What is Ordinary Income?
326 reads · Last updated: December 5, 2024
Ordinary income is any type of income earned by an organization or an individual that is taxable at ordinary rates. It includes (but is not limited to) wages, salaries, tips, bonuses, commissions, rents, royalties, short-term capital gains, unqualified dividends, and interest income.
Definition
Ordinary income refers to any type of income earned by an organization or individual that is taxed at regular tax rates. This includes (but is not limited to) wages, salaries, tips, bonuses, commissions, rents, royalties, short-term capital gains, non-qualified dividends, and interest income.
Origin
The concept of ordinary income evolved with the development of tax systems. The earliest tax systems date back to ancient civilizations, but the modern classification of ordinary income emerged during the 20th century as tax laws became more sophisticated, particularly with the establishment and development of personal income tax systems.
Categories and Features
Ordinary income can be categorized into various types, including earned income (such as wages and salaries), investment income (such as interest and rents), and other income (such as bonuses and commissions). The common feature of these incomes is that they are taxed at regular rates rather than preferential rates. Ordinary income is widely applicable in personal and business financial activities. Its advantage lies in the relatively straightforward tax calculation, but the downside is that the tax rates are typically higher.
Case Studies
Case 1: Mr. Li, an employee at a tech company, receives an annual salary and bonuses, which are considered ordinary income and taxed at regular rates. Mr. Li's income primarily comes from his labor, thus falling under the earned income category. Case 2: Ms. Wang, an investor, earns rental income from her property, which is also considered ordinary income and taxed at regular rates. Ms. Wang's income falls under the investment income category.
Common Issues
Investors often confuse ordinary income with capital gains. Ordinary income is taxed at regular rates, whereas long-term capital gains typically enjoy lower tax rates. Additionally, many people mistakenly believe that all investment income benefits from preferential rates, whereas short-term capital gains and interest income are considered ordinary income and taxed at regular rates.
