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 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.

  1. Dividend

    A distribution of a portion of a company's earnings, decided ...
  2. Capital Loss

    The loss incurred when a capital asset (investment or real estate) ...
  3. Realized Gain

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

    A U.S. tax law, passed by Congress on May 23, 2003, that lowered ...
  5. Capital Gains Treatment

    The specific taxes assessed on investment capital gains as determined ...
  6. Tax Gain/Loss Harvesting

    Selling securities at a loss to offset a capital gains tax liability. ...
Related Articles
  1. Mutual Funds & ETFs

    Is Your Financial Advisor Picking the Right Mutual Funds?

    Learn about the different types of mutual funds and how to know if your financial advisor is choosing the right funds for you based on your investment goals.
  2. Mutual Funds & ETFs

    The Basics of Income Tax on Mutual Funds

    Learn about the basics of income tax on mutual funds, including what types of income may be subject to the capital gains tax rate.
  3. Investing Basics

    Understanding How Dividends Are Taxed

    Learn how dividends are taxed by the IRS, and understand the different types of dividend income as well as the capital gains tax rates.
  4. Retirement

    Immediate Annuities: More Income and Lower Taxes

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

    Tax Tips For The Individual Investor

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

    Capital Gains Tax 101

    Find out how taxes are applied to your investment returns and how you can reduce your tax burden.
  7. 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.
  8. Taxes

    7 Expenses You Won’t Believe Are Deductible

    You may be surprised at some of the things that qualify as legitimate tax deductions. Here are seven that are especially quirky.
  9. Taxes

    6 Tax Myths Everyone Should Know

    The notion that large refunds are good is but one of many enduring tax myths. Here are five more you should know.
  10. Taxes

    Here's How to Deduct Your Stock Losses From Your Tax Bill

    Learn the proper procedure for deducting stock investing losses, and get some tips on how to strategically take losses to lower your income tax bill.
  1. What are the risks of rolling my 401(k) into an annuity?

    Though the appeal of having guaranteed income after retirement is undeniable, there are actually a number of risks to consider ... Read Full Answer >>
  2. What are the biggest disadvantages of annuities?

    Annuities can sound enticing when pitched by a salesperson who, not coincidentally, makes huge commissions selling them. ... Read Full Answer >>
  3. How are variable annuities taxed at death?

    If the owner of a variable annuity dies before receiving full payment, his beneficiary must pay taxes on any earnings received. ... Read Full Answer >>
  4. Are dividends considered passive or ordinary income?

    Despite the fact that earning dividends requires no active participation on the part of the shareholder, they do not meet ... Read Full Answer >>
  5. 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 >>
  6. 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 >>

You May Also Like

Hot Definitions
  1. Ex Works (EXW)

    An international trade term requiring the seller to make goods ready for pickup at his or her own place of business. All ...
  2. Letter of Intent - LOI

    A document outlining the terms of an agreement before it is finalized. LOIs are usually not legally binding in their entirety. ...
  3. Purchasing Power

    The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing ...
  4. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  5. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  6. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!