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What Is Gross Income?

At first glance, the definition of gross income seems fairly straightforward. The Internal Revenue Code defines gross income as "all income, from whatever source derived." This includes:

Excluded Sources of Income

Some sources of income are not included in your gross income. This excluded income includes life insurance payments, earnings your employer pays directly into 401(k) retirement accounts, child support, inheritances, a portion of Social Security benefits, and workers' compensation.

Are You Taxed on Your Gross Income?

The Internal Revenue Service (IRS) cares about your gross income for federal income tax purposes, but it is just a starting point for determining your tax liability. The IRS will subtract any adjustments to your income to arrive at your adjusted gross income(AGI). Any deductions you are entitled to claim are then subtracted from AGI to calculate your taxable income. The IRS also uses AGI to determine your tax bracket and the tax rate used to determine the amount of tax you will pay.

While you do not pay tax based on your gross income, it is still important for tax purposes because it determines whether you need to file an income tax return at all. If your gross income falls below certain thresholds based on your filing status, you are not required to file an annual federal tax return. For 2023, individuals under 65 do not need to file if their gross income is under $12,950. For filers under 65 and married filing jointly, the threshold is $25,900; for heads of households under 65, the threshold is $19,400.

Adjustments to Income

Many adjustments are often referred to as deductions. However, a taxpayer who has claimed the standard deduction can still take advantage of an adjustment but cannot claim most other deductions, known as "itemized deductions." Thus, adjustments are an exception to the general rule that you can't claim any additional deductions when you claim the standard deduction.

Common adjustments include amounts paid for:

  • Health savings accounts
  • Alimony paid under divorce decrees issued before 2019
  • Student loan interest
  • Individual retirement accounts (IRAs)
  • Self-employed health insurance premiums
  • Tuition and fees
  • Business expenses paid by business owners or the self-employed

Certain tax benefits are based on your AGI, such as the earned income tax credit.

Deductions

A deduction is an expense you paid that can be subtracted from your AGI to provide you with a tax benefit. The deduction reduces the tax you owe by reducing your taxable income. The most popular deduction is the standard deduction, which is claimed by an estimated 90% of taxpayers. But if you pay the standard deduction, you are usually not allowed to claim any additional deductions.

Other common deductions include:

  • Up to $10,000 in state and local taxes, including state income taxes
  • Donations to tax-exempt organizations
  • Mortgage interest on your primary residence
  • Medical expenses of more than 7.5% of AGI

More Questions About Gross Income? Talk to an Attorney

If you still have questions about what is included in your gross income and how it will affect your federal tax bill, a local attorney can help. Tax attorneys are trained in federal and state income tax law and can answer your questions regarding your income and how it is taxed. A skilled attorney can also help with tax planning to minimize the gross income you must report to the IRS.

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Contact a qualified tax attorney to help you navigate your federal and/or state tax issues.

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