Definition of Gross Income: What’s Included, Excluded, and AGI

For federal tax purposes, the definition of gross income is all income from whatever source derived, unless a specific provision of the tax code excludes it. That phrase comes straight from Section 61 of the Internal Revenue Code, and courts have read it to reach every “undeniable accession to wealth, clearly realized, and over which the taxpayer has complete dominion.”¹² The practical default: if money, property, or services increase your wealth, they belong in gross income unless you can point to a statute that lets them out.

That default matters because the burden runs against you. The IRS does not have to prove a receipt is taxable. You have to identify the exclusion that keeps it off your return.

What Counts as Gross Income

Section 61 lists fourteen categories, and the list is explicitly non-exhaustive. The sources below are the ones that show up most often on individual returns.

Pay for Work

Salary, hourly wages, tips, bonuses, commissions, and fringe benefits are all gross income, whether they arrive on a W-2 or a 1099.² Severance is included because it replaces wages. Unemployment compensation is included by a separate rule that says so directly.³

Investment and Property Income

Interest from bank accounts and bonds, dividends from stocks, and annuity payments all count.² When you sell an asset for more than your cost basis, the profit is a capital gain and goes into gross income. Only the gain, not the total sale price. Buy stock for $10,000, sell it for $14,000, and $4,000 is what enters gross income.⁴

Business, Rent, and Royalties

If you run a business, the net profit is part of your gross income. Rent from property you own and royalties from intellectual property go in on the same footing.²

Barter and Non-Cash Compensation

Gross income is not limited to cash. Trade services with someone (say, tax prep for plumbing work) and each of you must include the fair market value of what you received. The rule applies to informal one-off trades between individuals, not just to organized barter exchanges.⁵ A Form 1099-B may or may not arrive; the tax is owed either way.

Prizes, Awards, and Illegal Income

Lottery winnings, game show prizes, and contest awards are gross income. So is income from illegal activity. The “whatever source” language does not stop to check whether the source was lawful.²

Alimony (Depends on the Date)

Alimony received under a divorce or separation agreement executed before 2019 is taxable to the recipient and deductible by the payer. Agreements executed after December 31, 2018, flip that treatment: the recipient owes no tax on the alimony and the payer gets no deduction.⁶ An older agreement modified after 2018 keeps its original treatment unless the modification expressly adopts the new rule.⁷

Canceled Debt

When a lender forgives what you owe, the forgiven amount is gross income to you. If a $15,000 credit card balance is settled for $9,000, the $6,000 the lender wrote off is income. It gets reported on Form 1099-C, and the IRS expects to see it on your return.⁸ You received the borrowed money tax-free only because you had an obligation to repay; when the obligation goes away, the benefit becomes real.

Several exceptions can keep canceled debt out of gross income:

Debt discharged in a bankruptcy case.
Debt forgiven while you are insolvent (your liabilities exceed the fair market value of your assets), but only up to the amount of your insolvency.
Qualified farm debt and certain real property business debt.⁹
Qualified principal residence mortgage debt discharged before January 1, 2026, or under a written arrangement entered into before that date.¹⁰

Claiming any of these exclusions generally requires filing Form 982 and reducing tax attributes such as loss carryovers or the basis in your assets by the excluded amount. The exclusion shifts the tax consequence rather than erasing it.

What Is Excluded from Gross Income

Congress has written specific carve-outs for policy reasons: encouraging charitable giving, protecting people in hardship, avoiding double taxation. If a receipt fits one of these categories, it stays out of gross income entirely.

Gifts and Inheritances

Money or property received as a gift or inheritance is not gross income to the recipient. The giver may owe gift tax and a large estate may owe estate tax, but the person receiving the transfer owes no income tax on it.¹¹ The exclusion covers only the transfer itself. Rent from an inherited house or dividends from inherited stock are taxable to you like any other income.

Life Insurance Death Benefits

Life insurance proceeds paid because the insured person died are excluded from the beneficiary’s gross income, whether the payout goes to an individual, a trust, or the insured’s estate, and whether it arrives as a lump sum or in installments.¹² If you take installments, any interest the insurer credits on the unpaid balance is taxable. The death benefit itself is not.

Municipal Bond Interest

Interest on bonds issued by a state or local government is generally excluded from federal gross income.¹³ Certain private-activity bonds are an exception and can trigger federal tax, so the exclusion is not absolute.

Workers’ Compensation

Payments received under a workers’ compensation law for a job-related injury or illness are excluded from gross income.¹⁴ The exclusion is tied to the workers’ compensation system specifically. Disability payments from other sources follow different rules.

Qualified Scholarships

A scholarship used for tuition, required fees, books, supplies, and equipment at a degree-granting institution is excluded from gross income.¹⁵ Money used for room, board, or living expenses is taxable. Stipends for teaching or research assistantships are treated as compensation and are taxable as well.

Employer-Provided Health Coverage

Premiums your employer pays for your health insurance are excluded from your gross income. The benefit never appears on your W-2 as taxable wages, which is why many employees never notice the exclusion.¹⁶

Foreign Earned Income

U.S. citizens and resident aliens living and working abroad can exclude up to $132,900 of foreign earned income from gross income for tax year 2026, if they meet either the bona fide residence test or the physical presence test.¹⁷ The figure adjusts each year for inflation. The exclusion covers earned income such as wages and self-employment pay. Investment income earned abroad is not covered.

Social Security Benefits Sit in the Middle

Social Security retirement benefits are neither fully taxable nor fully excluded. How much lands in gross income depends on your “combined income,” which is roughly your adjusted gross income plus nontaxable interest plus half of your Social Security benefits.

Combined income below $25,000 (single) or $32,000 (married filing jointly): none of your benefits are taxable.
$25,000 to $34,000 (single) or $32,000 to $44,000 (joint): up to 50% of benefits may be included in gross income.
Above $34,000 (single) or $44,000 (joint): up to 85% may be included.

These thresholds are set by statute and are not indexed for inflation, so more retirees cross them each year as other income rises.¹⁸ If you are married filing separately and lived with your spouse at any point during the year, up to 85% of your benefits are includable regardless of income level.¹⁹

Gross Income Is Not the Same as AGI

Gross income is the starting line. Your adjusted gross income (AGI) is what you get after subtracting a specific group of “above-the-line” deductions from gross income, and you can take those deductions whether or not you itemize.²⁰ Deductible IRA contributions, up to $2,500 of student loan interest, half of self-employment tax, HSA contributions, and up to $250 of unreimbursed educator expenses are common examples.²¹

The distinction matters because eligibility for many downstream tax benefits is measured against AGI, not gross income. The Child Tax Credit begins phasing out at $200,000 of AGI for single filers and $400,000 for joint filers.²² The medical expense deduction only covers costs above 7.5% of AGI.²³ When a form or program asks for your “income,” check which figure it wants; the two are rarely equal.

1
Legal Information Institute. Commissioner of Internal Revenue v. Glenshaw Glass Co.
2
Office of the Law Revision Counsel. 26 U.S. Code 61 – Gross Income Defined
3
Office of the Law Revision Counsel. 26 USC 85 – Unemployment Compensation
4
eCFR. 26 CFR 1.61-6 – Gains Derived from Dealings in Property
5
Internal Revenue Service. Topic No. 420 – Bartering Income
6
Internal Revenue Service. Topic No. 452 – Alimony and Separate Maintenance
7
Internal Revenue Service. Alimony, Child Support, Court Awards, and Damages
8
Internal Revenue Service. About Form 1099-C, Cancellation of Debt
9
Office of the Law Revision Counsel. 26 USC 108 – Income from Discharge of Indebtedness
10
Internal Revenue Service. Topic No. 431 – Canceled Debt, Is It Taxable or Not
11
Office of the Law Revision Counsel. 26 U.S. Code 102 – Gifts and Inheritances
12
Office of the Law Revision Counsel. 26 U.S. Code 101 – Certain Death Benefits
13
Office of the Law Revision Counsel. 26 U.S. Code 103 – Interest on State and Local Bonds
14
Office of the Law Revision Counsel. 26 U.S. Code 104 – Compensation for Injuries or Sickness
15
Office of the Law Revision Counsel. 26 USC 117 – Qualified Scholarships
16
Internal Revenue Service. Revenue Ruling 2002-3, Section 106 – Contributions by Employer to Accident and Health Plans
17
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
18
Office of the Law Revision Counsel. 26 USC 86 – Social Security and Tier 1 Railroad Retirement Benefits
19
Internal Revenue Service. IRS Reminds Taxpayers Their Social Security Benefits May Be Taxable
20
Office of the Law Revision Counsel. 26 U.S. Code 62 – Adjusted Gross Income Defined
21
Internal Revenue Service. Topic No. 456 – Student Loan Interest Deduction
22
Internal Revenue Service. Child Tax Credit
23
Internal Revenue Service. Topic No. 502 – Medical and Dental Expenses