Gross income in United States income tax law is generally receipts and gains from all sources. Gross income is the starting point for determining Federal and state income tax of individuals, corporations, estates and trusts, whether resident or nonresident.
Under the U.S. Internal Revenue Code, "Except as otherwise provided" by law, gross income means "all income from whatever source derived," and is not limited to cash received. Federal tax regulations interpret this general rule. The amount of income recognized is generally the value received or the value 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. The amount on which tax is computed, taxable income, equals gross income less allowable tax deductions.
The Internal Revenue Code gives specific examples. The examples are not all inclusive. The term "income" is not defined in the statute or regulations. An early Supreme Court 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 basis (usually, the acquisition cost) 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 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. The sales price, net of discounts, less cost of goods sold is included in income.
- Gains on disposition of other property. Gain is measured as the excess of proceeds over the taxpayer's adjusted basis in the property. Losses from property may be allowed as tax deductions.
- Rents and royalties 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 and separate maintenance payments.
- Pensions, annuities, and income from life insurance or endowment contracts.
- Distributive share of partnership income or pro rata share of income of an S corporation.
- 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 crimes 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. 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 method taxpayer, the measure of income is generally the amount of money or fair market value of property received. For an accrual method taxpayer, it includes 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 portion is return of capital,
The value of goods or services received is included in income in barter transactions.
Exclusions from gross income: U.S. Federal income tax law
The courts have given very broad meaning to the phrase "all income from whatever source derived," 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 exemptions. 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.
- Some 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 received by reason of the death of the insured person.
- Certain 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. 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, group life insurance for policies up to $50,000, and certain fringe benefits, including those under a flexible spending or cafeteria plan.
- 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 (whether U.S. citizens or aliens residing in the United States), and U.S. corporations) are generally subject to U.S. federal income tax on their worldwide income. Nonresident aliens 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 nonresident aliens
Nonresident aliens are subject to regular income tax on income from a U.S. business or for services performed in the United States. Nonresident aliens 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. The rate of tax is 30% of the gross income, unless reduced by a tax treaty. Nonresident aliens are subject to U.S. federal income tax on some, but not all 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.
- ^ Resident individuals and corporations are allowed tax deductions. Nonresident individuals and corporations are both allowed deductions from gross income.
- ^ See, e.g., 26 USC 83, regarding taxation of certain transfers of property in connection with the performance of services.
- ^ 26 USC 61.
- ^ Eisner v. Macomber, 40 S.Ct. 189 (1920). This case and later cases adopted an accounting concept of income. For a definition of economic income, see Haig-Simons income. See Willis|Hoffman 2009 chapters 4, and 5 and Pratt & Kulsrud 2009 chapters 5 and 6, cited below, for a discussion of gross income.
- ^ Doyle v. Mitchell Bros. Co., 38 S.Ct. 467, 247 U.S. 179 (1918).
- ^ 26 CFR 1.61-1(a). The courts have rejected arguments by various tax protesters have argued that some types of income are not included in this broad definition. Where property or services are received in exchange for property, use of property, services, or use of money, the fair market value of the property or services received is included in gross income. See, 26 CFR 1.61-6, 26 CFR 1.1001-1, 26 CFR 1.61-2(d)(1). For examples, see, e.g., Rev. Rul. 79-24, 1979 1 C.B. 60.
- ^ 26 CFR 1.61-2. See, e.g., Lucas v. Earl, 50 S. Ct. 241, in which Mr. Earl's income that he assigned to his wife was taxed to him. In four community property states, however, income is considered jointly earned by a husband and wife. See Willis|Hoffman 2009 page 4-18 et seq.
- ^ 26 CFR 1.61-7.
- ^ See 26 USC 7872, Willis|Hoffman 2009 page 4-23 et seq. regarding imputed interest.
- ^ 26 CFR 1.61-9. Not all distributions from corporations to shareholders are taxable as dividends. Distributions in excess of earnings and profits as well as distributions in complete termination of a shareholder's interest are treated as proceeds on disposition of the shares. See 26 USC 316 and 26 USC 302.
- ^ 26 CFR 1.61-6.
- ^ 26 CFR 1.61-6, supra.
- ^ 26 USC 165.
- ^ 26 CFR 1.61-8.
- ^ For such deductions, see 26 USC 212.
- ^ 26 CFR 1.61-10.
- ^ 26 CFR 1.61-11.
- ^ 26 USC 72, 26 USC 402, 26 USC 403, and regulations thereunder.
- ^ Certain amounts received from some types of retirement accounts constitute income only when basis in the account has been recovered. For an overview, see IRS Publication 17, Chapter 10.
- ^ 26 USC 702
- ^ 26 USC 1366.
- ^ Rutkin v. United States, 343 U.S. 130 (1952); James v. United States, 366 U.S. 213 (1961).
- ^ 26 USC 102.
- ^ Willis|Hoffman 2009 page 4-9.
- ^ See, e.g. the Supreme Court's broad discussion in Commissioner v. Glenshaw Glass Co., 328 U.S. 426 (1955), which includes a discussion of numerous other cases on point.
- ^ For a basic discussion, see Willis|Hoffman 2009 Chapter 5. For a list of common exclusions, see the Index to IRS Publication 17 under "Exclusions from gross income".
- ^ 26 USC 103.
- ^ 26 USC 86.
- ^ 26 USC 102. To qualify as a gift, there must be donative intent. See Estate of D. R. Daly, 3 BTA 1042 (1926).
- ^ 26 USC 101.
- ^ 26 USC 104.
- ^ 26 USC 117.
- ^ Numerous provisions apply; see 26 USC 120-135. See, e.g., 26 USC 125 on cafeteria plans.
- ^ 26 USC 119.
- ^ 26 USC 911.
- ^ [26 USC 108].
- ^ 26 USC 118.
- ^ 26 USC 121.
- ^ For example, New Jersey requires that wages include contributions to 401(k) plans that are excluded for Federal purposes.
- ^ 26 USC 861 through 865.
- ^ 26 USC 872 and 26 USC 882.
- ^ 26 USC 871 and 26 USC 881.
- ^ See generally subsection (a), paragraph (2) of 26 USC 871.
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 978-0-324-66050-0 (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).