INCOME

 

For tax purposes, there are many types of income, and understanding the differences is a vital part of understanding income tax law. Gross income is defined in Section 26 of the U.S. Code as all income from all sources. This can include:

 

• Payment for services, including wages and fees

• Payment of debt owed to you

• Interest income

• Business income

• Rent

• Royalties

• Inheritance from an individual, estate or trust

• Life insurance payments

• Alimony

• Endowments

• Pensions

• Income from illegal activities

 

Some payments are not included in gross income. Businesses are exempted from paying taxes on income borrowed against business or personal assets. The Regulatory Code defines certain non-wage benefits as “fringe benefits”, excluded from income. Capital investment returns are not taxable: if you sell a business or business asset, only the profits are taxable.

 

Adjusted gross income subtracts allowable adjustments from gross income before deductions or personal exemptions are applied. These adjustments include health insurance for self-employed individuals and contributions to IRAs. Taxable income is the sum left after these deductions are subtracted from the adjusted gross income.

 

To avoid mistakes and maximize your return, you should consult with an experienced tax law attorney.