8513 / What is gross income?

Gross income is the starting point in computing the taxable income upon which individuals are subject to income tax. Gross income is a broad concept that includes all income (whether derived from labor or capital) excluding those items that are specifically identified by statute, and, thus, not taxable. For example, gross income includes salary, fees, commissions, business profits, interest and dividends, rents, alimony received prior to 2019, and gains from the sale of property – but not the mere return of capital expended by the taxpayer to purchase or improve the property.¹

Planning Point: Note that unemployment compensation is typically included in gross income. For 2020 only, the American Rescue Plan Act (ARPA) excluded the first $10,200 ($24,000 for joint returns) in unemployment compensation from income. The exclusion applies only for taxpayers with modified adjusted gross income that does not exceed $150,000.

The following is a non-exhaustive list of items that are excluded from gross income and received income tax-free by an individual taxpayer:

1. Gifts and inheritances²

2. Gain (within limits) from the sale of a personal residence (see Q 8647)

3. 50 percent of gain (within limits) from the sale of certain qualified small business stock held for more than five years (see Q 8608)

4. Interest on many bonds issued by a state, city or other political subdivision

5. Social Security and railroad retirement benefits (within limits – see Q 8569 to Q 8572); veterans’ benefits (but retirement pay is taxable)³

6. Workers’ Compensation Act payments (within limits)⁴

7. Death proceeds of life insurance and, as to death proceeds of insurance on the life of an insured who died before October 23, 1986, up to $1,000 annually of interest received under a life income or installment option by a surviving spouse⁵

8. Amounts paid or expenses incurred by an employer for qualified adoption expenses in connection with the adoption of a child by an employee if the amounts are furnished pursuant to an adoption assistance program⁶

9. Contributions to a “Medicare Advantage MSA” by the Department of Health and Human Services⁷

10. Exempt-interest dividends from mutual funds

11. Interest on certain U.S. savings bonds purchased after 1989 and used to pay higher education expenses (within limits)⁸

12. Contributions paid by an employer to Health Savings Accounts (HSAs)⁹

13. Distributions from HSAs used to pay qualified medical expenses¹⁰

14. Federal subsidies for prescription drug plans.¹¹

1.   IRC § 61(a).