Income

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What is 'Income'

Income is money that an individual or business receives in exchange for providing a good or service or through investing capital. Income is consumed to fuel day-to-day expenditures. Most people age 65 and under receive the majority of their income from a salary or wages earned from a job. Investments, pensions and Social Security are primary sources of income for retirees. In businesses, income can refer to a company's remaining revenues after all expenses and taxes have been paid. In this case, it is also known as "earnings". Most forms of income are subject to taxation.

BREAKING DOWN 'Income'

Most individuals gain income through earning wages by working and/or making investments into financial assets like stocks, bonds and real estate. In most countries, earned income is taxed by the government before it is received. The revenue generated by income taxes finances government actions and programs as determined by federal and state budgets. The IRS calls income from sources other than a job, such as investment income, “unearned income".

The wages, salaries, interest, dividends, business income, capital gains, pension and annuity payments, rental income, farming and fishing income, unemployment compensation, jury duty pay, gambling income, bartering income, retirement plan distributions and stock options an individual receives in a given tax year are considered taxable income in the United States.

Types of income that may be tax-exempt include interest income from U.S. Treasury securities (which is exempt at the state and local levels), interest from municipal bonds (which is potentially exempt at the federal, state and local levels) and capital gains that are offset by capital losses. Types of income that may be taxed at lower rates include qualified dividends and long-term capital gains. Social Security income is sometimes taxable, depending on how much other income the taxpayer receives during the year.

The money an individual has left after taxes are subtracted from income is called disposable income. Most people spend this money on necessities like housing, food and transportation and on discretionary items like restaurant meals, vacations and cable television.

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