Federal Income Tax Legality, Part 2: Definition of Income

This is the second in a series of articles dedicated to explaining the various arguments that some groups and individuals use for not paying federal income tax to the Internal Revenue Service (IRS) (the first article in this series addresses the “voluntary” nature of federal income tax).  Read on to find out whether any of these arguments have merit and will keep you from having to pay federal income tax, or if they will only result in you owing back taxes and having tax lien or wage garnishment handed out by the IRS.

Income Tax Return and Calcualtor

Income Tax Return and Calcualtor (Photo credit: Images_of_Money)

Second Argument Against: Definition of Income

This article is specifically dedicated to the various beliefs that the definition of taxable income and gross income is unclear and therefore federal income tax should not be paid.

Wages, tips, and other money received for work is not income.

This argument claims that when a person receives money for work—whether that money is classified as a salary, hourly wage, tip, or other—there is no taxable gain to the person, because the person has given away or exchanged their skill and labor for that money.  The belief under this argument is that the Sixteenth Amendment did not create a tax on wages earned in exchange for work done at a fair market value but only on money received that is classified as a gain or profit.  Therefore, money earned for working is not taxable income.

But the definition of gross income and taxable income in the Internal Revenue Code not only includes money that is considered a gain or profit but also money earned in exchange for a service rendered.  And such payments are considered income whether paid in the form of cash or other property.

Income is only taxable if it is from a foreign source.

This argument states that the federal income tax is not directed at income from sources in the United States by citizens or residents of the United States but rather is only imposed on non-resident aliens and other foreign entities who earn income in the United States.  This argument is based on their reading of certain sections of the Internal Revenue Code.

However, the Internal Revenue Code clearly states that gross income includes income earned by all citizens and residents of the United States and the sections of the Code referenced in this argument are there to prevent double taxation of income by more than one country.  These sections of the Code do not exempt income earned in the United States by citizens or residents from taxation.

Use of paper money and coins is not taxable

This arguments claims that as the current “money” used in the United States—paper bills and coins—are not gold, which was at one time the standard for determining value in our economic system, then the use of paper bills and coins is not taxable.

While states are prohibited from printing money, the federal government has the power to determine what constitutes money.  As such, as the current paper bills and coins created by the federal government are assigned value, they constitute money and are therefore taxable.

Military retirement pay is not considered income

Some claim that payments from the military to retired persons are not taxable income.

However, the Internal Revenue Code defines gross income as income regardless of the source, including pension income paid to retired persons.  Military retirement pay is considered pension income under this definition and is therefore subject to taxation.

Tax Attorney Information

If you have questions about what money is considered taxable income or gross income, or you need help completing your federal income tax return, you should seek the help of a tax attorney who can answer questions related to your specific situation.

by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.