A taxpayer wins $40,000 in a slot tournament, inherits a $300,000 brokerage account, and collects $8,000 in municipal bond interest. One hits the return at full value, one is completely off the return, one depends on what the property does next.
HIGH-FREQUENCY: §61 defines gross income as "all income from whatever source derived." Cash, property, services, barter, debt forgiveness, illegal income: all gross income unless the Code points to a specific exclusion. Congress wrote §61 broadly because every targeted carve-out lets some economic gain escape tax.
KEY: When asked whether something is gross income, start with "yes." Then look for a specific exclusion. If you cannot name the Code section, it is taxable.
Wages, salaries, tips, bonuses, commissions, severance: all gross income. Tips of $20+ per month must be reported to the employer.
Interest income. Bank deposits, CDs, corporate bonds, Treasuries (federally taxable, state-exempt), and seller-financed loans are taxable. State and local government bond interest is excluded under §103 but reported on Form 1040 line 2a, and it feeds the Social Security taxability calculation, net...
Common mistakes
- Including inherited or gifted cash. §102 covers both. Adding the $75,000 inheritance or the $30,000 gift to Dana's $88,400 gross income produces traps at $118,400 or $163,400. §102 excludes the transfer; only post-transfer income is taxable.
- Taxing the state refund despite the standard deduction. A state refund is income only if the taxpayer itemized AND received a tax benefit from the state tax deduction in the prior year. Including $1,200 inflates Example 1's gross income to $89,600.
- Including 100% of Social Security benefits. Maximum taxable portion is 85%, never 100%. Including the full $18,000 (instead of $15,300) overstates gross income by $2,700. Run the provisional income formula first.
Bottom line
- Section 61: gross income is all income from whatever source derived unless a specific Code section excludes it. Default is "yes, taxable."
- Constructive receipt asks when (income is taxable when available without substantial restriction). Assignment of income asks who (taxed to the earner).
- Social Security provisional income = modified AGI + 50% of benefits + tax-exempt interest. Taxable portion is 0%, 50%, or 85%, never 100%.
- Cancellation of debt is gross income, excepted only by bankruptcy, insolvency (to the extent insolvent), and qualified principal residence indebtedness.
Exam shortcut
When a question lists six income items and asks for gross income, start at the §61 default: every item is in. Then back out only items with a named exclusion. If you cannot point to a Code section, the item is taxable. For Social Security, when other income is well above the upper provisional threshold, jump straight to 85% of benefits and skip the formula.
The full lesson (about 2,900 words, 19 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- IV.A1
Browse all free CPA REG lessons or jump into free CPA REG practice questions.