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 primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...
Internal Revenue Code, the ''type'' of income is defined by its character. Ordinary income is usually characterized as income other than
long-term capital gains. Ordinary income can consist of income from
wages,
salaries
A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis.
...
,
tips,
commissions, bonuses, and other types of compensation from employment,
interest
In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...
,
dividends, or
net income 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. A sole ...
,
partnership
A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments ...
or
LLC.
Rents and
royalties, after certain
deductions,
depreciation
In accountancy, depreciation is a term that 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 ...
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 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. 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 on May 23, 2003 and signed into law by President George W. Bush on May 28, 2003. Nearly all of the cuts (individual rates, capital ...
.
[''2007 U.S. Master Tax Guide'', ΒΆ 733. CCH, 2006] Qualified dividends are dividends paid by domestic corporations or by corporations from foreign countries that have a
tax treaty
A tax treaty, also called double tax agreement (DTA) or double tax avoidance agreement (DTAA), is an agreement between two countries to avoid or mitigate double taxation. Such treaties may cover a range of taxes including income taxes, inheritance ...
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. REITs own many types of commercial real estate, including office and apartment buildings, warehouses, hospitals, shopping ce ...
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" 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
*
Taxation in the United States
The United States of America has separate federal, state, and local governments with taxes imposed at each of these levels. Taxes are levied on income, payroll, property, sales, capital gains, dividends, imports, estates and gifts, as well as ...
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