Computation of an individual’s income tax liability begins with the determination of
income. Although the meaning of the term
has long been debated by economists,
accountants, tax specialists, and politicians, no universally operational definition has
The Sixteenth Amendment to the Constitution gave Congress the power to tax
“income from whatever source derived.” To ensure the constitutionality of the income
tax, this phrase is incorporated in Sec. 61(a), where
is defined as follows:
“Except as otherwise provided . . . gross income means all income from whatever source
This chapter examines the concept of income for the purpose of determining what
items of income are taxable. Chapter I:4 considers items of income that are excluded from
gross income. As noted in Chapter I:2, many provisions in the tax law are created by a
process of political compromise. Thus, there is no single explanation of why certain items
are taxable and others are not. For this reason, determining whether a particular item of
income is taxable often proves difficult.
Economic and Accounting
Concepts of Income.
Tax Concept of Income.
To Whom Is Income Taxable?.
When Is Income Taxable?.
Items of Gross Income:
Other Items of Gross
Tax Planning Considerations.
Compliance and Procedural
CONOMIC AND ACCOUNTING
CONCEPTS OF INCOME
Explain the difference
between the economic,
accounting, and tax
concepts of income
is defined as the amount an individual could consume during a
period and remain as well off at the end of the period as he or she was at the beginning of
the period. To the economist, therefore, income includes both the wealth that flows to the
individual and changes in the value of the individual’s store of wealth. Or, more simply,
income equals consumption plus the change in wealth.
Alice earned a salary of $40,000. She consumed $30,000 of food, clothing, housing, medical
care, and other goods and services. Assets owned by Alice were worth $100,000 at the begin-
ning of the year. Her assets, including $10,000 of salary that was saved, were worth $115,000 at
the end of the year. Her liabilities did not change during the year. Alice’s economic income is