Gross income: broadly defined
IRC Section 61 defines gross income as "all income from whatever source derived" — a deliberately broad definition. Unless the Code specifically excludes an item, assume it's taxable.
Commonly taxable items
- Wages, salaries, bonuses, and tips
- Interest income (with municipal bond interest as a key exception — see below)
- Dividends
- Business and rental income
- Alimony from divorce/separation agreements executed before 2019 (post-2018 agreements: not taxable to recipient, not deductible by payer)
- Gambling winnings (in full — losses are only deductible as an itemized deduction, up to winnings)
- Prizes and awards (with narrow exceptions)
IMPORTANT — the 2019 alimony flip: For divorce/separation instruments executed after December 31, 2018, alimony is not deductible by the payer and not taxable to the recipient — the opposite of the pre-2019 rule. Watch for the execution date in exam scenarios.
Common exclusions
| Item | Treatment |
|---|---|
| Municipal bond interest | Excluded from federal gross income |
| Life insurance proceeds (death benefit) | Excluded, with narrow exceptions (e.g., transfer for value) |
| Gifts and inheritances received | Excluded to the recipient (though income later earned on them is taxable) |
| Child support received | Excluded |
| Employer-provided health insurance premiums | Excluded to the employee |
| Scholarships | Excluded to the extent used for tuition and required course materials (room/board is taxable) |
EXAMPLE: A taxpayer receives $5,000 in municipal bond interest and $3,000 in corporate bond interest during the year. Only the $3,000 of corporate bond interest is included in gross income; the municipal bond interest is excluded (though it may still affect the taxability of Social Security benefits).
Social Security benefits
Up to 85% of Social Security benefits can be taxable, depending on the taxpayer's "provisional income" (AGI + tax-exempt interest + 50% of Social Security benefits) relative to threshold amounts — a frequently tested calculation.
EXAM TIP: When a question lists several income items and asks for "gross income," go through each item and default to taxable unless you can specifically name the exclusion that applies.