Definition
Ordinary income constitutes all the income that individuals earn, which is subject to standard income tax rates. This includes wages, salaries, interest income, rental income, business income, and other forms of steady revenue. Ordinary income is distinct from capital gains, which may be taxed at a different (often lower) rate.
Examples
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Interest Income: Interest earned from savings accounts, certificates of deposit (CDs), and bonds is classified as ordinary income and taxed at the standard income tax rate.
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Salary Income: The wages or salary an employee earns from their employer falls under ordinary income and is taxed according to progressive income tax brackets.
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Business Earnings: Income generated by a sole proprietorship or a pass-through entity like an S-Corporation or LLC is typically considered ordinary income unless it qualifies for specific exclusions or deductions.
Frequently Asked Questions (FAQs)
What types of income are classified as ordinary income?
Ordinary income includes wages, salaries, interest income, rental income, and income from a business—essentially, any income that does not qualify for the reduced capital gains tax rate.
How is ordinary income taxed?
Ordinary income is taxed at the regular income tax rates, which are progressive in the United States, meaning higher earnings are taxed at higher rates.
Is dividend income considered ordinary income?
Qualified dividends are usually taxed at the same lower rate as capital gains, but ordinary or non-qualified dividends are taxed at ordinary income rates.
How do ordinary income and capital gains differ in tax treatment?
Ordinary income is taxed at regular income tax rates, which can be as high as 37% for the highest tax bracket. In contrast, long-term capital gains are often taxed at lower rates (e.g., 0%, 15%, or 20%).
Can farming and fishing income be considered ordinary income?
Yes, income from farming and fishing activities is generally considered ordinary income and is taxed according to regular tax rates.
Related Terms
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Capital Gains: Gains made from the sale of assets such as stocks, bonds, or real estate, often taxed at lower rates than ordinary income.
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Progressive Tax: A tax system in which the tax rate increases as the taxable amount increases, applicable to ordinary income in the U.S.
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Adjusted Gross Income (AGI): An individual’s total gross income minus specific deductions, which is a benchmark for calculating other tax benefits and costs.
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Tax Bracket: Categories of income that are taxed at particular rates in a progressive tax system.
Online References
Suggested Books for Further Studies
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“Taxation for Dummies” by Eric Tyson: A comprehensive guide to understanding various tax concepts, including ordinary income.
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“The Everything Personal Finance in Your 20s & 30s Book” by Howard Davidoff: Sections on how different income forms affect your taxes.
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“Principles of Taxation for Business and Investment Planning” by Sally Jones and Shelley Rhoades-Catanach: An in-depth look at various forms of income and their tax implications.
Fundamentals of Ordinary Income: Finance Basics Quiz
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