Module 1 · Tax Formulas and Credits · Lesson 2 of 10

Gross income: what counts

Taxable and excluded income, and why gross income is only a starting point.

In this lesson · about 10 minutes

  • Recognize the common kinds of taxable income
  • Spot money that is excluded from gross income
  • Explain why gross income is not the number tax is calculated on

  1. All of your income, whether from a salaried job, working for yourself, or interest on savings and investments. It is not the number the IRS taxes; it is the base for AGI.

    Form 1040, lines 1–9

We are at the very top of the formula.

Gross income typically means all of your income, whether it comes from a salaried job, working for yourself, or interest on savings and investments. The tax code starts from a broad rule: income from whatever source derived is included unless a specific law excludes it.

But gross income is not the number the IRS uses to calculate tax. It is the base for adjusted gross income, which is where the federal calculation really begins.

Common income that counts

  • Wages, salaries, bonuses and tips (Form W-2, box 1)
  • Self-employment profit, which is business income minus business expenses (Schedule C)
  • Interest and dividends (Forms 1099-INT and 1099-DIV)
  • Capital gains from selling stock, crypto or property (Form 8949, Schedule D)
  • Retirement distributions: pensions, traditional IRA and 401(k) withdrawals (Form 1099-R)
  • Rental income (Schedule E), unemployment (Form 1099-G), gambling winnings, and part of Social Security once other income passes certain levels

Common money that does not count

  • Gifts and inheritances received
  • Life insurance paid because someone died
  • Child support received
  • Interest on most municipal bonds
  • Qualified Roth IRA withdrawals
  • Employer-paid health insurance

Sorting drill

Taxable or excluded?

Click each item, then pick where it belongs. You will see why after each answer.

  • $2,400 of tips from waiting tables
  • $15,000 inherited from a grandparent
  • $900 of interest from a savings account
  • $6,000 of child support
  • $4,300 profit driving for a rideshare app
  • $300 of interest on a California municipal bond
  • $1,200 won at a casino
  • A $500 birthday gift from a parent

0 of 8 sorted

Check your understanding0 of 2 correct

Question 1

1.A client sold shares of stock for more than they paid. Where does that show up?

Question 2

2.Why isn't gross income the number the IRS taxes?

Quiz score: 0 of 2

Tip: answer every quiz question correctly first.

For learning only, not tax advice. Figures are federal for tax year 2025 and simplified; phase-outs and special rules are not all shown. Check current IRS instructions before preparing a return.