Understanding Gross Income

Understanding Gross Income Gross income is the figure from which an individual or an entity’s taxable income is derived from. ● It includes all types of income regardless of the source, unless it is ruled out by the provisions of the law. Gross income is all the income that an individual earns and this may include wages and salaries, interests on investment, dividends received from shares, rents received from property, business income and gains made in the sale of investment assets. - According to the Internal revenue Code (IRC), gross income is widely defined which makes sure that it encompasses the entire measure of economic benefit a taxpayer was able to receive in the year under consideration. Looking at the nature of gross income, it would be notable to know the usual source of gross income that is deserved by the population of South Africa. 1. Wages and Salaries: This is done in areas of remunerations for services provided, which include bonuses, commissions and other fringes. 2. Interest and Dividends: Money that is earned from interest on savings accounts, bonds, stocks and anyone, you know investments. 3. Business and Self-Employment Income: Amount received from business activities as an employee or from a business and as self-employed person such as freelancer. 4. Rental Income: Profits that are derived from the sale and/or renting of property after the deduction of allowable expenditures in connection with the rental business. 5. Capital Gains: Income from other businesses that devote a part of their earnings as capital gains from the selling of commodity like stocks and bonds or real property. - The amount by which the purchase price exceeds the selling price is capital gains that can either be short term or long term depending on the period of holding of the asset. 6. Retirement Income: This comprises of the distributions for retirement accounts such as 401(k), pension, and IRA. These are subject to taxation wholly or partially depending on the type of account and the age of the taxpayer. Exclusions from Gross Income ● Everyone interested to understand gross income should know that all income, which is earned during the year is not considered. ● There are cases under the IRC where specific forms of income are excluded in order to avoid some revenues from being taxed twice, as a result of their social use, or to promote certain economic activities. Some common exclusions include: 1. Gifts and Inheritances: For instance, one does not pay taxes on gifts or heirlooms that one is granted by other people or on death by a relative. - However the person tendering the gift may be liable for gift tax depending on the value of the gift give. 2. Life Insurance Proceeds: Amount received under life insurance policies where the amount is received after the demise of the insured is considered exempted from gross income. - This exclusion it aimed at seeing that the beneficiaries receive financial support without having to pay taxes. 3. Municipal Bond Interest: Thus, income tax on the interest earned from municipal bonds is not a federal issue and may also not be state issue depending on the type of the bond in this case, the bond is a state bond, thus the tax may not be applied. 4. Scholarships and Fellowships: Scholarships or fellowships for tuition, fees, and required course materials, if the recipient is a degree candidate for income received for teaching or research please refer to section 1095, are not included in gross income of the recipient. 5. Compensation for Injuries or Sickness: Amounts received for personal physical injuries or sicknesses which include workers compensation and certain damages in the lawsuits are not inclusive of gross income. For doing this, we will compare the two forms of income recognition: Constructive Receipt and Cash as against Accrual Accounting. ● Constructive Receipt: The doctrine of the constructive receipt specifies that income is considered earned as soon as it is available to the taxpayer even if physically did not arrive in the form of money or other property. - For instance, a check received on December 31st in a given tax year will readily be considered income even if the check is encashed the following year.