What is Gross Income?

What is Defined as Income?

There are many things that are considered income other than just the normal W-2 sort of income. Income from the IRSs viewpoint is income that has been realized. The term realized is a huge concept for income. For example, gains that have been made and can be taken to the bank are realized. Think of it as a physical gain that you can touch. Just because your stock went up a few points at the end of the year does not mean that it is realized and therefore does not count as income.

What Does Not Count as Income?

A few people may consider a loan to be part of income. Since it has to be repaid at a later date it is not income.

Difference between Earned and Unearned Income

Earned income is income that is… earned. Any compensation from an employer, have it be normal pay or even bonuses from any job is considered to be earned income. Some examples of earned income are earnings and self-employment earnings. Unearned income is income that has not been earned. Some prime examples of unearned income are interest, social security, and alimony payments received.

Return of Capital Doctrine

Make sure you have documentation of your investments that specifically shows what you have invested. Your return of capital through the sale of assets is not taxable. Just the gain is deemed taxable. For example if you buy one share of stock for 5$ and sell it later for $7, only $2 is taxable. The original $5 investment is considered to be the return of your capital.

Constructive Receipt Doctrine

Many people have tried to escape the clutches of the tax man many times. One important concept to note is the constructive receipt doctrine. The constructive receipt doctrine means that you may have to include in your income some income that has yet to be received. Here is an example. Let’s say that I am a cash basis taxpayer. Since it is the end of the year I decide to shovel a few driveways to earn some extra money. I ask every client to pay me after January 1st of the following year. Since I am able to receive that money now, I have to report that in my income for the year.

Some Typical Items that are Considered as Income

• Rents

• Royalties

• Dividends

• Compensation for Services

• Alimony

• Annuities (specifically the gains)

• Bonuses

• Commissions

• The list goes on….