Income under Internal Revenue Code § 61

Most, if not all, Americans either pay or know about the federal and state income tax. Yet, the word income as defined under Internal Revenue Code § 61 ("IRC") or 26 United States Code § 61 does not map to the generic definition of the word income. Most people will define income as wages or salaries received from their job or money received from their business. The Internal Revenue Service ("IRS") follows the IRC definition of the word income and it is the broad gap between the word income as understood generally and as understood by the IRS that may lead to an audit of tax returns.

IRS taxes the gross income of an individual; gross income is defined as income from whatever source derived. In other words, IRS will tax money an individual will receive or has received from any source, that is, whether it is derived from your job, your business, or parents. Additionally, § 61 includes fringe benefits as part of the income definition. This means that any free cup of coffee or donuts at workplace are technically income under IRC § 61. This definition is broad enough to include any interest, dividend, royalty, commissions, real property dealings, income from life insurance contracts, forgiveness of debts; the list is non-exhaustive.

If you are thinking that basically everything can be classified as income; you are absolutely right! Good news, due to high administrative costs or through Congressional grace, not everything that can be classified as income is taxed as such. This is why the word AGI (Adjusted Gross Income) appears on your tax return; only the adjusted gross income, after credits and deductions, is taxed.

For questions or inquiries, please contact Singh Tax Services at (661) 599-8884 or email us at singhtaxcenter@gmail.com.

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