before taxes
Who has the legal right to receive social security benefits?
The person receiving the benefits
What is included in the gross income of the recipient?
Qualified alimony and separate maintenance payments
What is the classification of dividends that must meet certain requirements and are taxed at lower capital gain rates?
Qualified dividends
What is the term for an amount received for the use of money that is to be repaid in full at a specified time or on demand?
Interest Received
What type of income is a fixed sum payable to a person at specific intervals for a specific period of time or for life?
Annuity
What type of income is not taxable as ordinary income?
Qualified dividends
What is not considered a true dividend for tax purposes?
Insurance dividend
What is the term for a person who has died?
Decedent
What is included in gross income, but not earned income?
Social security benefits
What is the main difference between the wages subject to Social Security tax and those subject to Medicare tax?
There is a limit on wages subject to Social Security tax, but no limit on wages subject to Medicare tax.
What is the purpose of Box 6 on the W-2 form?
To report Medicare tax withheld
What type of benefits are typically entered in Box 10 of the W-2 form?
Child and dependent care benefits
Why might an employee have a portion of computed tips allocated to them in Box 8?
Because they work in a food or beverage establishment
What is the additional Medicare tax rate withheld from wages exceeding a certain threshold?
0.9%
What is the purpose of Box 7 on the W-2 form?
To report Social Security tips
What type of retirement plan is reported in Box 11 of the W-2 form?
Nonqualified plan
How are tips reported on the W-2 form if the employee's wages are insufficient to collect the required Social Security tax?
They are reported in Box 7
Study Notes
Income
- Income includes money received for the investment of money or other property, such as interest, dividends, capital gains, rents, and royalties, also known as "investment income."
- It also includes pensions, alimony, unemployment compensation, social security benefits, and other income that is not from performing services.
Earned vs. Unearned Income
- Earned income: income from personal services, including wages, tips, bonuses, and self-employment income.
- Unearned income: taxable income other than that received for services performed, including interest, dividends, and royalties.
Social Security Benefits
- Social security benefits may be included in taxable income.
- Benefits are included in the taxable income of the person who has the legal right to receive the benefits.
Income Examples
- Mary Moore's $95,000 salary is earned income, while her $750 interest from a certificate of deposit is unearned income.
- Total gross income is the sum of earned and unearned income.
Tax Terms
- Alimony payments: payments made by one spouse to the other spouse or former spouse under a written separation or divorce instrument.
- Annuity: a fixed sum payable to a person at specific intervals for a specific period of time or for life.
- Dividend: a stockholder's share of the profits of a corporation, classified as either ordinary or qualified dividends.
- Interest received: an amount received for the use of money that is to be repaid in full at a specified time or on demand.
Tax Forms
- Box 6: Medicare tax withheld, including the total amount withheld for both Medicare tax and additional Medicare tax.
- Box 7: Social Security tips, including all tips reported by the employee, even if the employee's wages were insufficient to collect the required Social Security tax on the tips.
- Box 8: Allocated tips, including amounts allocated to employees of food or beverage establishments, which may be taxable but are not included in boxes 1, 3, 5, or 7.
- Box 10: Dependent care benefits, usually tax-free benefits provided by employers to help employees pay for child and dependent care expenses.
This quiz covers the different types of income, including investment income, pensions, alimony, and other sources of income.
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