What determination is made regarding a taxpayer's insolvency?

Insolvency is a financial state where an individual or entity cannot meet its financial obligations when they come due. The key determination of insolvency is whether total liabilities exceed total assets. This means that if a taxpayer's debts and obligations are greater than what they own (assets), they are considered insolvent.

This concept is crucial in various financial contexts, including bankruptcy proceedings, as it affects the taxpayer's eligibility for certain tax benefits. When assessing a taxpayer's financial health, understanding the balance between assets and liabilities provides a clear picture of their solvency status. In situations involving debt forgiveness, knowing if a taxpayer is insolvent can help determine if they need to recognize income from canceled debt.

The other choices do not directly address the definition of insolvency. Total income versus expenses deals with cash flow rather than net worth, total tax payments compared to deductions relate to tax liability rather than total asset value, and total savings in relation to liabilities also does not accurately define insolvency. Thus, the correct determination of insolvency hinges solely on the comparison between total liabilities and total assets.