REG, Regulation

Sources for Computing the Tax and Applying Credits

Last reviewed 2026-09-14

The standards and authorities behind PocketCPA's REG lessons on Computing the Tax and Applying Credits. The topic rests on IRC Secs. 1, 21, 24, 25A, 26, 32, 38, 55, 901, 904, 1401, 1402, 1411.

About this topic

The tax bill is computed twice, under two different sets of rules, and the taxpayer pays the higher figure. Credits then come off the result. After taxable income is fixed, the taxpayer computes tax under two parallel systems and then reduces it with credits.

Two structural facts explain most wrong answers.

Key points

The individual tax rate structure is progressive with seven brackets; the applicable rate depends on filing status and taxable income.
The child tax credit, earned income credit, and education credits are the most commonly tested personal credits.
AMT adds back preference items and adjustments to taxable income to compute alternative minimum taxable income.
The foreign tax credit prevents double taxation of income taxed by both the U.S. and a foreign jurisdiction.

What the lessons cover

Regular tax and the alternative minimum tax (Sec. 55)
Refundable versus nonrefundable credits
Family and education credits (Sec. 24 and Sec. 25A)
Foreign tax credit and general business credit (Sec. 901 and Sec. 38)
Preferential rates on net capital gain and qualified dividends (Sec. 1(h))
Tax on a child's unearned income (Sec. 1(g))
Self-employment tax (Sec. 1401 and Sec. 1402)
The net investment income tax (Sec. 1411)
The child and dependent care credit (Sec. 21)
The earned income credit (Sec. 32)

Authoritative references

Where these requirements sit in the literature.

IRC Sec. 32 governs the earned income credit. Sec. 32(a) allows a credit equal to the credit percentage of earned income, up to the earned income amount, reduced by the phaseout percentage of the excess of adjusted gross income (or earned income, if greater) over the phaseout amount. Sec. 32(b) is where those two percentages are prescribed.
IRC Sec. 1(h) holds the preferential rates on net capital gain. The six-subparagraph cascade at Sec. 1(h)(1) runs A through F. Sec. 1(h)(3) defines adjusted net capital gain, Sec. 1(h)(4) defines 28-percent rate gain, Sec. 1(h)(6) defines unrecaptured section 1250 gain, and Sec. 1(h)(11) folds qualified dividend income into net capital gain. Sec. 1(j)(5) is what substitutes the modern maximum zero rate amount and maximum 15-percent rate amount into subparagraphs (B)(i) and (C)(ii)(I).
IRC Sec. 1(g) is the kiddie tax. Sec. 1(g)(2) states who it applies to, Sec. 1(g)(4) defines net unearned income, and Sec. 1(g)(3) defines the allocable parental tax and the child's share of it. Sec. 1(j)(4) is repealed, which is why the tax runs at the parents' rates rather than at estate and trust rates.
IRC Sec. 55 imposes the alternative minimum tax. Sec. 55(a) is the excess of tentative minimum tax over the regular tax, and Sec. 55(b)(1)(A) holds the 26 and 28 percent rates. Sec. 55(b)(1)(D) defines alternative minimum taxable income, and Sec. 55(b)(3) preserves the capital gain rates inside the AMT. Sec. 55(c)(1) defines regular tax; Sec. 55(d)(1) states the exemptions, Sec. 55(d)(2) the phase-out, and Sec. 55(d)(4) the substitutions that govern current years.
IRC Sec. 56 and IRC Sec. 57 are the base adjustments and the preference list. Sec. 56(b)(1)(A)(ii) disallows state and local taxes, Sec. 56(b)(1)(D) disallows the standard deduction and personal exemptions. Sec. 56(b)(3) switches off Sec. 421 for incentive stock options and prescribes the resulting AMT basis. Sec. 57(a) is the closed list of preferences, with private activity bond interest at Sec. 57(a)(5)(A).
IRC Sec. 24 is the child tax credit. Sec. 24(c)(1) sets the under-17 test, Sec. 24(b)(1) the $50-per-$1,000 phase-out, and Sec. 24(d)(1) the refundable computation. Sec. 24(h) supplies the substitutions that give the operative credit amount, threshold, other-dependent amount, refundable cap, earned income floor and social security number requirement. Sec. 24(i) indexes two of those amounts.
IRC Sec. 25A holds both education credits. Sec. 25A(b) is the American Opportunity Tax Credit and its four limitations, Sec. 25A(c) the Lifetime Learning Credit and its coordination rules, and Sec. 25A(d) the modified adjusted gross income phase-out. Sec. 25A(f)(1) defines qualified tuition and related expenses, Sec. 25A(g)(2) is the scholarship reduction, and Sec. 25A(i) the 40 percent refundable portion.
IRC Sec. 21 is the child and dependent care credit. Sec. 21(a)(2) holds the two-tier applicable percentage, and Sec. 21(b) the definitions of qualifying individual and employment-related expenses. Sec. 21(c) holds the $3,000 and $6,000 ceilings and the Sec. 129 reduction in its flush language. Sec. 21(d) holds the earned income limitation and the deemed income rule for a student spouse, and Sec. 21(e)(6) the bar on payments to related individuals.
IRC Sec. 26(a) is the ceiling on the nonrefundable personal credits, and it is the provision that puts the Sec. 27 foreign tax credit ahead of them. Sec. 26(b) defines regular tax liability and lists the taxes excluded from it.
IRC Sec. 901 allows the foreign tax credit, IRC Sec. 27 makes it a credit against the chapter 1 tax. IRC Sec. 904 limits it: Sec. 904(a) is the ratio, Sec. 904(c) the one-year carryback and ten-year carryforward, and Sec. 904(d) the separate application by income category.
IRC Sec. 38 is the general business credit, with its limitation at Sec. 38(c) and its carryover at Sec. 39.
IRC Sec. 1401 imposes the self-employment tax: Sec. 1401(a) at 12.4 percent, Sec. 1401(b)(1) at 2.9 percent, and Sec. 1401(b)(2) the additional 0.9 percent. IRC Sec. 1402(a) defines net earnings from self-employment and its exclusions, and Sec. 1402(a)(12) gives the deduction that produces the 92.35 percent factor. Sec. 1402(a)(13) excludes a limited partner's distributive share, and Sec. 1402(b) caps the base and sets the $400 floor. IRC Sec. 164(f) gives the above-the-line deduction for one-half of the Sec. 1401 taxes other than Sec. 1401(b)(2).
IRC Sec. 1411 imposes the net investment income tax: Sec. 1411(a)(1) for individuals and Sec. 1411(a)(2) for estates and trusts. Sec. 1411(b) holds the unindexed thresholds, and Sec. 1411(c) what net investment income includes and excludes.
IRC Sec. 1211(b) limits an individual's capital loss deduction to gains plus the lower of $3,000 ($1,500 married filing separately) or the excess of losses over gains. IRC Sec. 1212(b) carries the remainder forward with its character preserved.
IRC Sec. 129 is the exclusion for employer-provided dependent care assistance, and it is the provision whose excluded amount reduces the Sec. 21(c) ceiling. Sec. 129(e)(7) states the same coordination from the other direction: no credit is allowed for any amount excluded under Sec. 129.
IRC Sec. 152(c) defines a qualifying child and is incorporated by reference into Sec. 24(c)(1), Sec. 1(g)(2)(A)(ii)(I) and Sec. 32(c)(3)(A), each with its own modifications. Sec. 152(f)(1) defines child for the Sec. 21(e)(6)(B) related-payee bar.
IRC Sec. 117 defines a qualified scholarship, which is what Sec. 25A(g)(2)(A) subtracts from qualified tuition and related expenses before the credit rate structure runs.
IRC Sec. 246(c) holds the dividend holding period rules that Sec. 1(h)(11)(B)(iii)(I) borrows, with 60 days substituted for 45 days and a 121-day period substituted for the 91-day period. The unmodified version governs the corporate dividends-received deduction, so the same section runs two clocks.
IRC Sec. 67(h) disallows every miscellaneous itemized deduction for years beginning after 2017, with no expiration, and Sec. 67(b)(13) carves educator expenses out of that class. Together they are why the Sec. 56(b)(1)(A)(i) AMT adjustment now has almost nothing left to disallow.
IRC Sec. 63(c)(5)(A) supplies the dependent standard deduction limitation that Sec. 1(g)(4)(A)(ii) uses twice in computing net unearned income.

A research tip for this area. When a question supplies a dollar amount, ask first whether the amount is in the operative subsection or in an override. Sec. 24, Sec. 55 and Sec. 1 all state one figure in the base text and a different, controlling figure in a later subsection, so the answer to "which provision sets the amount" is often the substitution subsection rather than the subsection that appears to allow the credit.

How PocketCPA uses these sources

Every lesson is written in original words and cites the paragraph each rule comes from. No standard's text is reproduced. How lessons and questions are written and checked is set out in our methodology.