Generally speaking, income is financial gain derived from:

  • Labor (work)
  • Capital (money)

or a combination of the two.

Financial gain derived from labor is generally referred to
as wages.

Unless specifically exempt or excluded by law, all income
is subject to income tax and is reported on a tax return.

Gross income is all worldwide income from whatever source derived, unless specifically excluded by law.

There are also two types of gross income:

  • Earned
  • Unearned

Gross income means all worldwide income from
whatever source derived, unless specifically excluded
from taxation by law.

Gross income includes income realized in any form,
whether in money, property, or services.

Included in Gross income

  • Net income derrived from bussines
  • Royalties
  • Alimony and separate maintenance payments
  • Pensions
  • Rents

Excluded from Gross income

  • life insurance payments if paid  by reason on the death of the insured
  • Gifts and inheritance
  • Compensation for persona injuries
  • Qualified sholarships and fellowships
  • Dister relief paymen

Earned income is received for services performed. Some examples are wages, commissions, tips, and, generally, farming and other business income.

Note: Disability retirement benefits qualify as earned
income until the taxpayer reaches minimum retirement
age. Social security disability payments, social security disability insurance (SSI) payments, and military disability pension payments are not considered earned income.

Unearned income is income that does not meet
the definition of earned income. It includes money received
for the investment of money or other property, such as
interest, dividends, rents, and royalties. It also includes
pensions, alimony, unemployment compensation, and
other income that is not from performing services.

Note: Social security benefits may be included in taxable
income. Benefits are included in the taxable income (to the
extent they are taxable) of the person who has the legal
right to receive the benefits.

income typeearn or unearnedInclude or not include
interest from saving accountunearnedincludible
interst for state bondunearnedexcluded
tips received from waiting tableearnedincludible
unemplyment compensationunearnedincludible
Birthday gift from a friedunearnedexcluded

The five forms used to report
individual income tax are:

  • Form 1040EZ-With only 12 lines, Form 1040EZ is
    the simplest to complete. This chapter focuses primarily on this form.
  • Form 1040A-Form 1040A, popularly referred to as “the short form,” is getting fairly long as new items are added almost every year.
  • Form 1040-Form 1040, also known
    as “the long form,” is the
    most comprehensive of
    the three forms.

Notice the sections in Forms 1040A and 1040 where you enter income, adjustments, deductions, credits, and other taxes and payments.  All of these items will be discussed in detail during the course. Generally, additional schedules and forms are required when a taxpayer uses Form 1040A, Form 1040, Form 1040NR, or Form 1040PR.

  • The Form 1040NR and Form 1040PR are shown. However, this courses does not cover the completion of Forms 1040NR/1040P.
  • Form 1040NR
  • Form 1040PR

U.S. citizens and resident aliens
are required to file Form 1040EZ,
Form 1040A, or Form 1040.

Nonresident aliens who are
required to file a U.S. return file
Form 1040NR. Residents of
Puerto Rico file Form 1040PR.