Recall the “tax formula” in chapter 1. Now we take up various elements of the formula. You should place whatever we are studying at the moment (the “trees”) within that formula (the “forest”). This chapter introduces you to the concept of “gross income,” the very first item in the tax formula.
You will notice that after adding up all of the items encompassed by the phrase “gross income,” every succeeding arithmetical operation is a subtraction. If an item is not encompassed by the phrase “gross income,” it will not be subject to federal income tax. The materials that follow consider various aspects of gross income: its definition, whether certain items that taxpayer has received constitute “gross income,” the timing of “gross income,” and valuation.
The Tax Formula
➔ (gross income)
MINUS deductions named in § 62
EQUALS (adjusted gross income (AGI))
MINUS (standard deduction or itemized deductions)
MINUS (personal exemptions)
EQUALS (taxable income)
Compute income tax liability from tables in § 1 (indexed for inflation)
MINUS (credits against tax)
Do the CALI lessons, Basic Income Taxation: Gross Income: Realization Concepts in Gross Income and Basic Income Taxation: Gross Income: Indirect Transfers for Services. These are fairly short Lessons that you may do several times as we cover this chapter.