Ordinary income: Difference between revisions
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Under the [[United States]] [[Internal Revenue Code]], the ''type'' of income is defined by its character. '''Ordinary income''' is usually characterized as income other than [[capital gain]]. Ordinary income can consist of income from [[wages]], [[salaries]], tips, [[Commission (remuneration)|commissions]], bonuses, and other types of compensation from employment, [[interest]], [[dividends]], or [[net income]] from a [[sole proprietorship]], [[partnership]] or [[LLC]]. [[Passive income|Rents]] and [[royalties]], after certain [[Tax deduction|deductions]], [[depreciation]] or [[Tax depletion|depletion]] allowances, are also treated as ordinary income. A "short term capital gain", or gain on the sale of an asset held for less than one year of the [[Capital_gains_tax#United_States |capital gains holding period]], is taxed as ordinary income. |
Under the [[United States]] [[Internal Revenue Code]], the ''type'' of income is defined by its character. '''Ordinary income''' is usually characterized as income other than [[capital gain]]. Ordinary income can consist of income from [[wages]], [[salaries]], tips, [[Commission (remuneration)|commissions]], bonuses, and other types of compensation from employment, [[interest]], [[dividends]], or [[net income]] from a [[sole proprietorship]], [[partnership]] or [[LLC]]. [[Passive income|Rents]] and [[royalties]], after certain [[Tax deduction|deductions]], [[depreciation]] or [[Tax depletion|depletion]] allowances, and gambling winnings are also treated as ordinary income. A "short term capital gain", or gain on the sale of an asset held for less than one year of the [[Capital_gains_tax#United_States |capital gains holding period]], is taxed as ordinary income. |
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Ordinary income stands in contrast to capital gains, which is defined as gain from the sale or exchange of a capital asset. The definition of capital asset under the tax law can be explained by noting that your house is a capital asset to you the homeowner but if you bought it from a land developer who had many houses on many lots, each of those houses was inventory when he sold them and hence was not a capital asset to him, just as clothing would be inventory and not a capital asset to [[Saks Fifth Avenue]]. |
Ordinary income stands in contrast to capital gains, which is defined as gain from the sale or exchange of a capital asset. The definition of capital asset under the tax law can be explained by noting that your house is a capital asset to you the homeowner but if you bought it from a land developer who had many houses on many lots, each of those houses was inventory when he sold them and hence was not a capital asset to him, just as clothing would be inventory and not a capital asset to [[Saks Fifth Avenue]]. |
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Revision as of 03:51, 8 February 2007
Under the United States Internal Revenue Code, the type of income is defined by its character. Ordinary income is usually characterized as income other than capital gain. Ordinary income can consist of income from wages, salaries, tips, commissions, bonuses, and other types of compensation from employment, interest, dividends, or net income from a sole proprietorship, partnership or LLC. Rents and royalties, after certain deductions, depreciation or depletion allowances, and gambling winnings are also treated as ordinary income. A "short term capital gain", or gain on the sale of an asset held for less than one year of the capital gains holding period, is taxed as ordinary income.
Ordinary income stands in contrast to capital gains, which is defined as gain from the sale or exchange of a capital asset. The definition of capital asset under the tax law can be explained by noting that your house is a capital asset to you the homeowner but if you bought it from a land developer who had many houses on many lots, each of those houses was inventory when he sold them and hence was not a capital asset to him, just as clothing would be inventory and not a capital asset to Saks Fifth Avenue.
Another case where income is not taxed as ordinary income is with qualified dividends. Generally dividends are taxed as ordinary income, but qualified dividends are taxed at the long term capital gains rate. Qualified dividends are dividends paid by most domestic corporations or qualified foreign ones. The change allowing capital gains rates for qualified dividends was made with the Jobs and Growth Tax Relief Reconciliation Act of 2003.[1]
In the United States, ordinary income is taxed at the marginal tax rates. As of 2006, there are six "tax brackets" ranging from 10% to 35%. Ordinary income is taxed within the particular tax bracket listed on the rate schedules or tax tables as a percentage for each dollar within that bracket.
See also
Notes
References
- 2007 U.S. Master Tax Guide. CCH, 2006
External link
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