Posted by Income Taxes and Bookkeeping LLC

What is Gross Income: IRC Section 65

What is Gross Income: IRC Section 65

Uncle Sam knows that many taxpayers are trying to limit or completely get rid of their federal income tax. They do this by claiming that all forms of compensation and funds received as a form of exchange for personal service is an income that cannot be taxed. 

According to Uncle Sam, such a group of people further do not file the tax return at the federal level, and many do not report income that comes from various compensation for their federal income. This set of people provide W4 and claim absolute exemption from any withholding. 

However, the agency submits that promoters and tax preparation agencies' wages that come as a form of exchange for services rendered are considered taxable income, which warrants the payment of federal tax return. It is a frivolous tax argument to conclude that such a form of compensation cannot be taxed. 

Uncle Sam further revealed that it would not relax in identifying citizens who try to avoid their federal tax obligations by such arguments. 

Interested taxpayers can get more information on this from the Internal Revenue Code section 61. It is a comprehensive definition that stretches over every possible form of income, making it pretty important to understand what income is based on Uncle Sam's description. 

The definition has a few approaches:

  1. The Haig-Simons approach reveals that income is the total value derived from consumption, alongside the change in the value of the property between the start period and the completion of the specified period. This approach might not be helpful to many as it relates more to the theoretical. 

  2. We also have the practical economic benefit approach that reveals that income can be defined as the value of whatever economic benefit comes from the taxpayer, no matter the form of benefit. As a result, the receipt of any tangible item, which includes cash receipt or any income-generating property, can generate income. It does not matter if the source is unusual, like finding some money inside an old suit. 


With respect to the economic benefit approach as well, intangible benefits are classified as gross income. As a result, if a taxpayer satisfies the legal obligation, the income of the latter is the satisfaction amount. As an example, Jude is legally bound to pay income every year. In a situation where I pay Jude's taxes, Jude just got an intangible benefit. Jude must include the value of the benefit in estimating his gross income. 

As evident from section 61, there are many things covered as gross income. As a result, the definition covers several and almost every receipt type from various sources possible. The bright side is that other codes in the section refine what can be classified as income by including some items and excluding others. 

This is a brief list of some items classified as gross income.

  1. Gross income derived from business

  2. Gains that come from property dealings

  3. Alimony

  4. Awards and prizes

  5. Discharge of debts

  6. Investment income like annuities and interest inputted

  7. Funds embezzled 

  8. Other payments like the reimbursement of moving expense, compensation for unemployment, some social security benefit portion, etc., 

On the other hand, here is a list of items not included in the gross income:

  1. Gifts

  2. Debt benefits that come from a life insurance policy

  3. Scholarships that qualify

  4. Some compensation for sickness or physical injury

  5. Some exclusions related to employment

  6. Some education incentives

  7. Child support (not alimony)

  8. Exclusion for principal residence or gain


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