What is Income?

Generally speaking, income is financial gain derived from labor (work), capital (money) or a combination of the two. Unless specifically exempt or excluded by law, all income is subject to income tax and is reported on the tax return.

Gross income is total worldwide income received in the form of money, property, or services that is subject to the tax. There are two types of gross income:

• Earned income is received for services performed. Some examples are wages, commissions, tips, and generally, farming and other business income.
• Unearned income is taxable income that does not meet the definition of earned income. It includes money received for the investment of money or other property, such as interest, dividends, and royalties. It also includes pension, alimony, unemployment compensation, and other income that is not from performing service.

Non taxable income is by law exempt from tax. Exempt income includes child support, municipal bond interest, welfare benefits, VA benefits, various military allowances, workers' compensation, gifts, and life insurance proceeds paid to the death of the insured.

Gross Income

There are two aspects to determining gross income:

1. Who owns the income, and
2. What income should be reported on a tax return.

Ownership of income is determined by state law. The laws regarding the ownership of income and property in most states are based on British common law. These states are called separate property states. In separate property states, income belongs to the person who earned it or who owns the property that produced the income.

Nine states are community property states. With the exception of Wisconsin, the laws of community property states are based on Spanish civil law. Generally, in community property states, income received by a married couple for services performed is considered to belong half to the husband and half to the wife regardless of which of them earned the income. The laws regarding the ownership of income from property vary among these states. The nine community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Generally, ownership of the income of a married couple needs to be determined only if they file separate returns.

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