Section 61 "Gross Income"No study of taxation can begin without an overview of what constitutes "gross income" for purposes of the Internal Revenue Code. The concept of gross income is broad under the Internal Revenue Code and includes wages, money received from rentals, interest on savings accounts and bonds, dividends from stock holding, and capital gains from the sales of stocks, among other items of income not specifically provided for under Section 61(a). For an example of the various types of income, look generally at the Form 1040, lines 7-21.
As mentioned above, I.R.C. Sec. 61(a) takes an expansively broad definition of income (i.e. gross income includes "income from whatever source derived"). Thus, when a taxpayer receives an item of income throughout the tax year, it is presumed includable in gross income unless the taxpayer can point to a specific tax provision or court doctrine that excludes it from gross income. See, e.g., Comm'r v. Glenshaw Glass Co. (1955). For example, the receipt of loan proceeds (e.g. from a bank) are not includable in gross income because the presumption is that these proceeds will be paid back over time. Note that if this presumption no longer applies, that is, the taxpayer is relieved of this debt obligation, then the amount the taxpayer is discharged from is income (subject to certain exceptions in I.R.C. Sec. 108). See., e.g., United States v. Kirby Lumber (1931). Also, certain provisions may delay the recognition of income. Thus, even though a taxpayer has increased their wealth from stock holdings that increased in value throughout the tax year, the Code provides that this increase in wealth does not need to be taxed until it is "realized" - i.e., sold. Example: In tax year 2011, Joe receives $40,000 from his employer (W-2 wages), $2000 from dividends in IBM stock, and $6000 from renting out another home he owns. Joe bought the stock on January 1, 2011, for a total cost (including commissions) of $10,000. At year end, the IBM stock is now worth $20,000. Joe has $48,000 of gross income for purposes of Section 61 ($40,000 + 2000 + 6000). The $10,000 increase in value of the IBM stock will not become income until Joe sells or disposes of the stock. See I.R.C. Sec. 1001 et. seq. Depending on the nature of the income, it may be taxed at various rates. For example, sales of stock that have been held by the taxpayer for more than one year are taxed at 15 % (unless the taxpayer is in the lowest two tax brackets, and then it is not taxable at all). Sales of stock held for one year or less are taxed at the taxpayer's normal ordinary income rates. Money received from dividends on stock are taxable at 15 % if they are qualified dividends (generally, stock held in domestic corporations). Interest and income from wages are taxed at progressive ordinary income tax rates depending on how much total income the taxpayer has throughout the tax year. As you well know, totalling up gross income is only the first step in determining a taxpayer's tax liability. The Code provides for various deductions, credits, and exemptions from gross income - all with special and intricate rules the taxpayer must follow. All of these are discussed in later parts of the website. | "Gross Income" ContinuedSome items of income are included in income even though we typically do not think of them as income. For example, the discharge of indebtedness gives rise to gross income under the Code. See I.R.C. Sec. 61(a)(12).
Assume Joe has a credit card account with a balance of $10,000. Joe is having problems paying the balance due on the account, and negotiates with the credit card company to bring the balance down to $4,000. The $6,000 liability Joe is released from is income for purposes of Section 61 (though Joe may still get to exclude the income under the income exclusion provisions found in I.R.C. Sec. 108(a), which is discussed under the "Income Exclusions" tab). Taxpayers receive a Form 1099-C for discharge of indebtedness income. Additionally, the Internal Revenue Code specifically provides that other types of income are "gross income" such as: (1) alimony; (2) annuities; (3) prizes and awards received; (4) and other enumerated items. See I.R.C. Secs. 71-79. Illegal income such as extortion and sale of illegal drugs also constitute gross income for purposes of Section 61. Notably, child support payments are not taxable to the recipient. See I.R.C. Sec. 71(c). Example: Jill is recently divorced. In tax year 2011, she receives $20,000 in alimony and $12,000 in child support from her ex-husband. Jill also won in an online contest $3000 cash. For tax year 2011, Jill will have $23,000 in gross income under Section 61 (assuming no other income from other sources). The $12,000 she received from child support will not be taxable to her. Once the taxpayer determines their gross income and the sources of the gross income, they can begin putting these numbers on the Form 1040, lines 7-21. Thus, for example, if the taxpayer receives a W-2 due to wages they received throughout the year, they would place the Box 1 number on line 7 of the Form 1040. The total for all income under lines 7-21 would go on line 22 and that would be the taxpayer's total income for the year. Example: Max has $35,000 in W-2 income; $2000 in interest on a savings account; $6000 in dividends on McDonald's stock he owns; and $5,000 in capital gains from the sale of the McDonald's stock during the year (he purchased the McDonald's stock for $25,000 3 years ago, and sold it this year for $30,000). Max would put the $35,000 on line 7 of the Form 1040; the $2000 in interest would be placed on line 8a; the $6000 in dividends would be ordinary and qualifying dividends and would be put on lines 9a and 9b; and finally, the capital gains of $5,000 would be put on line 13. The total of these numbers, or $48,000, would be place on line 22. |