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.
- What is income
- Year of inclusion
- Amount of income
- Exclusions from gross income US Federal income tax law
- Source of income
- Taxation of nonresident aliens
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:
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:
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:
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:
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.