Tax Tip – Identifying Gross Income

Internal Revenue Code section 61 defines gross income as “all income from whatever source derived.” This definition reaches your worldwide income, so it is important to understand exactly what “income” means. There are a couple of approaches to the definition of income.

One approach is the Haig-Simons approach which indicates that income is the sum of the market value of rights exercised in consumption, plus the change in the value of the store of property rights between the beginning and end of the period in question. This approach leans toward the theoretical and you may not find it very helpful.

In steps the more practical economic benefit approach which says that income is the value of any economic benefit received by the taxpayer regardless of the form of the benefit. Thus, income can come from the receipt of tangible items including receipt of cash or other property that generates income, even if it comes from an unusual source, such as finding a chunk of money inside an old piano.

The economic benefit approach also includes intangible benefits as gross income. If one taxpayer satisfies another taxpayer’s legal obligation, the later has income in the amount of the satisfaction. For example, I have a legal obligation to pay my income taxes each year. If you pay my taxes for me, I’ve received an intangible benefit. The value of that benefit is included in the calculation of my gross income.

As you can see, section 61 casts the widest net possible. The definitions above would act to capture almost every type of receipt from any source imaginable. Take heart, later code sections refine the idea of “income” by specifically including certain items and specifically excluding others.

Here is a brief list of specific items included in gross income:

  1. Compensation income
  2. Gross income from business
  3. Gains derived from dealings in property
  4. Investment income, including imputed interest and annuities
  5. Alimony
  6. Discharge of indebtedness
  7. Prizes and awards
  8. Helpful payments including certain moving expense reimbursements, unemployment compensation, possibly a portion of social security benefits
  9. Embezzled funds

Here is a brief list of specific items excluded from gross income

  1. Death benefits under a life insurance policy
  2. Gifts
  3. Certain compensation for physical injury or sickness
  4. Certain types of discharge of indebtedness income, generally conditioned on the taxpayer giving up certain tax benefits
  5. Qualified scholarships
  6. exclusion for gain on principal residence
  7. Certain employment related exclusions
  8. Certain education incentives
  9. Child support (distinguished from alimony)