Ordinary Income
Income taxed at regular ratesâwages, salary, interest, short-term capital gains. Taxed higher than qualified dividends and long-term capital gains.
What You Need to Know
Ordinary income faces the highest tax rates: 10% to 37% federally. Includes wages, salary, bonuses, tips, interest income, short-term capital gains (held <1 year), and non-qualified dividends.
Compare to preferential rates: long-term capital gains and qualified dividends are taxed at 0%, 15%, or 20%ânever the full ordinary income rates.
A $10,000 bonus is ordinary income taxed at your marginal rate (potentially 24-37%). A $10,000 long-term stock gain is taxed at 0-20% depending on income. The difference can be $1,400-1,700 on that $10,000.
Tax planning strategy: Convert ordinary income to capital gains when possible. Hold investments 1+ years. Maximize tax-deferred accounts (401k, traditional IRA) to avoid ordinary income taxes today.
Sources & References
This information is sourced from authoritative government and academic institutions:
- irs.gov
https://www.irs.gov/publications/p550
Related Calculators & Tools
Put your knowledge into action with these interactive tools:
Payroll Calculator
Calculate exact take-home pay after federal, state taxes, 401(k), health insurance, and all deductions
Capital Gains Tax Calculator
Calculate federal and state capital gains taxes on stocks, crypto, real estate. Compare short-term vs long-term rates and get tax optimization strategies
Related Terms in Taxes
Active Income
Active income is earnings from work, crucial for meeting immediate expenses and building wealth.
Discretionary Income
Discretionary income is the money left after essential expenses, crucial for saving and investing.
Earned Income
Earned income is money received from working, crucial for tax calculations and financial stability.
Effective Tax Rate
Your actual tax rateâtotal taxes paid divided by total income. Lower than marginal rate because of brackets and deductions.
Estate Tax
A tax on the transfer of assets after death, impacting wealth distribution and inheritance.
Estimated Taxes
Estimated taxes are prepayments of income tax owed, helping you avoid penalties and manage cash flow.