In the United States, gross income is taxed based on the federal income tax rate and state/local tax rates, although many states use “adjusted gross income” after a set of applied modifications. Other forms of income only exist as exclusions from gross income; in other words, gross income includes all income, regardless of source, that has not been specifically exempted or excluded. There is a huge range of tax liabilities among excluded or exempted forms of income, nearly all of which can be found on state or federal government websites. To see how this works, it is important to understand what these terms mean and how they are interpreted by the requisite authorities.
What Is Tax Liability?
Tax liabilities are the legal claim by the government on a portion of the value of a privately owned asset. The Internal Revenue Service (IRS) calculates taxes through “events,” which can range from an asset appreciating in value, to its sale, to the passing of an asset on to a legal heir. The event’s liability is equal to the multiplication of the size of the asset’s tax base by its tax rate(s).
The tax liability for gross income is calculated on a yearly basis, in most cases, and depends on the level of income and the location where the income was earned. Some states do not tax gross income, while others apply taxes past a certain income threshold. Still others apply a flat tax rate on all gross income.
What Is Gross Income
Gross income has multiple definitions in finance. It can refer to the total revenue earned by a company less cost of goods sold (COGS). It can also refer to the total level of personal income earned by an individual during the course of a year.
The taxation of gross income is done on a progressive scale in the U.S. Most workers fill out a W-4 form when starting a new job, which then allows for personal allowances that change withholding rates; these can impact the tax bracket of a worker. Estimating taxable gross income is more difficult for self-employed workers or small business owners.
Exemptions and Exclusions From Gross Income
The government allows some kinds of income to be excepted from taxes or for workers to pay a modified amount. There is a huge list of possible exemptions and exclusions from gross income. It is not possible to list them all, but some of the most common include social security benefits; gifts and inheritances; some scholarships for higher education; employee health and life insurance; life insurance proceeds; deferred retirement savings, such as a 401(k); and earnings awarded form workers’ compensation claims.
The U.S. is the only western nation to also require income taxes to be paid on earnings outside of its territory. This means an American citizen in France likely has to pay both French and American income taxes. To find the tax liability for any non-gross income, consult the IRS or other relevant government agency.