Gross Income Overview and Tax Rules

Gross income includes all income from whatever source derived unless specifically excluded.
Noncash income is measured at the fair market value (FMV) of the property or services received.
Gain must be both realized (receipt of cash, property, or services, or a sale/exchange) and recognized (included on the tax return) to be taxable.
Accrual method recognizes revenue when earned (following GAAP with exceptions); Cash method recognizes revenue when actually or constructively received in cash or FMV property.

Taxable compensation includes money, FMV of property, bargain purchases, guaranteed payments to a partner (subject to self-employment tax), and employer Roth 401(k) contributions.
Premiums paid by an employer for group term life insurance are tax-free up to the first $50{,}000$ of coverage; premiums for coverage above $50{,}000$ are taxable income based on IRS tables.
Key nontaxable fringe benefits:
- Employer-paid accident, medical, and health insurance premiums and medical expense reimbursements.
- De minimis benefits and meals/lodging provided for employer convenience on business premises (lodging must be required as a condition of employment).
- Employer payment of educational expenses up to $5{,}250$ (undergraduate, graduate, or student loans).
- Adoption assistance is available up to 17,670 in 2026, but begins to phase out for Modified Adjusted Gross Income (MAGI) between 265,080 and 305,080.
- Dependent care assistance can be claimed up to 7,500 for qualifying dependents under age 13 or those who are incapacitated dependents or spouses.
- Qualified employee discounts are limited to the gross profit percentage for merchandise, while for services, the limit is 20% of the Fair Market Value (FMV).
- Qualified parking and transit passes are available up to 340 per month in 2026.
- Flexible Spending Arrangements (FSAs) allow contributions up to 3,400 in 2026, which can be deposited pretax and carry over up to 680 to the next year.

Taxable interest includes interest from federal, corporate, and industrial development bonds, installment sales, late tax refund interest, and bank account opening gifts at FMV.
Tax-exempt interest (reportable on return) includes state and local government obligations, U.S. possession bonds (e.g., Guam, Puerto Rico), and post-1989 U.S. Series EE savings bonds used for higher education (subject to 2026 MAGI phaseouts of $101{,}800$ – $116{,}800$ for single and $152{,}650$ – $182{,}650$ for MFJ).
Early withdrawal penalties for forfeited interest are included in gross interest income and deducted separately as an adjustment.

Dividends are distributions from C corporation earnings and profits (E&P) and are reported on Schedule B.
Distributions exceeding E&P reduce the stock basis (nontaxable return of capital); distributions exceeding stock basis are taxed as capital gains.
Qualified dividends are taxed at preferential long-term capital gains rates (0%, 15%, 20%) provided holding period requirements (>60 days in a 120-day window) are met.
Nontaxable distributions include return of capital, stock splits, stock dividends (unless a cash option exists), and mutual life insurance policy dividends.
Realized gain/loss on property disposition (Schedule D) equals the amount realized minus the adjusted basis.

Traditional Deductible IRA distributions of principal and earnings are 100% taxable as ordinary income.
Traditional Nondeductible IRA distributions are taxed pro-rata on earnings; principal distributions are a nontaxable return of basis.
Qualified Roth IRA distributions (held at least 5 years and distributed after age 59½, death, disability, or up to $10{,}000$ for first-time homebuyer) are completely nontaxable.
Required minimum distributions (RMDs) must start by April 1 following the year the taxpayer turns age 73 (born 1951–1959) or age 75 (born 1960 or later).
Premature distributions before age 59½ incur a 10% penalty tax unless a specific exception applies (e.g., homebuyer, medical, disability, education, adoption/birth, disaster, emergency, domestic abuse).
Fixed period annuity monthly exclusion ratio: $\text{Exclusion Ratio} = \frac{\text{Original Investment}}{\text{Expected Value}}$
Life annuity monthly return of capital: $\text{Monthly Nontaxable Return} = \frac{\text{Original Investment}}{\text{IRS Life Expectancy Factor}}$

State/local income tax refunds are taxable under the tax benefit rule if itemized deductions were taken in the prior year; they are nontaxable if the standard deduction was used.
For divorce agreements executed on or before December 31, 2018, alimony is taxable to the recipient and deductible by the payor. For agreements executed after December 31, 2018, alimony is nontaxable and non-deductible.
Child support is non-deductible and nontaxable; partial payments apply to child support first before alimony.
Lump-sum property settlements are nontaxable and non-deductible.

Net rental real estate income/loss is calculated on Schedule E (passive activity).
Unemployment compensation is 100% taxable.
Up to 50% or 85% of Social Security benefits are taxable depending on modified AGI thresholds ( $25{,}000$ single / $32{,}000$ MFJ for 50%; $34{,}000$ single / $44{,}000$ MFJ for 85%).
Final Form 1040 is filed for the year of death for income received while alive; post-death income is reported on the federal estate return.
Gambling winnings are fully taxable; gambling losses are deductible on Schedule A up to 90% of losses, capped at total winnings.
Damage awards for lost profits or punitive damages are taxable; physical injury/illness damages are nontaxable.
Foreign-earned income exclusion allows up to $132{,}900$ (2026) to be excluded under the Bona Fide Residence test or Physical Presence test (330 full days in a 12-month period).