Ordinary Income

AAA

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.

INVESTOPEDIA EXPLAINS '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 wen 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. 

RELATED TERMS
  1. Dividend

    A distribution of a portion of a company's earnings, decided ...
  2. Realized Gain

    A gain resulting from selling an asset at a price higher than ...
  3. Jobs And Growth Tax Relief Reconciliation ...

    A U.S. tax law, passed by Congress on May 23, 2003, that lowered ...
  4. After-Tax Return

    The return on an investment including all income received and ...
  5. Tax Gain/Loss Harvesting

    Selling securities at a loss to offset a capital gains tax liability. ...
  6. Capital Loss Carryover

    The net amount of capital losses that aren't deductible for the ...
RELATED FAQS
  1. If I reinvest my dividends, are they still taxable?

    Cash dividends tend to fall into two broad tax categories: qualified dividends and ordinary dividends. However, some companies ... Read Full Answer >>
  2. After receiving a required distribution when and how are my taxes affected?

    Any taxable amount of the distribution will represent ordinary income for the year that the distribution occurs and will ... Read Full Answer >>
  3. What is the difference between income tax and capital gains tax?

    The conceptual difference between income tax and capital gains tax is that income tax is the tax paid on income earned from ... Read Full Answer >>
  4. What is the optimal level of withholding tax to enter on my W-4?

    Most workers in the United States have part of their income withheld from each paycheck. This step is required by the federal ... Read Full Answer >>
  5. How can I calculate my withholding tax rate?

    Your withholding tax rate is estimated by your employer, who relies on the information on your Form W-4. How you fill out ... Read Full Answer >>
  6. What's the difference between short-term investments and marketable securities?

    The chief difference between federal and state withholding taxes is that state withholding is done based on state-level tax ... Read Full Answer >>
Related Articles
  1. Retirement

    Immediate Annuities: More Income and Lower Taxes

    These instruments may shed their bad rap to bring you a hefty tax break.
  2. Retirement

    Tax Tips For The Individual Investor

    We give you seven guidelines to help you keep more of your money in your pocket.
  3. Taxes

    Capital Gains Tax 101

    Find out how taxes are applied to your investment returns and how you can reduce your tax burden.
  4. Active Trading

    Seek Out Past Losses To Uncover Future Gains

    Tax loss carry-forwards can help reduce the tax burden of owning a profitable fund.
  5. Taxes

    Understanding Income Tax

    Income tax is a levy many governments place on revenue of entities within their jurisdiction.
  6. Economics

    What is a Tax Liability?

    Tax liability is the amount of money a person or entity owes to the government as the result of a taxable event.
  7. Taxes

    Top 4 Ways to Invest Tax Free

    When you're ready to invest, start by looking at these 4 tax-advantaged ways to build your portfolio and your future.
  8. Taxes

    Missed The Tax Return Deadline? Here's What To Do

    Most important: Do it now.
  9. Taxes

    Are Taxes the Solution for Income Inequality?

    Income inequality continues to increase. Why? And are taxes the solution?
  10. Retirement

    Some Tax Considerations For Your Retirement Income

    Even if you don’t plan to retire, it’s still a good idea to think ahead about where to live, your income and how it all interacts with Social Security.

You May Also Like

Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  3. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  4. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
  5. Rule Of 70

    A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate ...
  6. Risk Premium

    The return in excess of the risk-free rate of return that an investment is expected to yield. An asset's risk premium is ...
Trading Center