ORDINARY INCOME

Summary

Ordinary income refers to income that is taxed at regular income tax rates, as opposed to capital gains rates. This includes money earned from employment (wages, salaries, tips), business operations, interest from savings accounts and bonds, rental property income, and other regular sources of income. Unlike capital gains from investments held for over a year, ordinary income is typically taxed at higher rates and represents the most common types of income people receive.

Usage Context

Understanding ordinary income is crucial when learning about tax planning, comparing different investment strategies, calculating take-home pay, and making decisions about retirement account contributions. It's fundamental to personal finance and tax preparation topics.

Common Confusions

• Thinking all income is taxed the same way
• Confusing ordinary income with capital gains income
• Assuming rental income isn't ordinary income because it seems 'passive'
• Believing that interest from all investments is taxed as capital gains
• Mixing up ordinary income rates with capital gains tax rates