Individual Taxation: Gross Income

Formula

Gross income − adjustments = adjusted gross income (AGI) − standard or itemized − qualified business income (QBI) and other deductions = taxable income.

Taxable

Wages · interest (Treasury too) · dividends · prizes and gambling · unemployment · cancellation of debt (unless bankruptcy or insolvency) · pre-2019 alimony · up to 85% of Social Security · punitive damages · scholarship room and board.

Excluded

Gifts and inheritances · life insurance death benefits · municipal bond interest · physical injury damages · scholarship tuition and books · child support · post-2018 alimony · foreign earned income up to $132,900 (2026).

Rules

• Constructive receipt; assignment of income to the earner.
• State refund taxable only if deducted with benefit.
• Kiddie tax: child's unearned income at parents' rate.

Loss limits (in order)

Basis → at-risk → passive → excess business loss.

• Portfolio income is not passive.
• Active rental: up to $25,000; phase-out 50% over $100,000–$150,000 modified AGI.
• Suspended passive losses released on full disposal.

Exam traps

• Life insurance paid in installments: the interest element of each payment is taxable.
• Disability benefits are taxable if the employer paid the premiums, and excluded if the employee paid them with after-tax money.
• Damages for emotional distress are taxable unless they flow from a physical injury.
• Constructive receipt: a check received on December 31 is income that year, even if deposited in January.