What is gross income?

Gross income is defined as all income from gains made from whatever source – and not just cash received. It is essentially how much is made before being charged taxes.

For individual people gross income means total income before taking into account taxes or deductions, while for companies it is revenue minus cost of goods, also known as gross profit or gross margin.

According to merriam-webster.com, gross income is:

“The total of all revenue or receipts usually for a given period except receipts or returns of capital,” or “all income derived from any source except for items specifically excluded by law and deductions of certain outlays (as cost of goods sold or expenses in connection with rental income).”

Gross income is one of the main components that the US Federal and State governments assess in order to determine how much income tax corporations, individuals, and trusts have to pay.

In a Supreme Court case, it was once stated that “income may be defined as the gain derived from capital, from labor, or from both combined, provided it is understood to include profit gained through a sale or conversion of capital assets.”

According to the Cornell University Law School and the 26 U.S. Code § 61, the following items can be considered sources of income:

  • Annuities
  • Compensation for services, including fees, fringe benefits, commissions and similar items
  • Distributive share of partnership gross income
  • Dividends
  • Gross income sourced from business
  • Income from an inheritance
  • Income from an interest in an estate or trust
  • Income from discharge of indebtedness
  • Interest
  • Life insurance and endowment contract incomes
  • Money made from dealings in property
  • Pensions
  • Rents
  • Royalties
  • Separate maintenance and alimony payments

However, there are also some types of income that are excluded from gross income, such as:

  • Certain employee benefits
  • Contributions to “401(k)” plans
  • Contributions to capital received by a corporation
  • Foreign earned income exclusion for U.S. citizens
  • Gains of up to $250,000 on a single, or $500,000 on a married joint tax return, after the sale of a private residence
  • Inheritances and gifts
  • Interest that is exempt of tax
  • Physical sickness or personal injury compensation
  • Proceeds from life insurance
  • Scholarships

Video explaining the difference between gross income and net income: