Taxable Income

• Payments received such as wages, salary, stipends or consulting fees for services rendered are included in taxable income, subject to certain narrow exceptions. The IRS follows the Internal Revenue Code, which states that "gross income means all income from whatever source derived," which is interpreted as broadly as possibly, and even includes illegal sources of income being subject to tax, enabling federal law enforcement alternate means to prosecute certain defendants who bring in substantial income from illicit sources.
  
  

Some Exclusions

• Despite the broad interpretation of gross income, there are limited instances of tax exempt income. These include tax exempt interest on state and municipal government bonds, a certain amount of social security benefits, gifts and inheritances, life insurance proceeds, personal injury lawsuit settlements, scholarships, some employee "fringe" benefits and up to a certain amount of any gain on sale of a primary residence, among others.
  
  

Government Pay

• Payment from employment at a government agency, or payment for serving on a government board, is included in taxable income. Since this income meets the definition of gross income under the Internal Revenue Code, it cannot be excluded because it does not qualify as a tax exempt source and is properly subject to tax. The flawed line of reasoning is that since these payments are received from the government, they are somehow automatically exempt from tax or are paid "net of tax," and have no basis in tax authority.
  
  

Certain Exceptions

• For various political and economic reasons, International Monetary Fund (IMF) salaries are paid net of tax. However, because some IMF employees are subject to tax on their salaries and others are not, so-called "tax equalization adjustments" are applied. IMF countries, including the U.S., have agreed to exempt from taxation IMF employees who are foreign nationals, but nonetheless the IRS taxes its U.S. citizen-employees. Citizen-employees are taxed by the IRS as usual on their IMF salary; however, the IMF pays an additional "tax allowance" in an attempt to offset the IRS tax impact on base salary.