What Is Gross Income? A Look at IRC Section 61(a)

The calculation of U.S. federal income tax begins with a foundational concept: gross income. This figure represents the starting point for determining an individual’s or entity’s tax obligations. The Internal Revenue Code (IRC), the body of law governing federal taxation, provides a definition that is both broad and intentionally comprehensive, designed to capture all forms of economic benefit a taxpayer receives. The rules that shape this definition have been established by the legislative text and decades of judicial review, ensuring the tax base is defined before any deductions, credits, or other adjustments are applied.

The Core Principle of Income

At the heart of the U.S. tax system is the definition of gross income found in Internal Revenue Code Section 61. This section establishes the rule that gross income includes “all income from whatever source derived.” This language signals Congress’s intent to tax a wide array of financial gains unless a specific provision of the law explicitly excludes an item.

The phrase “all income from whatever source derived” has been the subject of significant legal interpretation. The Supreme Court case, Commissioner v. Glenshaw Glass Co., provided a judicial framework for understanding what constitutes income. This case established a three-part test, defining income as an undeniable accession to wealth, that is clearly realized, and over which the taxpayer has complete dominion and control.

Breaking down the Glenshaw Glass test helps to clarify its application. An “accession to wealth” means the taxpayer has experienced an economic gain. “Clearly realized” signifies that the gain is not merely a theoretical increase in value, like appreciated stock, but has been converted into a tangible benefit. “Complete dominion” means the taxpayer has control over the income and can use it as they please.

A simple example illustrates this principle in action. If an individual finds a wallet containing $500 and keeps it, all three prongs of the test are met. The $500 is an accession to wealth, it has been realized as cash, and they have complete dominion over it. This found money is considered gross income.

Statutory Examples of Income

The tax code provides a non-exclusive list of fifteen common items that constitute gross income. This list illustrates the breadth of the definition and provides clear guidance on frequent forms of income. These statutory examples are not the only types of taxable income, but they represent core sources the tax system is designed to capture.

Among the most common examples is compensation for services, which includes wages, salaries, fees, and commissions. This covers nearly every form of payment an individual receives for their labor. Another significant source is gross income derived from a business, which is the total revenue a business generates before expenses are deducted.

Investment and property-related activities also generate several types of income listed in the statute. Gains derived from dealings in property, such as the profit from selling stock or real estate, are included. Interest earned from bank accounts, rents received from leasing property, royalties from intellectual property, and dividends paid by corporations are all specified as items of gross income.

The list also extends to other financial arrangements. It includes income from annuities, pensions, and distributions from life insurance contracts. The distributive share of a partnership’s gross income is also taxable to the individual partners, as is income from an interest in an estate or trust.

Broad Interpretations of Income

The phrase “from whatever source derived” gives the government authority to tax income sources not explicitly listed in the statute. This ensures that any economic benefit meeting the Glenshaw Glass criteria of a realized accession to wealth under the taxpayer’s control is subject to taxation. This principle extends to gains that might not fit into traditional categories.

One clear example is prizes and awards. Winnings from lotteries, game shows, or raffles are considered taxable income. The fair market value of a non-cash prize, such as a car or a vacation, must be included in the winner’s gross income because it represents a realized accession to wealth.

Bartering, the practice of exchanging goods or services without money, also generates taxable income. If a painter offers to paint an accountant’s office in exchange for the accountant preparing their tax return, both have realized income. The fair market value of the services each person received must be reported as gross income.

Another important category is the cancellation of debt. If a lender forgives a debt, the borrower generally must recognize the forgiven amount as gross income. This is because the cancellation frees up assets and results in an accession to wealth. Even illegal income, such as from theft, is considered gross income, a principle established in James v. United States.

Items Specifically Excluded from Gross Income

While the definition of gross income is expansive, the Internal Revenue Code contains other sections that specifically exclude certain items from being taxed. These provisions are known as exclusions and are different from deductions. An excluded item is never included in the initial calculation of gross income, whereas a deduction is an amount subtracted from gross income to arrive at taxable income.

One of the most well-known exclusions is for gifts and inheritances. The value of property received from another person as a gift, or property acquired through an inheritance, is not included in the recipient’s gross income. This rule recognizes that such transfers are a shift of existing wealth. However, any income generated by the property after the transfer, such as interest or dividends, is taxable to the new owner.

A significant exclusion pertains to the proceeds from a life insurance contract paid out due to the death of the insured. These payments are generally not taxable to the beneficiary. This provision provides financial relief to beneficiaries without imposing an income tax burden on the amount received.

Other specific exclusions exist throughout the tax code for various policy reasons. For instance, certain compensation for injuries or sickness may be excluded. Similarly, meals or lodging provided for the convenience of an employer on the employer’s premises can be excluded from an employee’s income.