Ordinary Income
Ordinary income is income taxed at regular marginal tax rates (10% to 37%), including wages, salaries, interest, short-term capital gains, non-qualified dividends, and business income. Unlike long-term capital gains and qualified dividends, ordinary income does not receive preferential tax treatment.
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Exam Tip
Ordinary income = taxed at marginal rates (10%-37%). Short-term gains (held 1 year or less) are taxed as ordinary income. Long-term gains and qualified dividends get preferential rates (0%, 15%, 20%).
What is Ordinary Income?
Ordinary income includes most types of income earned through regular activities and is taxed at your marginal tax rate. This contrasts with net long-term capital gains and qualified dividends, which receive preferential lower tax rates.
Types of Ordinary Income
| Income Type | Description |
|---|---|
| Wages and Salaries | Compensation from employment |
| Interest Income | Bank accounts, CDs, bonds |
| Short-Term Capital Gains | Gains on assets held 1 year or less |
| Non-Qualified Dividends | Ordinary dividends, often including REIT and money-market fund distributions; partnership/MLP distributions have separate basis and income rules |
| Business Income | Self-employment, partnerships |
| Rental Income | Property rental proceeds |
| Alimony | Pre-2019 divorce agreements |
| Retirement Distributions | Traditional IRA, 401(k) withdrawals |
Ordinary Income vs. Capital Gains Comparison
| Factor | Ordinary Income | Long-Term Capital Gains |
|---|---|---|
| Tax Rates (2025) | 10%, 12%, 22%, 24%, 32%, 35%, 37% | 0%, 15%, 20% |
| Top Rate | 37% | 20% (+ 3.8% NIIT for high earners) |
| Holding Period | N/A | Must hold asset > 1 year for preferential rates |
| Examples | Wages, interest, short-term gains | Long-term stock gains, qualified dividends |
| Tax Treatment | No preference | Preferential lower rates |
2025 Ordinary Income Tax Brackets (Single Filers)
| Tax Rate | Income Range |
|---|---|
| 10% | $0 - $11,925 |
| 12% | $11,926 - $48,475 |
| 22% | $48,476 - $103,350 |
| 24% | $103,351 - $197,300 |
| 32% | $197,301 - $250,525 |
| 35% | $250,526 - $626,350 |
| 37% | Over $626,350 |
Short-Term vs. Long-Term Capital Gains
| Holding Period | Tax Treatment | Rate |
|---|---|---|
| 1 year or less | Taxed as ordinary income | Up to 37% |
| More than 1 year | Preferential capital gains rates | 0%, 15%, or 20% |
Tax Planning Strategies
| Strategy | Benefit |
|---|---|
| Hold investments > 1 year | Convert short-term to long-term gains |
| Tax-loss harvesting | Offset gains with losses |
| Qualified dividend focus | Lower tax rates than ordinary |
| Tax-deferred accounts | Defer ordinary income to retirement |
| Roth conversions | Pay ordinary tax now, tax-free later |
Exam Alert
Key exam points for Ordinary Income:
- Short-term capital gains are taxed as ORDINARY INCOME (marginal rates)
- Long-term capital gains (held > 1 year) get PREFERENTIAL rates (0%, 15%, 20%)
- Non-qualified dividends are taxed as ordinary income
- Qualified dividends get the same preferential rates as long-term capital gains
- Interest income from bonds is generally ORDINARY income (exception: municipal bonds are tax-exempt)
- REIT dividends are typically taxed as ordinary income
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