A Comparison of Income Concepts: IRS Statistics of

A Comparison of Income Concepts: IRS Statistics of

Income, Census Current Population Survey, and BLS

Consumer Expenditure Survey

Eric L. Henry and Charles D. Day, Internal Revenue Service

S

everal Federal Government agencies produce

statistics on individual and household income.

Because of the differing purposes to which their

data will be put, agencies use different definitions for

income (income concepts), as well as different reporting

units, sample designs, collection modes, and processing rules. Data users are faced with an array of choices,

often without much help to sort out which data series

best meets their needs or much guidance to reconcile

results based on different sources of data.

In order to help users, a number of papers have

been written comparing the Census Bureau’s Current

Population Survey (CPS) Money Income and Survey of

Income and Program Participation concepts, the Bureau

of Labor Statistics (BLS) Consumer Expenditure Survey

(CE) concept, and the Bureau of Economic Analysis

Personal Income concept [1-3]. This paper extends that

body of work by first describing the Adjusted Gross

Income (AGI) concept, which is used most frequently

to define individual income by the Internal Revenue

Service (IRS) Statistics of Income (SOI) Division.

That description is followed by an explanation of the

most important differences between the AGI concept

and the definitions of income used in BLS’s Consumer

Expenditure Survey and the Census Bureau’s Current

Population Survey. Note that this is a discussion of

income concepts only; no attempt is made in this paper

to discuss other causes of differences between estimates

of income.

The Census Bureau conducts the CPS for BLS. It

states that the data are “the primary source of information

on the labor force characteristics of the U.S. population. CPS data are [intended for use] by Government

policymakers and legislators as important indicators of

our nation’s economic situation, and for planning and

evaluating many Government programs. They are also

used by the press, students, academics, and the general

public. … Supplemental questions on … income …

are often added to the questionnaire.” The CPS ques-

tionnaire is administered at the household level, with

information being collected for each person living in the

household over age 15 [4].

BLS conducts the CE. It is the “basic source of data

for revising the items and weights in the market basket

of consumer purchases to be priced for the Consumer

Price Index.” It consists of two components, a quarterly

interview survey and a weekly diary survey. The CE

targets the entire noninstitutionalized population of the

United States [5].

SOI Individual taxpayer data are an administrative

data set. The data are collected from a sample of Forms

1040 filed by individual taxpayers [6]. The target population is all individuals required to file a tax return.

The AGI concept is appropriate to administration of

the tax laws and thus varies quite a bit from the CPS and

CE concepts. In order to make a discussion of those differences tractable and useful to readers, the authors have

chosen to discuss those differences of greatest practical

significance in comparing the data series, knowing that

this will leave out many minor differences.

 The Adjusted Gross Income Concept

This section describes the AGI concept used by

IRS’s SOI Division. This description includes highlights

of changes to the concept over the last 16 years. AGI is

the difference between Total Income and Adjustments to

Income. A deficit (negative AGI) occurs if Adjustments

to Income exceed Total Income.

Total Income includes the following:

Wages, salaries, and tips include compensation for

services, including wages, salaries, fees, commissions,

tips, taxable fringe benefits, and similar items. AGI does

not include money designated for a health flexible spending or health reimbursement arrangement. Similarly,

elective contributions and employer matching amounts

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for retirement plans, such as 401(k)’s, tax-sheltered

annuities, and the Federal Thrift Savings Plan, are not

included in salaries and wages for tax purposes. Also

excluded from AGI are most forms of armed forces pay

earned while in a combat zone or in a hospital recovering

from illness or injury suffered in a combat zone. Note

that there is a limited exclusion of qualified foreignearned income.

Taxable interest consists of interest from bonds,

savings accounts and certificates of deposit, interest accrued on unpaid amounts due to the taxpayer, and interest

on privately held mortgages. Tax-exempt interest, from

sources such as tax-free municipal bonds, IRA’s, and

401(k) accounts, is excluded from AGI.

Dividends and capital gain distributions do not

include the one-time exclusion of part or all of the gain

from the sale of principal residence by an individual 55

years of age or older. The words “one-time exclusion of”

were deleted in Tax Years 1990 and 1991, brought back

in 1992 to 1996, and then incorporated into the current

wording, “Exclusion of part or all of the gain from the

sale of principal residence up to $250,000 ($500,000 on

joint returns),” in Tax Year 1997 to the present time.

Refunds of State and local income taxes claimed as

itemized deductions in previous years were first included

in Tax Year 1990.

Alimony and separate maintenance payments are

part of AGI, but child support payments (as IRS defines

them) are not.

Net income derived from a business, profession,

or farm helps make up AGI. Note that the business must

be a “for profit” enterprise. Generation of revenue from

a hobby does not qualify an individual to claim all of his

or her expenses associated with that hobby.

Net gain from the sale of capital assets or of business property is included in AGI.

Annuities, pensions, individual retirement arrangement (IRA) distributions, and Tier II railroad retirement, reduced by their cost basis, are part of AGI [7].

Rents and royalties, along with net income from

estates and trusts, help make up AGI.

Partnerships and subchapter S corporations are

not taxable entities; therefore, income from these sources

is distributed to the partners or owners and is included

in individual AGI.

Unemployment compensation is part of AGI, although compensation paid by a union is reduced by the

amount of any dues paid.

Taxable amounts of Social Security contribute to

AGI. Since the inception of Social Security, railroad employees have had a separate, similar retirement system.

Taxable Tier 1 railroad retirement payments were

added in Tax Year 1990.

Taxable distributions from a Coverdell education

savings account were added to AGI in Tax Year 2000.

Among the items of income included in AGI under

“Other Income” are prizes, awards, and gambling

winnings, jury duty fees (started in Tax Year 2000),

amounts received that were claimed as a deduction

or credit in a prior year, bartering income, Alaska

permanent fund dividends (started in Tax Year 2000),

and qualified State tuition program earnings (started

in Tax Year 2000).

Statutory adjustments (lines 23 through 32, Form

1040 for Tax Year 2003) are amounts that are subtracted

from Total Income to arrive at AGI (line 34, Form 1040

for Tax Year 2003). These include the following:

Reimbursed employee business expenses that

were included in reported income (deleted for Tax

Year 1990) are used to reduce Total Income.

With some limitations, elementary and secondary

educators could deduct up to $250 in Educator expenses

(starting in Tax Year 2002) from Total Income for items

purchased out-of-pocket for classroom use.

Contributions to self-employed retirement plans

(Keogh or simplified employee pension) and certain

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contributions to IRA’s can be deducted when computing AGI.

Up to $2,500 in Student loan interest (started in Tax

Year 1998), paid on loans used for tuition, transportation, room and board, books, supplies, and equipment,

can be used to reduce AGI by taxpayers with modified

AGI under limits based on filing status.

Up to $4,000 in Tuition and fees (started in Tax Year

2002) may be deducted in calculating AGI.

Archer medical savings accounts (started in Tax Year

1997, “Archer” added in TY 2002) are used by employees

of small businesses and self-employed persons covered by

a high-deductible health plan to save money for paying

medical expenses. Contributions to such a plan can be

used to reduce AGI.

Moving expenses (started in Tax Year 1994) associated with a move that is closely related to work

and covers enough distance may be deducted in calculating AGI.

One-half of self-employment tax (started in Tax

Year 1990) can be used to reduce AGI.

Self-employed health insurance expenses may be

deducted in computing AGI.

Repayments of supplemental unemployment

compensation from an employer-paid-for fund may be

deducted when calculating AGI.

Certain expenses of qualified performing artists, in

particular those working for more than one employer and

with AGI less than $16,000 before expenses are deducted,

may reduce their AGI by the amount of those expenses,

provided they are more than 10 percent of AGI.

Amount of jury duty pay reported on line 21,

Form 1040, that was repaid to employers (started in

Tax Year 1991).

The Deduction for clean-fuel vehicles (started

in Tax Year 1999) allows the taxpayer to deduct up to

$2,000 of the cost of a designated clean-fuel vehicle

from AGI.

Employee business expenses of fee-basis State or

local government officials (started in Tax Year 1999).

SOI uses AGI as its most common measure of

income as can be seen in its publications. Many of the

components broken out by SOI are then further analyzed

by also breaking them out by various sizes of AGI. This

is done to compare tax returns to different AGI classes

so that economists can easily see counts and money

amounts and break out components of the tax return.

Forfeited interest and penalties incurred by persons who made premature withdrawals of funds from

time savings accounts can be used to reduce income in

computing AGI.

 Comparison of Adjusted Gross Income

and the Consumer Expenditure Survey

Income Concept

Alimony payments are deductible for AGI computation purposes. Note that alimony received is considered

income.

A description of the Consumer Expenditure Survey

reads, “Income is the combined income of all consumer

unit members (14 years of age or over) during the 12

months preceding the interview.” The income concept

includes the following:

Forestation or reforestation expenses of up to

$10,000 can be used by owners of qualified timber

property to reduce AGI.

The foreign housing exclusion is available to reduce

AGI for those living abroad whose housing expenses are

paid out of amounts provided by their employers.

Wages and salaries include total money earnings

for all consumer unit members (14 years of age and

over) from all jobs, including civilian wages and salaries; armed forces pay and allowances; piece-rate payments; commissions; tips; National Guard or Reserve

pay (received for training periods); and cash bonuses

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before deductions for taxes, pensions, and union dues.

This corresponds to Wages, Salaries, and Tips on Form

1040. Portions of income that are nontaxable are the

main source of differences between the CE and AGI

concepts. AGI does not include money designated for

a health flexible spending or health reimbursement arrangement. Also excluded from AGI are most forms of

armed forces pay earned while in a combat zone or in a

hospital recovering from illness or injury suffered in a

combat zone. Note that identifiable amounts as classified

under the definition of Salaries and Wages, which may

have been reported by taxpayers as “other income,” are

treated as salaries and wages for the statistics where

possible.

Self-employment income includes net business and

farm income, which consists of net income (gross receipts minus operating expenses) from a profession or

unincorporated business or from the operation of a farm

by an owner, tenant, or sharecropper. If the business

or farm is a partnership, only an appropriate share of

net income is recorded. Losses are also recorded. This

corresponds with net income derived from a business,

profession, or farm on the 1040. Rental income taken as

crop shares is counted as rental income (line17) in AGI,

not farm income (line 18).

Social Security, private, and Government retirement includes the following: (1) payments by the

Federal Government made under retirement, survivors’,

and disability insurance programs to retired persons,

dependents of deceased insured workers, or disabled

workers and (2) private pensions or retirement benefits

received by retired persons (or their survivors), either

directly or through an insurance company. AGI includes

only the taxable portion of Social Security benefits in

its AGI computation. At least 15 percent of benefits are

not taxable; if income is under $34,000 ($44,000 for a

married couple filing jointly) and the taxpayer is not

married filing separately and living with a spouse, at

least 50 percent is not taxable. The CE concept includes

income from “companies or unions, Federal Government

(Civil Service), military, State or local governments,

railroad retirement, annuities or paid-up insurance policies, individual retirement accounts (IRA’s), Keogh, or

401(k) payments.” Note that Tier I railroad retirement

is treated like Social Security for tax purposes. Also,

if an employee paid part of the cost of a pension, then

payments that represent the return of his or her cost are

not included in income.

Interest, dividends, rental income, and other

property income include interest income on savings

or bonds; payments made by a corporation to its stockholders; periodic receipts from estates or trust funds; net

income or loss from the rental of property, real estate, or

farms; and net income or loss from roomers or boarders. AGI does not include interest on certain State and

municipal bonds, as well as any tax-exempt interest

dividends from a mutual fund or other regulated investment company. Dividends do not include nontaxable

distributions of stock or stock rights, returns of capital,

capital gains, or liquidation distributions. Taxpayers who

paid penalties for the premature withdrawal of funds

from time savings accounts or deposits could deduct

those penalties as an adjustment to total income. Rental

income taken as crop shares is counted as rental income

in AGI, not farm income.

Unemployment and workers’ compensation and

veterans’ benefits include income from unemployment

compensation and workers’ compensation and veterans’

payments, including educational benefits but excluding military retirement, which is already included in

Government retirement. A minor difference may arise

from IRS’s reducing unemployment paid based on

regular union dues by the amount of dues paid. Because

workers’ compensation benefits paid “under a workers’

compensation act or a statute in the nature of a workers’

compensation act” are not taxable, they are not included

in the AGI concept. Veterans’ benefit payments are not

included in AGI, since they are not taxable. AGI excludes

payments from workers’ compensation or from military

or other uniformed services if the payee became entitled

to the benefits or was a member before September 25,

1975, or if the payment is due to a combat-related injury.

Also, if the payment is from a private disability insurance

policy for which the taxpayer paid him- or herself, then

the payment is exempt from taxation. Further, railroad

retirement disability is treated like Social Security disability for tax purposes.

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Public assistance, supplemental security income,

and food stamps include public assistance or welfare,

including money received from job training grants;

supplemental security income paid by Federal, State,

and local welfare agencies to low-income persons who

are age 65 or over, blind, or disabled; and the value of

food stamps obtained. Public assistance, supplemental

security income, and food stamps are not included in the

AGI concept because they are not taxable.

Regular contributions for support include alimony

and child support, as well as any regular contributions

from persons outside the consumer unit. Child support,

as defined by IRS, is not included in AGI. Regular

payments that individuals receive from nonhousehold

members are usually not taxable, and thus not included

in AGI, although they may be treated as gifts and be

taxable to the giver.

Other income includes money income from care

of foster children, cash scholarships, fellowships, or

stipends not based on working and meals and rent as pay.

AGI does not include assistance from friends or relatives.

Scholarships and grants that do not represent payment

for services, like teaching or research, and which are

used for qualified educational expenses, like tuition and

books (but not room and board), are not included as they

are not taxable. Assistance received from employers can

be excluded up to $5,250.

 Additional Notes

Capital gains are not included as income in the CE

but are included in AGI. State Tax Refunds are not included in the CE but are included in AGI if the taxes were

deducted in the immediate prior year. Also, all lump sum

payments like prizes, awards, and gambling winnings are

not included in the CE but are included in AGI.

BLS uses income from the CE survey obtained

from the interview process as its main component too.

These data are then further analyzed by showing income

and expenditures by quintiles of income before taxes.

This is done to compare both income and expenditure

components by varying income classes to more easily

see trends in the data.

 Comparison of Adjusted Gross Income

and the Current Population Survey

Income Concept

“Earnings” is a three-part concept in the CPS.

The first part includes “wages, salary, armed forces

pay, commissions, tips, piece-rate payments, and cash

bonuses earned, before deductions are made for items

such as taxes, bonds, pensions, and union dues.” This

corresponds most closely to Wages, Salaries, and Tips

on Form 1040. Portions of income that are nontaxable

are the main source of differences between the CPS concept and AGI. AGI does not include money designated

for a health flexible spending or health reimbursement

arrangement. Similarly, elective contributions and employer-matching amounts for retirement plans, such as

401(k)’s, tax-sheltered annuities, and the Federal Thrift

Savings Plan, are not included in salaries and wages for

tax purposes. Also excluded from income for purposes

of computing AGI are most forms of armed forces pay

earned while in a combat zone or in a hospital recovering

from illness or injury suffered in a combat zone.

Net income from farm or nonfarm self-employment makes up the other two categories of earnings on

the CPS. The CPS concepts are quite close to the AGI

concepts; in fact, the CPS accepts replies for these two

categories based on the respondent’s tax return. In cases

where the respondent does not consult his or her tax

return or other official records, differences may arise

from change in inventories not being accounted for

by the CPS. Also, rental income taken as crop shares

is counted as rental income for AGI computation, not

farm income.

Unemployment compensation from private or

Government sources, as well as strike benefits, are included in both concepts. A small difference may arise

from IRS’s reducing unemployment paid based on regular union dues by the amount of dues paid.

Workers’ compensation, defined as “payments

people receive periodically from public or private insurance companies for injuries received at work,” is

included in the CPS money income concept. Because

workers’ compensation benefits paid “under a workers’

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compensation act or a statute in the nature of a workers’

compensation act” are not taxable, they are not included

in the AGI concept.

Social Security pensions are a part of the CPS concept, as well as Social Security survivors’ and disability

insurance payments. IRS includes only the taxable portion

of Social Security benefits in its AGI computation. At least

15 percent of benefits are not taxable; if income is under

$34,000 ($44,000 for a married couple filing jointly) and

the taxpayer is not married filing separately and living

with a spouse, at least 50 percent is not taxable.

Supplemental Security Income is included in the

CPS concept but not in AGI because it is not taxable.

Public assistance or welfare payments are included in the CPS concept but, again, not in AGI because

they are not taxable.

Veterans’ payments, under the CPS concept, consist

of payments “disabled members of the armed forces

or survivors of deceased veterans receive periodically

from the Department of Veterans Affairs for education

and on-the-job training, and means-tested assistance to

veterans.” These payments are not part of AGI since

they are not taxable.

Survivor benefits include benefits from “private

companies or unions, the Federal Government (Civil

Service), the military, State or local governments, railroad retirement, workers’ compensation, Black Lung

payments, estates and trusts, annuities or paid-up insurance policies, and survivor payments.” Except for workers’ compensation, most survivor benefits are included in

AGI. There is an exclusion amount, similar to the Social

Security exclusion amount, for railroad retirement survivor benefits. There is also an exclusion amount based

on the cost of a private annuity. Also, survivor payments

made to families of military personnel who died after

September 10, 2001, and payments made to survivors

of victims of the 9/11 attacks are nontaxable.

Non-Social Security disability benefits such as

disability income from “workers’ compensation, companies or unions, Federal Government (Civil Service),

military, State or local governments, railroad retirement,

accident or disability insurance, Black Lung payments,

State temporary sickness, or other disability payments,”

are included the CPS income concept. AGI excludes

payments from workers’ compensation or from military

or other uniformed services if the payee became entitled

to the benefits or was a member before September 25,

1975, or if the payment is due to a combat-related injury.

Also, if the payment is from a private disability insurance

policy for which the taxpayer paid him- or herself, then

the payment is exempt from taxation. Further, railroad

retirement disability is treated like Social Security disability for tax purposes.

Pension or retirement income is generally included

in both concepts. The CPS concept includes income

from “companies or unions, Federal Government (Civil

Service), military, State or local governments, railroad

retirement, annuities or paid-up insurance policies, individual retirement accounts (IRA’s), Keogh, or 401(k)

payments.” Note that part of railroad retirement is

treated like Social Security for tax purposes. Also, if an

employee paid part of the cost of a pension, then payments that represent the return of his or her cost are not

included in income.

Interest income under the CPS concept is made up

of all interest income, including interest from “bonds,

Treasury notes, IRA’s, certificates of deposit, and interest-bearing savings and checking accounts.” Some of this

income is included in AGI. Other nontaxable interest,

from sources such as tax-free municipal bonds, IRA’s,

and 401(k) accounts, is excluded from AGI.

Dividends received from stock and mutual fund

shares are part of the CPS concept. AGI includes these

amounts as well, although distributions of stock or options to buy stock (stock dividends or stock options) are

usually not taxable, so long as the distribution is made

in common stock and in the same way to all common

stockholders.

Rents and royalties, net of expenses, and periodic

payments from estates or trusts are included in both

income concepts.

Educational assistance includes Pell grants, other

Government assistance, and financial assistance received

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A Comparison of Income Concepts

from employers, friends, or relatives not residing in the

student’s household are included in the CPS concept.

AGI does not include assistance from friends or relatives.

Scholarships and grants that do not represent payment

for services, like teaching or research, and which are

used for qualified educational expenses, like tuition and

books (but not room and board), are not included as they

are not taxable. Assistance received from employers can

be excluded up to $5,250.

illegal income, the value of property the taxpayer stole,

and rewards all count as other income in AGI.

Capital gains are not included as part of income

in the CPS money income concept (although there are

several “alternative” concepts for income in CPS that

attempt to capture capital gains and other forms of income). AGI includes capital gains except for exclusions

enumerated in the AGI definition section of this paper.

Alimony is included in both income concepts. Alimony

paid is used to reduce the income of the payer in AGI.

State tax refunds that were part of an itemized

deduction for State income taxes in the prior year are

included in AGI. CPS does not include these amounts.

Child support makes up part of CPS income but,

as defined by IRS, is not included in AGI.

 Comparison of Income Data

Financial assistance from outside the household

that consists of regular payments that individuals receive

from nonhousehold members is usually not taxable, and

thus not included in AGI, although it may be treated as

a gift and be taxable to the giver. This category in the

CPS does not include sporadic help or irregular gifts,

such as a birthday or holiday present, or educational

assistance listed above.

Other income includes all other payments people

receive regularly, including foster care payments, military family allotments, and income received from foreign

pensions in the CPS concept. AGI includes many types of

other income. For example, income from an activity the

taxpayer might consider a “business” and might report

a net loss for the CPS is included in AGI if the taxpayer

did not expect to make a profit. For example, if someone

owns two horses and gives a few riding lessons, he or she

cannot then treat the upkeep of the horses as a business

expense. Rather, the horses would be considered to be

kept for personal use, and the income from the lessons

would be reported as other income. Alaska permanent

fund dividends are reported as other income. This item

in AGI also includes some, although not all, foster care

payments. Interestingly, the value of found property of

which the taxpayer comes into undisputed possession

is considered other income. Prizes, gambling winnings,

Figures A and B present income as measured by the

three concepts, along with the capital gains component

of AGI. Figure A shows the trend in average income

across the agencies. For AGI, this is average income per

tax return, and capital gains have been averaged across

all tax returns and not just those with capital gains. BLS

average income is measured by consumer unit, while

Census average income is per household.

Figure B shows the trend in total income across the

agencies. Note that, while the definitions on income

according to BLS have not changed, the method of collecting income data changed in 2001 with the introduction of brackets. If a respondent reported the receipt of

an income component, but refused to answer or did not

know the amount, he or she was presented with brackets

to select the range that the amount fell into. Prior to the

introduction of brackets, these responses were left as

invalid blanks. This accounts for the increase in slope

for CE average and total income in 2001 [5].

Also worth noting is the acceleration in the rate of

increase in AGI starting in the middle 1990’s, and the

downturn in AGI in 2001. The shape of the trend line

for capital gains included in these figures suggests that

this behavior may be largely explained by the rapid rise

in the value of equities over the last half of the 1990’s

and the subsequent correction in those values in the early

part of the current decade.

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Figure A.--Average Income Across Agencies

$70,000

$60,000

Average Income

$50,000

$40,000

$30,000

$20,000

$10,000

$0

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2000

2001

2002

2003

Years

SOI

BLS

Census

Capital Gains

Figure B.--Total Income Across Agencies

$7

Income (in Trillions of Dollars)

$6

$5

$4

$3

$2

$1

$0

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

Years

SOI

BLS

Census

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Capital Gains

A Comparison of Income Concepts

Income, CPS Money Income, and Beyond,”

http://www.bea.gov/bea/about/fesac/Alternative‑

measuresHHincomeFESAC121404.pdf.

 Acknowledgments

The authors wish to thank Laura Paszkiewicz of the

Bureau of Labor Statistics and Michael Strudler of the

Statistics of Income Division, Internal Revenue Service

for their patient efforts in furtherance of the authors’

understanding of the concepts described in this paper.

[4]

Material describing the Current Population Survey

income concept, along with the data and explanation of terms, can be found at www.bls.census.

gov/cps/cpsmain.htm.

 Endnotes

[5]

Material describing the Consumer Expenditure

Survey income concept, along with the data and

explanation of terms, can be found at www.bls.

gov/cex.

[6]

Descriptions of AGI are taken from Individual

Income Tax Returns, Statistics of Income Division,

Internal Revenue Service, 1988-2002.

[7]

At the time of the establishment of the Social Security system, a separate system called Railroad

Retirement was established for railroad workers.

Tier I of the system replaces Social Security for

these workers, while Tier II provides a supplemental pension amount.

[1]

[2]

[3]

“Comparability of Current Population Survey Income Data with Other Data,” U. S. Census Bureau,

http://www.census.gov/hhes/www/income/com‑

pare1.html.

Weinberg, D., “Income Data Quality Issues in

the Annual Social and Economic Supplement to

the Current Population Survey,” http://www.wel‑

fareacademy.org/pubs/poverty/seminar/2004.10.

docs/weinberg_income_data.pdf.

Ruser, J.; Pilot, A.; and Nelson, C., “Alternative

Measures of Household Income: BEA Personal

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