Gross income
Gross income in United States tax law is receipts and gains from all sources less cost of goods sold
Cost of goods sold
Cost of goods sold refers to the inventory costs of those goods a business has sold during a particular period. Costs are associated with particular goods using one of several formulas, including specific identification, first-in first-out , or average cost...

. Gross income is the starting point for determining Federal and state income tax of individuals, corporations, estates and trusts, whether resident or nonresident.

"Except as otherwise provided" by law, Gross income means "all income from whatever source," and is not limited to cash received. However, tax regulations expand on this and say "all income from whatever source derived, unless excluded by law." The amount of income recognized is generally the value received or which the taxpayer has a right to receive. Certain types of income are specifically excluded from gross income.

The time at which gross income becomes taxable is determined under Federal tax rules, which differ in some cases from financial accounting rules.

What is income

Individuals, corporations, members of partnerships, estates, trusts, and their beneficiaries ("taxpayers") are subject to Income tax in the United States
Income tax in the United States
In the United States, a tax is imposed on income by the Federal, most states, and many local governments. The income tax is determined by applying a tax rate, which may increase as income increases, to taxable income as defined. Individuals and corporations are directly taxable, and estates and...

. The amount on which tax is computed, taxable income
Taxable income
Taxable income refers to the base upon which an income tax system imposes tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. The amounts included as income, expenses, and other deductions vary by country or system. Many systems provide that...

, equals gross income less allowable tax deductions.

The Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...

 states that "gross income means all income from whatever source derived," and gives specific examples. The examples are not all inclusive. The term "income" is not defined in the law or regulations. However, a very early Supreme Court
Supreme Court of the United States
The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all state and federal courts, and original jurisdiction over a small range of cases...

 case stated, "Income may be defined as the gain derived from capital, from labor, or from both combined, provided it is understood to include profit gained through a sale or conversion of capital assets." The Court also held that the amount of gross income on disposition of property is the proceeds less the capital value (cost basis) of the property.

Gross income is not limited to cash received. "It includes income realized in any form, whether money, property, or services."

Following are some of the things that are included in income:
  • Wages, fees for services, tips, and similar income. It is well established that income from personal services must be included in the gross income of the person who performs the services. Mere assignment of the income does not shift the liability for the tax.
  • Interest
    Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....

    received, as well as imputed interest on below market and gift loans.
  • Dividends, including capital gain distributions, from corporations.
  • Gross profit from sale of inventory
    Inventory means a list compiled for some formal purpose, such as the details of an estate going to probate, or the contents of a house let furnished. This remains the prime meaning in British English...

    . The sales price, net of discounts, less cost of goods sold
    Cost of goods sold
    Cost of goods sold refers to the inventory costs of those goods a business has sold during a particular period. Costs are associated with particular goods using one of several formulas, including specific identification, first-in first-out , or average cost...

     is included in income.
  • Gains on disposition of other property. Gain is measured as the excess of proceeds over the taxpayer's adjusted basis
    Adjusted basis
    In tax accounting, adjusted basis is the net cost of an asset after adjusting for various tax-related items.Adjusted basis is one of two variables in the formula used to compute gains and losses when determining gross income for tax purposes...

     in the property. Losses from property may be allowed as tax deductions.
  • Rents and royalties
    Royalties are usage-based payments made by one party to another for the right to ongoing use of an asset, sometimes an intellectual property...

    from use of tangible or intangible property. The full amount of rent or royalty is included in income, and expenses incurred to produce this income may be allowed as tax deductions.
  • Alimony
    Alimony is a U.S. term denoting a legal obligation to provide financial support to one's spouse from the other spouse after marital separation or from the ex-spouse upon divorce...

    and separate maintenance payments.
  • Pensions, annuities, and income from life insurance or endowment contracts.
  • Distributive share of partnership
    A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...

    income or pro rata share of income of an S corporation
    S Corporation
    An S corporation, for United States federal income tax purposes, is a corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code....

  • State and local income tax refunds, to the extent previously deducted. Note that these are generally excluded from gross income for state and local income tax purposes.
  • Any other income from whatever source. Even income from crime
    Crime is the breach of rules or laws for which some governing authority can ultimately prescribe a conviction...

    s is taxable and must be reported, as failure to do so is a crime in itself.

Gifts and inheritances are not considered income to the recipient under U.S. law. However, gift or estate tax may be imposed on the donor or the estate of the decedent.

Year of inclusion

A taxpayer must include income as part of taxable income in the year recognized under the taxpayer's method of accounting
Comparison of Cash Method and Accrual Method of accounting
The two primary accounting methods of the cash and the accruals basis are used to calculate US public debt, as well as taxable income for U.S. federal income taxes and other income taxes...

. Generally, a taxpayer using the cash method of accounting (cash basis taxpayer) recognizes income when received. A taxpayer using the accrual method (accrual basis taxpayer) recognizes income when earned. Income is generally considered earned:
  • on sales of property when title to the property passes to the customer, and
  • on performance of services when the services are performed.

Amount of income

For a cash basis taxpayer, the measure of income is generally the amount of money or fair market value of property received. For an accrual basis taxpayer, it is the amount the taxpayer has a right to receive.

Certain specific rules apply, including:
  • Constructive receipt,
  • Deferral of income from advance payment for goods or services (with exceptions),
  • Determination what portion of an annuity is income and what is return of capital,

The value of goods or services received is included in income in barter
Barter is a method of exchange by which goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money. It is usually bilateral, but may be multilateral, and usually exists parallel to monetary systems in most developed countries, though to a...


Exclusions from gross income

Gross income includes "all income from whatever source derived." The courts have consistently given very broad meaning to this phrase, interpreting it to include all income unless a specific exclusion applies. Certain types of income are specifically excluded from gross income. These may be referred to as exempt income, exclusions, or tax exemption
Tax exemption
Various tax systems grant a tax exemption to certain organizations, persons, income, property or other items taxable under the system. Tax exemption may also refer to a personal allowance or specific monetary exemption which may be claimed by an individual to reduce taxable income under some...

s. Among the more common excluded items are the following:
  • Tax exempt interest. For Federal income tax, interest on state and municipal bonds is excluded from gross income. Some states provide an exemption from state income tax for certain bond interest.
  • Social Security benefits. The amount exempt has varied by year. The exemption is phased out for individuals with gross income above certain amounts.
  • Gifts and inheritances. However, a "gift" from an employer to an employee is considered compensation, and is generally included in gross income.
  • Life insurance proceeds.
  • Compensation for personal physical injury or physical sickness, including:
    • Amounts received under worker’s compensation acts for personal physical injuries or physical sickness,
    • Amounts received as damages (other than punitive damages) in a suit or settlement for personal physical injuries or physical sickness,
    • Amounts received through insurance for personal physical injuries or physical sickness, and
    • Amounts received as a pension, annuity, or similar allowance for personal physical injuries or physical sickness resulting from active service in the armed forces.
  • Scholarships. However, amounts in the nature of compensation, such as for teaching, are included in gross income.
  • Certain employee benefits. Non-taxable benefits include group health insurance
    Health insurance
    Health insurance is insurance against the risk of incurring medical expenses among individuals. By estimating the overall risk of health care expenses among a targeted group, an insurer can develop a routine finance structure, such as a monthly premium or payroll tax, to ensure that money is...

    , group life insurance
    Life insurance
    Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...

     for policies up to $50,000, and certain fringe benefits, including those under a flexible spending or cafeteria plan
    Cafeteria plan
    A cafeteria plan is a type of employee benefit plan offered in the United States pursuant to Section 125 of the Internal Revenue Code. Its name comes from the earliest such plans that allowed employees to choose between different types of benefits, similar to the ability of a customer to choose...

  • Certain elective deferrals of salary (contributions to "401(k)" plans).
  • Meals and lodging provided to employees on employer premises for the convenience of the employer.
  • Foreign earned income exclusion for U.S. citizens or residents for income earned outside the U.S. when the individual met qualifying tests.
  • Income from discharge of indebtedness for insolvent taxpayers or in certain other cases.
  • Contributions to capital received by a corporation.
  • Gain up to $250,000 ($500,000 on a married joint tax return) on the sale of a personal residence.

There are numerous other specific exclusions. Restrictions and specific definitions apply.

Some state rules provide for different inclusions and exclusions.

Source of income

United States persons (including citizens, residents, and U.S. corporations) are generally subject to U.S. federal income tax on their worldwide income. Foreign persons (i.e., persons who are not U.S. persons) are subject to U.S. federal income tax only on income from a U.S. business and certain income from United States sources. Source of income is determined based on the type of income. The source of compensation income is the place where the services giving rise to the income were performed. The source of certain income, such as dividends and interest, is based on location of the residence of the payor. The source of income from property is based on the location where the property is used. Significant additional rules apply.

Taxation of foreign persons

Foreign persons are subject to regular income tax on income from a U.S. business or for services performed in the U.S. Foreign persons are subject to a flat rate of U.S. income tax on certain enumerated types of U.S. source income, generally collected as a withholding tax
Withholding tax
Withholding tax, also called retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require...

. The rate of tax is 30% of the gross income, unless reduced by a tax treaty
Tax treaty
Many countries have agreed with other countries in treaties to mitigate the effects of double taxation . Tax treaties may cover income taxes, inheritance taxes, value added taxes, or other taxes...

. Foreign persons are not subject to U.S. tax on capital gains. Wages may be treated as effectively connected income, or may be subject to the flat 30% tax, depending on the facts and circumstances.

Further reading

Standard tax texts:
  • Willis, Eugene, Hoffman, William H. Jr., et al., South-Western Federal Taxation, published annually. 2009 edition (cited above as Willis|Hoffman 2009) included ISBN 973-0-324-66060-0 (student) and ISBN 978-0-324-66208-5 (instructor).
  • Pratt, James W., Kulsrud, William N., et al., Federal Taxation", updated periodically. 2010 edition ISBN 978-1-4240-6986-6 (cited above as Pratt & Kulsrud).

IRS materials:

See also

  • Effective gross income
    Effective gross income
    This term used for an income-producing property, derived from the potential gross income, less the vacancy factor and a collection loss amount.This is the relationship or ratio between the sale price of the value of a property and its effective gross rental income.The anticipated income from all...

  • Gross profit
    Gross profit
    In accounting, gross profit or sales profit is the difference between revenue and the cost of making a product or providing a service, before deducting overhead, payroll, taxation, and interest payments...

  • Gross margin
    Gross margin
    Gross margin is the difference between revenue and cost before accounting for certain other costs...

  • Net income
    Net income
    Net income is the residual income of a firm after adding total revenue and gains and subtracting all expenses and losses for the reporting period. Net income can be distributed among holders of common stock as a dividend or held by the firm as an addition to retained earnings...

  • Amount Realized
    Amount realized
    Amount Realized is defined by § 1001 of Internal Revenue Code, and is one of two variables in the formula used to compute gains and losses when determining gross income for tax purposes...

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