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 used to fund day-to-day expenditures. People aged 65 and under typically 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 paying all expenses and taxes. In this case, income is referred to as "earnings.” Most forms of income are subject to taxation.
BREAKING DOWN Income
Individuals receive income through earning wages by working and/or making investments into financial assets such as stocks, bonds and real estate. For instance, an investor’s stock holding may pay income in the form of an annual 5% dividend. 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 Internal Revenue Service (IRS) calls income from sources other than a job, such as investment income, “unearned income.”
Income from wages, salaries, interest, dividends, business income, capital gains and pensions received during a given tax year are considered taxable income in the United States. Other taxable income includes annuity payments, rental income, farming and fishing income, unemployment compensation, retirement plan distributions and stock options. Lesser known taxable income includes gambling income, bartending income and jury duty pay.
Tax-Exempt and Tax-Reduced Income
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 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.
Disposable and Discretionary Income
Disposable income is money that’s remaining after paying taxes. Individuals spend disposable income on necessities, such as housing, food and transportation. Discretionary income is money that's remaining after paying all necessary expenses. People spend discretionary income on items like vacations, restaurant meals, cable television and movies. In a recession, individuals tend to be more prudent with their discretionary income. For example, a family may use their discretionary income to make extra payments on their mortgage or save it for an unexpected expense.