A more thorough explanation:

Income refers to the money or value that an individual or business entity receives in exchange for providing a good or service or through investing capital. This can include:

• Wages, salary, commissions, and business profits
• Interest from securities and bank accounts
• Tips and rental income
• Transfer payments, gifts, and inheritances
• Income in kind, such as the value of free parking provided by an employer
• The net increase in the real value of a person's assets

The federal government is allowed to tax income under the 16th Amendment, and state governments may also have their own income tax regimes. For example, New York's Tax Code defines taxable income in reference to the federal income tax regime.

For federal income tax purposes, income is divided into three categories:

• Gross income: includes all income from whatever source derived, such as compensation for services, income from business, gains from property, interest, rents, royalties, dividends, annuities, income from life insurance, pensions, income from discharge of indebtedness, and more.
• 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.

For example, if someone earns $50,000 in wages and $5,000 in rental income, their gross income would be $55,000. If they have $10,000 in allowable deductions, their adjusted gross income would be $45,000. Finally, if their taxable income is subject to a 20% tax rate, they would owe $9,000 in federal income taxes.