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Income Tax Fundamentals and Calculations - Gross Income

Gross Income

Inclusions
Gross income is generally the total amount of income received from all sources before exclusions and deductions. Gross income falls under four major types: active, passive, portfolio and other. The distinction between these types dictates the treatment used for losses.

All of the following would be included as Gross Income:

  • Wages and Tips
  • Self-employment income
  • Taxable scholarships
  • Taxable interest and dividends
  • Capital gains
  • Prizes and awards
  • Taxable Pensions and Annuities
  • Rents
  • Royalties
  • Annuities and pensions
  • Trust distributions
  • IRA distributions
  • Alimony received
  • Dividends

Exclusions
Certain elements of income can be excluded from taxation and gross income.

Exclusions from Gross Income include:

  • Tax-exempt interest
  • Tax-free fringe benefits
  • Qualifying scholarships
  • Qualified Roth distributions
  • Life Insurance proceeds
  • Reimbursement for business expenses
  • Worker's compensation

Social Security
Social security benefits are typically excluded from income, unless:

  • You are married filing separately, and you live with your spouse at some point during the tax year,
  • 50% of net Social Security benefits + Gross Income + Tax-exempt Interest exceeds $32,000 MFJ or $25,000 single.

If either from above applies, a portion of the Social Security benefit is taxable.

Imputed Income
Imputed income is the benefit received when a person avoids paying wages or accepting income, because they perform the services on their own or enjoy the use of the property themselves.

An example would be a rental property owner who lives in his rental property for three months and doesn't pay any rent. He is foregoing the three months of rental income, which would normally be treated as taxable income, to enjoy rent-free use of the rental unit.

NOTE:
While there is no Internal Revenue Code establishing the exclusion for imputed income, it is so difficult to measure in quantitative form that it is not treated as income and, therefore, is not taxed.

Imputed Interest
Imputed interest is important to consider in tax calculations, as they can affect income, and subsequently, which income tax bracket an individual falls under.

An example of when this is employed is when a wealthy parent lends money, interest-free, to their children, who may fall within a lower tax bracket. The money stays within the family's hands, however if the money is invested by the children, it is subject to lower tax standards; thus, the money being loaned by the parent is taxed at a lower rate.

Imputed interest is accounted for by the IRS on said loans and, depending on the amount loaned, are given a default rating dictated by the applicable federal rate (AFR.)

Adjustments
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