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.
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 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 | REITs, MLPs, money market funds |
| 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 - $250,500 |
| 35% | $250,501 - $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