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Income is money or value that an individual or business entity receives in exchange for providing a good or service or through investing capital. Investopedia. Commonly used in economics is the Haigs-Simon model of income, which considers the following income: wages, salary, commissions, business profits, interest from securities and bank accounts, tips, and rental income; transfer payments; gifts of inheritances; income in kind (e.g. the value of free parking providing by an employer); the net increase in the real value of a person’s assets.

The 16th Amendment allows the federal government to tax income. State governments may also have their own income state regime, but it generally does not vary widely from that of the federal government. For example, New York’s Tax Code defines their taxable income in reference to the federal income tax regime.

For the purpose of U.S. federal income tax, income is divided into gross income, adjusted gross income, and taxable income.

  • Gross Income: includes “all income from whatever source derived.” 26 U.S.C. § 61. For example, it includes, but is not limited to, the following: compensation for services, income derived from business, gains derived from dealings in property, interest, rents, royalties, dividends, annuities, income from life insurance, pensions, income from discharge of indebtedness, etc. As an example of the broadness of gross income, in Commissioner v. Glenshaw Glass Co., the Supreme Court found that the punitive aspect of the treble damages that a company won in an anti-trust suit was included in gross income. 
  • Adjusted Gross Income: Gross income minus allowable deductions.
  • Taxable Income: The income subject to government taxation after allowable deductions are taken and adjustments are made.

[Last updated in August of 2020 by the Wex Definitions Team]