Gross Income - Exclusions From Gross Income

Exclusions From Gross Income

Gross income includes "all income from whatever source derived." The courts have consistently given very broad meaning to this phrase, interpreting it to include all income unless a specific exclusion applies. Certain types of income are specifically excluded from gross income. These may be referred to as exempt income, exclusions, or tax exemptions. Among the more common excluded items are the following:

• Tax exempt interest. For Federal income tax, interest on state and municipal bonds is excluded from gross income. Some states provide an exemption from state income tax for certain bond interest.
• Social Security benefits. The amount exempt has varied by year. The exemption is phased out for individuals with gross income above certain amounts.
• Gifts and inheritances. However, a "gift" from an employer to an employee is considered compensation, and is generally included in gross income.
• Life insurance proceeds.
• Compensation for personal physical injury or physical sickness, including:
  • Amounts received under worker’s compensation acts for personal physical injuries or physical sickness,
  • Amounts received as damages (other than punitive damages) in a suit or settlement for personal physical injuries or physical sickness,
  • Amounts received through insurance for personal physical injuries or physical sickness, and
  • Amounts received as a pension, annuity, or similar allowance for personal physical injuries or physical sickness resulting from active service in the armed forces.
• Scholarships. However, amounts in the nature of compensation, such as for teaching, are included in gross income.
• Certain employee benefits. Non-taxable benefits include group health insurance, group life insurance for policies up to $50,000, and certain fringe benefits, including those under a flexible spending or cafeteria plan.
• Certain elective deferrals of salary (contributions to "401(k)" plans).
• Meals and lodging provided to employees on employer premises for the convenience of the employer.
• Foreign earned income exclusion for U.S. citizens or residents for income earned outside the U.S. when the individual met qualifying tests.
• Income from discharge of indebtedness for insolvent taxpayers or in certain other cases.
• Contributions to capital received by a corporation.
• Gain up to $250,000 ($500,000 on a married joint tax return) on the sale of a personal residence.

There are numerous other specific exclusions. Restrictions and specific definitions apply.

Some state rules provide for different inclusions and exclusions.