What is gross income, and what does it mean for tax purposes?

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In a Nutshell

Gross income means all of your income, whether it’s from working a salaried job, making money working for yourself, or gaining interest on savings or investments. But it’s not the number the IRS actually uses to calculate your federal income tax obligation. Instead, gross income serves as the basis for determining adjusted gross income, which is where federal tax calculations really begin.
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This article was fact-checked by our editors and a member of the Credit Karma product specialist team, led by Senior Manager of Operations Christina Taylor. It has been updated for the 2020 tax year.

Keeping track of how much tax you might owe when Tax Day comes around — or how much refund you might be due — is always a good idea.

To estimate your federal tax obligation, the starting point is your adjusted gross income, or AGI — your income after making adjustments but before taking any tax deductions. But to determine your starting point, you’ll need an important piece of information: your gross income.

Let’s look at how the IRS defines gross income and what role this number plays in calculating your total tax obligation each year.

Knowing what the IRS says you should include in gross income and what you might be able to exclude from tax calculations can help you file an accurate return and pay the correct amount of federal income tax.

What does “gross income” mean?

Does the concept of “gross income” seem obvious? When it comes to taxes, identifying your gross income isn’t quite as simple as just looking at your annual salary.

The IRS considers all of the income you received — including money, goods, property or services — to be part of your gross income, unless it’s specifically exempt from taxation. This includes income from sources outside of the U.S. and earnings from the sale of your main home, even if you can exclude part or all of it. It may even include part of your Social Security benefits, if you can receive them.

Keep in mind: Gross income includes both earned and unearned income.

For example, if you receive a paycheck from an employer, you can typically look on the pay stub for a line item that says something like “total gross pay.” This number is calculated before taxes and other withholdings are taken out. If you have multiple employers and receive multiple paychecks, you’ll need to add the income from all of your W-2s to get the total for your tax return. If you receive tips for your job, don’t forget to include these as well. Then you’ll need to add in unearned income — for example, the interest you receive from a savings account during the year.

What’s the difference between earned and unearned income?

Generally, earned income includes money you make — either as an employee or through working for yourself. In other words, it includes all types of income that you actively earned.

Unearned income means income that you didn’t work for, like interest from savings, dividends on investments, lottery winnings, life insurance proceeds and more.

What is excluded from gross income for tax purposes?

There’s an important distinction between gross income for tax purposes and gross income as it applies to other financial matters.

For example, a mortgage lender who wants to know your gross income when considering whether to give you a mortgage likely means all of your income before taxes. Comparing that number to your net income (your take-home pay after payroll taxes and other deductions) can help the lender understand your financial picture. But for tax purposes, you’re allowed to exclude certain types of income from your gross income because those types aren’t considered taxable.

The list of income items excluded from gross income is lengthy. Here are some examples.

  • Alimony you receive (if you divorced or separated after Dec. 31, 2018)
  • Life insurance death benefits
  • Inheritances, bequests and gifts
  • Interest from state or municipal bonds
  • Workers’ compensation
  • Amounts your employer contributes to a qualified pension plan on your behalf
  • Military pay for serving in a combat zone
  • The amount your employer pays for your accident or health insurance
  • Payments foster parents receive from a government entity to provide foster care

So if you’re injured at work and are approved for three months of workers’ compensation pay, you likely won’t have to include that money in your gross income. The same is true if you inherit money or real estate from a relative who has died. If you receive life insurance payouts in addition to your inheritance, you likely won’t have to consider this money as part of your gross income either.

Why is gross income important for taxes?

First of all, your gross income is important because it helps determine whether you must file or not.

For tax year 2020, you must file a federal tax return if your gross income is at or above the minimum listed below for your filing status and age. (Note that while this is draft info from the IRS, the numbers aren’t likely to change.)

Filing status

Under 65

65 and older




Married filing jointly

$24,800 (both spouses)

$26,100 (one spouse)

$27,400 (both spouses)

Married filing separately



Head of household



Qualifying widow(er)



Gross income is also the starting point for figuring out adjusted gross income. AGI is defined as gross income minus adjustments to income as allowed by the IRS. Once you know your AGI, you can figure out your taxable income, which is essentially your AGI minus deductions.

On IRS Form 1040 you’ll list your gross income and work through adjustments and deductions before determining your taxable income. Finally, you’ll use this taxable income number to see which income tax table applies to you.

Gross income: taxes and beyond

Gross income is necessary for filing taxes. But it’s also an important number that you’ll use when you apply for a loan like a mortgage. Your credit reports, credit scores and debt-to-income ratio are key factors that lenders consider in evaluating credit applications. You’ll need to know your gross income to figure out your debt-to-income ratio, which is calculated by dividing your total monthly debt by your gross income. The resulting number gives lenders an idea of whether you’ll be able to pay back the loan.

Bottom line

Gross income may seem like a pretty straightforward concept — it’s all the income you earn. But when it comes to taxes, not all types of income are treated the same.

Gross income can get you a step closer to calculating your federal tax obligation. But you may have some types of income that aren’t taxable and don’t need to be included in your gross income.

To learn more about the types of income that are and aren’t taxed, you can check out IRS Publication 525.

Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She codeveloped an online DIY tax-preparation product, serving as chief operating officer for seven years. She is an Enrolled Agent and the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s degree in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.

About the author: Laura Malm is a writer and editor with a bachelor’s degree in journalism and strategic communication from the University of Minnesota. She is passionate about financial literacy and helping others feel confident in th… Read more.