Ordinary Income

DEFINITION of 'Ordinary Income'

Income received that is taxed at the highest rates, or ordinary income rates. Ordinary income is composed mainly of wages, salaries, commissions and interest income (as from bonds). Ordinary Income can only be offset with standard tax deductions, while capital gains income can only be offset with capital losses.

BREAKING DOWN 'Ordinary Income'

The government wants citizens to be long-term investors, which is why the capital gains tax is lower than ordinary income tax rates. Dividend income was historically taxed at ordinary income rates, but when the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) was passed, common stock dividends received the same tax rate as long-term capital gains, which is a lower tax rate than ordinary income. As a result, many companies raised or instituted dividends to make their stock more marketable to investors.

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