Last year Lenny had an annual earned income of \( \$ 58,475 \). He also had passive income of \( \$ 1,255 \), and capital gains of \( \$ 2,350 \). What was Lenny's total gross income for the year? a. \( \$ 58,475 \) b. \( \$ 59,730 \) c. \( \$ 60,395 \)

Gross income for tax purposes generally includes “all income from whatever source derived” except for a few specifically excluded items. In many cases capital gains are fully includible in gross income. However, under certain circumstances a taxpayer may be able to exclude (all or part of) the gain realized—for example, if the gain is from the sale of a principal residence and the taxpayer qualifies for the Section 121 exclusion. (See “Includable Income vs. Excluded Income” in your text.) In this problem Lenny had three sources of income:  • Earned income (wages):     $58,475  • Passive income:        $1,255  • Capital gains:         $2,350 If none of the capital gains were excludable, his total gross income would be:   58,475 + 1,255 + 2,350 = 62,080 However, none of the multiple‐choice answers list $62,080. In many textbook examples the capital gain shown may be an item that is excludable (for example, from the sale of a principal residence that meets the exclusion requirements). In that case, the capital gain would not be included in gross income. His “gross income” would then consist only of earned income plus passive income:   58,475 + 1,255 = 59,730 Since one of the answer choices is $59,730, it appears that the problem intends for you to assume that Lenny’s capital gains are not included—perhaps because they qualify for an exclusion. Thus, the best answer is   b. $59,730. Remember to always check if any gains or other types of income are excludable under the tax law when determining gross income.