| | Gross income for tax purposes is commonly defined as the amount of any taxpayer’s income before all deductions except that which is specifically excluded by the Internal Revenue Code before taking deductions or taxes into account. Gross income in accordance to the IRS, is defined in Internal Revenue Code Section 61. There are exceptions to this definition under Sections 101-140 of the Internal Revenue Code. In broad general terms gross income can be seen as an accession to wealth which requires an inflow of cash, noncash property, services, in excess on a taxpayer’s return of actual capital invested. Taxpayers recognized when this inflow is included in their gross income by either the cash method, the accrual method, or the hybrid method. Tax Deduction or a tax-deductible expense represents an expense incurred by a taxpayer that is subtracted from gross income or adjusted gross income and results in lower overall taxable income and therefore less tax owed to the government. There should be a distinction made a taxpayer’s realized tax deductions in which their overall taxable income is reduced and items deductible for tax purposes where the taxpayer may have deductible transaction but for some reason the transaction does not qualify in reducing the taxpayers taxable income and reduce their tax owed to the government. Many of these items deductible for tax purposes in which the taxpayer may not get a tax benefit for their deductible expense are those items deducted from the taxpayer’s adjusted gross income. For example, the government provides for a standard deduction amount for taxpayers for items deductible for tax purposes from adjusted gross income. While you as a taxpayer may have actually incurred expenses in these categories you need to itemize your actual deductions incurred for the year. If your itemized deductions are less than standard deduction, you take the greater standard deduction amount the government gives you to reduce your tax liability and not the total of your actual deductions incurred. Therefore, the actual deductible expenses incurred by you are of no actual tax benefit to you. Tax Credit is generally more valuable than an equivalent tax deduction or tax allowance because a tax credit benefits you by reducing your tax liability directly on a dollar for dollar basis, while a deduction or allowance only reduces taxable income and so the reduction in tax is only a fractional benefit (the marginal tax rate) of the deduction or allowance. The most common form of tax credit is the recognition of partial payment already made towards your tax liability in the form of withholding or estimated tax payments. Other tax credits a taxpayer may qualify for can either be refundable or nonrefundable in nature. A nonrefundable tax credit will only reduce your tax liability to zero and you may lose the excess credit amount or could carryforward the excess amount to future tax liabilities. A refundable tax credit can reduce your tax liability to zero and you can receive payment in the current tax year for the excess credit above your tax liability. |