Discussion Questions

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Chapter I:2

Determination of Tax

Discussion Questions

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 sole 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 Schedule 1 (and from there to Form 1040). This is procedurally convenient but means gross income is not shown on Form 1040.

• Gross income is relevant to certain tax determinations. For example, whether an

individual is required to file a tax return is based on his or her 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 dependent is a qualifying relative. pp. I:2-3, I:2-15, and I:2-35.

I:2-2 The term “income” includes all income from whatever source derived, based on principles of economics and/or accounting. Gross income refers only to income from taxable

sources; it does not include tax-exempt income. p. I:2-3.

I:2-3 a. A deduction is an amount that is subtracted from gross income (or adjusted gross income), while a credit is an amount that is subtracted from the tax itself.

• In general, a $200 credit is worth more than a $200 deduction because the credit

results in a $200 tax savings. The savings from a deduction is less than 100% of $200, depending 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.

I:2-4 A dependent must be a qualifying child or a qualifying relative.

● A qualifying child must:

• Be the taxpayer’s (a) child, (b) sibling, or (c) descendent of (a) or (b) • Be under 19, a full-time student under 24, or disabled • Live with the taxpayer for more than half the year, and • Not provide more than half of his or her own support.

● A qualifying relative must:

• Be related to the taxpayer (or reside in the taxpayer’s home for the entire year) • Have gross income less than $5,200 (2025), • Receive more than half of his or her support from the taxpayer, and • Not be a qualifying child.

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Additional requirements must be met for a taxpayer to claim a qualifying child or qualifying

relative as a dependent:

• The qualifying child or qualifying relative meets a citizenship test • The qualifying child or qualifying relative generally cannot file a joint return, and • The taxpayer is not a dependent of someone else.

pp. I:2-13 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.

• Yes, it is possible. There are several situations where a taxpayer provides 50% or

less of another person’s support and can claim that person as a dependent:

• If the other person does not provide more than half of his or her own support, that person is the taxpayer’s qualifying child (if the other tests for a qualifying child are met).• 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 supported person as a qualifying relative.• In the case of divorced couples, the parent with custody for over half of the year may claim their child as a dependent. Similarly, in the case of a written agreement, the noncustodial parent may claim their child as a dependent.

• 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:2-14 through I:2-16.

I:2-6 A taxpayer will use a tax 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 a special tax

computation method such as short-year computation. p. I:2-20.

I:2-7 a. In general, it is an individual’s gross income that determines whether he or she 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: (1) dependent individuals whose unearned income exceeds $1,350 or whose total gross income exceeds the standard deduction, (2) taxpayers who owe the 0.9% Additional Medicare Tax or the 3.8% Net Investment Income Tax, and (3) taxpayers with $400 or more of net self-employment income.

• Individuals who owe no tax because of deductions or other reasons must still file

a return if they have gross income in excess of the filing requirement amounts. p. I:2-35.

I:2-8 Home mortgage interest and real property taxes are itemized deductions. As a result, a homeowner’s itemized deductions often exceed the standard deduction, making it beneficial to itemize. Renters typically do not have these deductions, so the standard deduction often is greater

than itemized deductions. p. I:2-12. 2 / 3

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I:2-9 If the support test for a qualifying relative were “50% or more” and two individuals each provided exactly 50% of another person’s support, that person would be a qualifying relative of both individuals (assuming the other requirements for a qualifying relative were met). By specifying that the individual provides “more than 50%” of the person’s support, that person cannot be a qualifying relative of more than one individual. If two individuals each provide exactly 50% of another person’s support, that person would not be a qualifying relative of anyone because no one provided more than half of his or her support, but the two individuals may be able to use a multiple support agreement to allow one of them to claim that other person as a dependent.

In practice, it is unlikely that an individual provides exactly 50% of another person’s support. The distinction between “50% or more” and “more than 50%” is important, however, in other areas of the tax law. For example, consider an individual who owns exactly 50% of a corporation’s stock, and that individual sells all of his or her stock to the person who owns the other 50% of the corporation’s stock. As Chapter C:7 discusses, the deductibility of a corporation’s net operating loss is limited if the corporation’s ownership changes by more than 50 percentage points. In this case, that limitation would not be triggered because the corporation’s ownership changes by exactly 50 percentage points, not more than 50 percentage

points. p. I:2-16.

I:2-10 The normal due date for calendar year individuals and C corporations is April 15. The normal due date for calendar year partnerships and S corporations is March 15. If the normal due date is a Saturday, Sunday, or holiday, the due date is delayed to the next day that is not a

Saturday, Sunday or holiday. p. I:2-35.

I:2-11 Automatic extensions of six months generally are available. For a C corporation, the extension is six or seven months, depending on the fiscal year-end. Any tax that may be owed must be paid with the application for an extension. pp. I:2-35 and I:2-36.

I:2-12 Yes. In general, the source of income is not important. It is the use that is important. An exception does exist for a child’s scholarship. Parents do not have to consider a child’s scholarship when determining whether they provide over half of the child’s support (or whether

the child provided more than half of his or her own support). p. I:2-16.

I:2-13 Scholarships generally do qualify as support, but an exception exists for a scholarship received by the taxpayer’s child. Parents may ignore a child’s scholarship in determining whether they provide over half of the child’s support (or whether the child provided more than

half of his or her own support). p. I:2-16.

I:2-14 The purpose of the multiple support agreement is to allow one member of a group to claim a supported person as a qualifying relative when the members together contribute more than 50% of the support of that person and each member of the group contributes over 10% (the group includes only those individuals contributing over 10% of the supported person’s support and who meet the relationship test for a qualifying relative with respect to the supported person).The multiple support agreement results in an exception to the requirement that the taxpayer alone must provide over one-half of the qualifying relative’s support. pp. I:2-17 and I:2-18.

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