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Under the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

United States
Internal Revenue Code The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large The ''United States Sta ...

Internal Revenue Code
, the ''type'' of income is defined by its character. Ordinary income is usually characterized as income other than
long-term Long-Term Capital Management L.P. (LTCM) was a hedge fund''A financial History of the United States Volume II: 1970–2001'', Jerry W. Markham, Chapter 5: "Bank Consolidation", M. E. Sharpe, Inc., 2002 based in Greenwich, Connecticut, Greenwich, Co ...
capital gain Capital gain is an economic concept defined as the profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and econ ...
s. Ordinary income can consist of income from
wages A wage is the distribution from an employer Employment is the relationship between two party (law), parties, usually based on a employment contract, contract where work is paid for, where one party, which may be a corporation, for profi ...
,
salaries A salary is a form of payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wage A wage is the distribution from an employer Employment is a relationship between two parties ...
,
tips Tips may refer to: * Tips Industries Tips Industries Limited is an Indian music record label and film production, film promotion, and film distribution company in Mumbai, Maharashtra, India. It was founded by Kumar S. Taurani and Ramesh S. Taura ...
, commissions, bonuses, and other types of compensation from employment,
interest In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...

interest
,
dividends A dividend is a distribution of profits by a corporation A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law 'b ...
, or
net income In business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a busin ...
from a
sole proprietorship A sole proprietorship , also known as a sole tradership, individual entrepreneurship or proprietorship, is a type of enterprise owned and run by one person and in which there is no legal distinction between the owner and the business entity I ...
,
partnership A partnership is an arrangement where parties, known as business partner A business partner is a commercial entity with which another commercial entity has some form of Business alliance, alliance. This relationship may be a contractual, exclus ...

partnership
or
LLC A limited liability company (LLC) is the US-specific form of a private limited company A private limited company is any type of business entity in Privately held company, "private" ownership used in many jurisdictions, in contrast to a Pu ...
. Rents and
royalties A royalty payment is a payment made by one party to another that owns a particular asset, for the right to ongoing use of that asset. Royalties are typically agreed upon as a percentage of gross or net revenues derived from the use of an asset ...

royalties
, after certain
deductions Deduction may refer to: Philosophy * Deductive reasoning, inference in which the conclusion is of greater generality than the premises * Natural deduction, an approach to proof theory that attempts to provide a formal model of logical reasoning as ...

deductions
,
depreciation In accountancy, depreciation refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the allocation in a ...

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
capital gains holding period
, is taxed as ordinary income. Ordinary income stands in contrast to capital gain, which is defined as gain from the sale or exchange of a capital asset. A personal residence is a capital asset to the homeowner. By contrast, a land developer who had many houses for sale on many lots would treat each of those lots (and homes) as inventory when they are sold. For the developer, each lot and home would not be a capital asset. Similarly, clothing held by a retail store for sale in the ordinary course of business would be inventory -- and not a capital asset -- for the store. Another case where income is not taxed as ordinary income is the case of
qualified dividends Qualified dividends, as defined by the United States Internal Revenue Code, are ordinary dividends that meet specific criteria to be taxed at the lower long-term Capital gains tax in the United States, capital gains tax rate rather than at higher Ra ...
. The general rule taxes dividends as ordinary income. A change allowing use of the same tax rates as is used for long term capital gains rates for qualified dividends was made with the
Jobs and Growth Tax Relief Reconciliation Act of 2003 The Jobs and Growth Tax Relief Reconciliation Act of 2003 ("JGTRRA", , ), was passed by the United States Congress The United States Congress is the legislature A legislature is an deliberative assembly, assembly with the authority to ...
.''2007 U.S. Master Tax Guide'', ¶ 733. CCH, 2006 Qualified dividends are dividends paid by domestic corporations or by corporations from foreign countries that have a
tax treaty Many countries have entered into tax treaties (also called double tax agreements, or DTAs) with other countries to avoid or mitigate double taxation Double taxation is the levying of tax by two or more jurisdictions on the same income (in the case ...
with the United States. This rule applies under the condition that the corporation has included the dividends in its own taxable income. Thus pass-through corporations like
REIT A real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minera ...
s and REMICs would not distribute qualified dividends, and the dividends from those entities would be taxed at the ordinary income rates.


Rates

In the United States, ordinary income is taxed at the marginal tax rates. As of 2006, there are six "
tax brackets Tax brackets are the divisions at which tax rates change in a progressive tax system (or an explicitly regressive tax system, though that is rarer). Essentially, tax brackets are the cutoff values for taxable income—income past a certain point i ...
" 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. However, after the 2003 Tax Cut, qualified dividends and long-term capital gains are taxed at the same rate of 15% (up to 20% after 2012).


See also

*
Internal Revenue Service The Internal Revenue Service (IRS) is the revenue service A revenue service, revenue agency or taxation authority is a government agency responsible for the intake of government revenue, including taxes and sometimes non-tax revenue. Depe ...
*
Taxation in the United States The United States of America The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. st ...


Notes


References

*''2007 U.S. Master Tax Guide''. CCH, 2006


External links


2006 Federal Tax Rate Schedules
{{DEFAULTSORT:Ordinary Income United States federal income tax