Income: Wages, Interest, Dividends and Other Income

What counts as gross income for 2025 and when it is reported: wages and tips, interest, dividends, scholarships, barter, gambling, canceled debt, recoveries and the common exclusions. The SEE tests both the yes-or-no question (is it income?) and short computations of the taxable part.

Income and Assets5 min read7 sections

Must-know for the exam

Gross income includes income from all sources unless a Code section excludes it, including illegal income (IRC 61(a); James v. United States, 366 U.S. 213).
Income is constructively received when credited or made available without substantial restriction; a check received December 31 is income that year (Treas. Reg. 1.451-2(a)).
A dividend is qualified only if the stock is held more than 60 days in the 121-day period starting 60 days before the ex-dividend date (IRC 1(h)(11)(B)(iii)).
Capital gain distributions are long-term whatever the holding period; nondividend distributions reduce basis (IRC 852(b)(3), 301(c); Pub. 550 (2025)).
For 2025, gambling losses are deductible only as an itemized deduction up to winnings; the 90% limit starts in 2026 (IRC 165(d); 2025 Schedule A instructions).
A scholarship is excluded only for tuition, required fees, books, supplies and equipment; room and board are taxable (IRC 117(b); Pub. 970 (2025)).
Canceled debt is excluded to the extent of insolvency immediately before discharge; report on Form 982 (IRC 108(a)(1)(B), (d)(3); Pub. 4681 (2025)).
Form 1099-K is required for 2025 only above $20,000 and more than 200 transactions, after P.L. 119-21 restored the old threshold (IRC 6050W(e)).
The 2025 foreign earned income exclusion is $130,000 per qualifying individual (IRC 911(b)(2)(D); Rev. Proc. 2024-40 sec. 3.39).
Employer group-term life coverage over $50,000 is taxable wages at the Table I rate (IRC 79; Treas. Reg. 1.79-3(d)(2)).

On this page · 7 sections

Traps that cost marks

Using the deposit or clearing date instead of the date the funds were available.
Omitting tax-exempt interest from the return because it is not taxed.
Assuming savings bond interest must be reported each year as it accrues.
Relying on the Form 1099-DIV box without checking the shareholder's holding period.
Applying the shareholder's own holding period to capital gain distributions.
Allowing losses above winnings or netting them without itemizing.
Treating the whole scholarship as tax-free because the student is enrolled.
Treating a service swap as tax-free because no money changed hands.

Why it matters on the exam

Income items make up a large share of Part 1 Domain 2. Questions ask whether an item is includible, which year it belongs to, and how much is taxable after an exclusion or limit. Many distractors are real figures attached to the wrong rule, such as the $1,500 Schedule B threshold or the 2020-only unemployment exclusion.

Start from IRC 61: everything is income unless a specific section excludes it. Then look for the exclusion and its limit.

Timing and wages

•Constructive receipt: a cash-method individual reports income when it is credited or made available, even if not deposited (Treas. Reg. 1.451-2(a)).
•Series EE and I bonds: a cash-method owner may defer the interest until redemption or final maturity, or elect to report it yearly. The interest is exempt from state and local tax (IRC 454(a)).
•Tips: cash tips of $20 or more in a month go to the employer by the 10th of the next month; unreported tips go on Form 4137. Tips stay in income even if the 2025 tips deduction applies (IRC 6053(a)).
•Group-term life: coverage over $50,000 is taxed using the Table I monthly cost. $150,000 of coverage at age 52 means $100,000 x $0.23 per $1,000 x 12 = $276 of wages (IRC 79).
•Combat zone pay: enlisted members exclude all of it for a month served in a combat zone; officers are capped at the top enlisted rate plus imminent danger pay (IRC 112; Pub. 3 (2025)).

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Income and Assets