At first glance, the definition of gross income seems fairly straightforward. As described in 26 U.S.C. § 61, gross income is “all income, from whatever source derived”. This includes income from wages, business activities, gains from property deals, alimony, dividends, etc., etc.
Calculating Your Gross Income
Gross income is essentially all the money that a person earns during the tax year. If that individual uses the cash method of accounting, they must include income in their gross income calculations for the year that the income was actually received. (In other words, the year in which they actually had the money in their possession.) If the taxpayer uses the accrual method of accounting, the income belongs to the gross income calculations for the year in which they earned the money, not necessarily the year they received it. Most individuals use the cash method of accounting, however.
Excluded Sources of Income
In addition, some sources of income are specifically excluded from the gross income calculation. Life insurance proceeds and income that goes directly into 401(k) plans are not considered gross income, for example, nor are Social Security benefits. These types of income are known as “exempt” income since they are not a part of an individual’s gross income calculation.
Gross income itself is only a starting point for calculating an individual’s tax liability. Once gross income is calculated, a taxpayer can reduce the amount of income through the use of deductions. The resulting figure is known as the individual’s adjusted gross income.