Legal Definitions - income

In legal terms, income refers to any economic benefit or value that an individual or business entity receives, which increases their wealth. This can come from various sources, such as compensation for work, profits from a business, returns on investments, or even certain government benefits.

For the purpose of U.S. federal income tax, income is categorized into three main types:

• Gross Income: This is the total amount of money or value you receive from all sources before any deductions or expenses are subtracted. It's a very broad concept, encompassing nearly everything that adds to your economic well-being.
• Adjusted Gross Income (AGI): This is calculated by taking your Gross Income and subtracting specific deductions allowed by law. These deductions can include things like contributions to certain retirement accounts, student loan interest, or health savings account contributions. AGI is an important figure because it often determines eligibility for other tax credits and deductions.
• Taxable Income: This is the final amount of income on which you actually pay taxes. It's derived by taking your Adjusted Gross Income and further subtracting any standard deduction or itemized deductions you are eligible for.

Here are some examples to illustrate the concept of income:

• Example 1: A Freelance Web Developer

  Maria works as a freelance web developer. Throughout the year, she receives payments from several clients for designing and building websites. She also earns a small amount from selling templates on an online marketplace. All these payments, totaling $70,000, constitute her Gross Income. To calculate her Adjusted Gross Income, Maria subtracts her business expenses, such as the cost of her design software, internet service, and professional development courses, which total $10,000. Her AGI is therefore $60,000. After taking the standard deduction, her remaining income, say $45,000, becomes her Taxable Income, on which she will pay federal income tax.

• Example 2: An Investor and Landlord

  David owns shares in several companies and also rents out a small apartment building. In a given year, he receives $5,000 in dividends from his stock investments and collects $24,000 in rent from his tenants. He also sold some old antique furniture online for a profit of $1,000. His total Gross Income from these sources is $30,000. David can deduct expenses related to his rental property, such as property taxes, mortgage interest, and maintenance costs, totaling $12,000. These deductions reduce his Adjusted Gross Income to $18,000. After further deductions, the final amount, for instance $10,000, is his Taxable Income.

• Example 3: A Retiree Receiving Benefits and a Gift

  Eleanor is retired and receives monthly Social Security benefits. She also has a small pension from her former employer. Additionally, she won $500 in a local lottery. All these amounts—her Social Security benefits (a portion of which may be taxable), her pension, and her lottery winnings—are considered part of her Gross Income. While Social Security benefits have specific rules regarding their taxation, and she might have deductions for medical expenses, the combined total of these receipts represents the broad concept of income that increases her economic resources. The portion remaining after all allowable deductions and adjustments would be her Taxable Income.