Determination of Tax
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 is carried to Form 1040.
procedurally convenient, but means gross income is not shown on Form 1040.
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 computation in order to determine whether a dependency exemption is available.
pp. I:2-2 through I:2-5.
The term "income" includes all income from whatever source derived.
refers only to income from taxable sources.
A deduction is an amount that is subtracted from income, while a credit is an
amount that is subtracted from the tax itself.
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.
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 receive a
refund, but may be entitled to a carryover or carryback.
pp. I:2-4 through I:2-6.
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-time student under 24, or disabled, (3) live with the taxpayer, and (4) not be
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
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
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 claim the dependency exemption.
Also, in the case of divorced couples, the parent with