What Everyone Ought to Know About Their Income Tax Returns – Part 2

Tax

THE SIMPLE GUIDE TO GROSS INCOME

In Part 1, I introduced you to two key components at the beginning of your Form 1040. Now we get down to business and dissect the foundation of your return – your gross income.

What is gross income?

The IRS defines gross income (also referred to as total income) as: “all income from whatever source derived.”

Internal Revenue Code Section 61(a) goes on to list some examples:

  • Compensation for services, including fees, commissions, fringe benefits, and similar items
  • Gross income derived from business
  • Gains derived from dealings in property
  • Interest
  • Rents  
  • Royalties
  • Dividends
  • Alimony and separate maintenance payments
  • Annuities
  • Income from life insurance and endowment contracts
  • Pensions
  • Income from the discharge of indebtedness
  • Distributive share of partnership income
  • Income in respect of a decedent
  • Income from an interest in an estate or trust

As you can see, the definition pretty much covers everything. Simply put, your gross income is anything and everything that you have earned.

Gross income doesn’t include just cash. The value of services you trade in a barter transaction (e.g., exchanging legal services for dental services) also counts as part of your gross income. In addition, as described above, debt that you don’t have to pay back counts.

Gross income is just the start to a giant math problem

Adding up everything you earn seems tedious and overwhelming. However, the fundamental take away from gross income isn’t a numerical figure, it’s the understanding that gross income begins what results in a giant math problem.

Your tax return identifies how much tax you will pay on your income. You start with the gross income figure, then make some adjustments, deductions, and allowances until you get a final amount that the government taxes (your taxable income). 

Yes, you will run into many complexities (after all the tax code is almost 74,000 pages long). For example, you may get pension, annuity, or social security income that counts as gross income but isn’t taxable.  As a result, you leave out some or all of that income in your total calculation.

Rather than getting caught up in the Code’s complexities, use the income documents you receive (W2, 1099, 1099-INT, etc. ) and any tax software to guide you through the math problem.

Tricks of the Trade

  • Take time to read the form: The Form 1040 itself can be surprisingly helpful in navigating from one line to another. Take time to read it to better understand how to work your way through each section.
  • Use Publication 17: If you can’t figure out how to treat the different parts of your income, the IRS gives you a guidebook: Publication 17. Again, use your income documents and how you earned your income (wages, real estate, self-employment) to learn the nuances of your particular income source.
  •  Move step by step: Remember gross income starts your math problem. So make sure that you have included all of your income and then move to the next step.

While it seems simple and self explanatory that your income tax return revolves around your income, many people let the anxiety and fear of tax overwhelm them. Breaking the return into separate parts, like first figuring out your gross income, will allow you to overcome your trepidation.

Speaking of steps, you have now completed the initial step of totaling all of your income. Next we get to subtract from this figure to calculate adjusted gross income. 

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