Gross Income
Gross Income
Gross income is the total amount of money and other taxable compensation a person or business receives from all sources before any deductions, adjustments, or taxes are subtracted.
How It Works
When the IRS calculates how much of your income is subject to tax, it typically starts with gross income as the foundation. From there, the tax process works its way down through several stages, subtracting allowable deductions and adjustments to arrive at the final taxable amount. Gross income is generally the starting point for that entire process.
Under the Internal Revenue Code, gross income is defined broadly and includes virtually all income from whatever source derived, unless a specific exemption applies. In most cases, if money or value comes into your hands, it counts as gross income.
Common sources that are generally included in gross income:
- Wages, salaries, and tips from employment
- Self-employment and freelance income
- Interest and dividends from investments
- Rental income from property
- Business profits
- Alimony received (for agreements finalized before January 1, 2019)
- Gambling winnings
- Certain prizes and awards
Some types of income are typically excluded from gross income, such as gifts, inheritances, most life insurance proceeds, and certain employer-provided benefits. These exclusions are defined by specific tax law provisions and do not apply in every situation.
Why It Matters
Gross income matters because it determines eligibility for many tax deductions, credits, and other tax benefits. A number of rules throughout the tax code use gross income (or a closely related figure called adjusted gross income) as a threshold for phasing in or phasing out benefits. Understanding your gross income helps give a clearer picture of your overall tax situation before any reductions are applied.
Practical Examples
Example 1: A Salaried Employee
Maria earns a salary of $65,000 per year. She also earns $800 in interest from a savings account and receives $1,200 in freelance consulting fees during the year. Her gross income for the year is generally calculated as:
- Salary: $65,000
- Interest income: $800
- Freelance income: $1,200
- Total gross income: $67,000
This $67,000 figure is the starting point before any deductions or adjustments are applied to determine her taxable income.
Example 2: A Small Business Owner
James runs a small landscaping business and brings in $90,000 in total revenue during the tax year. He also collects $2,500 in rental income from a property he owns. His gross income is typically the combined total of $92,500, calculated before subtracting business expenses or other deductions.
Note that for self-employed individuals, business expenses are generally deducted in a separate step, resulting in a lower figure called net self-employment income, which then feeds into the broader gross income calculation.
Related Tax Concepts to Explore
Gross income connects closely to several other important terms in the tax process:
- Adjusted Gross Income (AGI): Gross income minus certain allowable adjustments, such as student loan interest or contributions to a traditional IRA.
- Taxable Income: The amount of income actually subject to tax after subtracting the standard deduction or itemized deductions from AGI.
- Modified Adjusted Gross Income (MAGI): A variation of AGI used to determine eligibility for specific credits and deductions, including certain retirement account contributions.
- Above-the-Line Deductions: Deductions subtracted from gross income to arrive at AGI, generally available regardless of whether a taxpayer itemizes.
- Tax Exclusions: Specific categories of income that are excluded from gross income by law.
Understanding gross income is a foundational step in navigating the broader tax system. Most other calculations in the individual income tax process build directly on this number.