Determination of Tax
I:2-1 a. Gross income is income from taxable sources. Form 1040 combines the results of computations made on several separate schedules. For example, income from a proprietorship is reported on Schedule C where gross income from the business is reduced by related expenses. Only the net income or loss computed on Schedule C iscarried to Form 1040. This is procedurally convenient, but means gross income is not shown on Form 1040.
b. Gross income is relevant to certain tax determinations. For example, whether a person is required to file a tax return is based on the amount of the individual’s gross income. As the amount does not necessarily appear on any tax return, it may be necessary to separately make the computationin order to determine whether a dependency exemption is available.
pp. I:2-2 through I:2-5.
I:2-2 The term "income" includes all income from whatever source derived. Gross income refers only to income from taxable sources. p. I:2-3.
I:2-3 a. A deduction is an amount that is subtracted from income, while a credit is an amount that is subtracted from the tax itself.
b. In general,a $10 credit is worth more than a $10 deduction because the credit results in a direct dollar for dollar tax savings. The savings from a deduction depends on the tax bracket that applies to the taxpayer.
c. If a refundable credit exceeds the taxpayer's tax liability, the taxpayer will receive a refund equal to the excess. In the case of nonrefundable credits the taxpayer will not receivea refund, but may be entitled to a carryover or carryback. pp. I:2-4 through I:2-6.
I:2-4 All dependents (1) must have social security numbers reported on the taxpayer’s return, (2) must meet a citizenship test, (3) cannot normally file a joint return and (4) cannot claim others as dependents. Qualifying children must (1) be the taxpayer’s child or sibling, (2) be under 18, a full-timestudent under 24, or disabled, (3) live with the taxpayer, and (4) not be self-supporting. Other dependents must (1) be related to the taxpayer (2) have gross income less than the amount of the personal exemption, and (3) receive over one-half of their support from the taxpayer. pp. I:2-12 through I:2-17.
I:2-5 a. Support includes amounts spent for food, clothing, shelter, medical and dental care,education, and the like. Support does not include the value of services rendered by the taxpayer for the dependent nor does it include a scholarship received by a son or daughter of the taxpayer.
b. Yes. When several individuals contribute to the support of another, it is possible for members of the group to sign a multiple support agreement that enables one member of the group to claimthe dependency exemption. Also, in the case of divorced couples, the parent with custody for over half of the year receives the dependency exemption even if that parent did not provide more than 50% of the child's support. Similarly, in the case of written agreement, the dependency exemption can be given to the noncustodial parent even if that parent provided 50% or less of the child's support.c. The value of an automobile given to an individual may represent support for that individual. The automobile must be given to the individual and must be used exclusively by the individual. pp. I:2-15 through I:2-18.
I:2-6 A taxpayer will use a rate schedule instead of a tax table if taxable income exceeds the maximum in the tax table (currently $100,000) or if the taxpayer is using aspecial tax computation method such as short-year computation. p. I:2-20.
I:2-7 a. In general, it is the taxpayer's gross income that determines whether the individual must file a return. The specific dollar amounts are listed in the text. Certain individuals must file even if they have less than the specified gross income amounts. These include taxpayers who receive advance payments of...