Understanding Income
Definitions
Gross Income: Total Value of one's salary or payments, without accounting for any cash outflows
Net Income: Income left over after subtracting taxes or fees. Discretionary Income is common for individual earners which is the amount they have available after paying for necessary expenses
Taxable Income
The general tax framework applies to taxpayers' personal revenue (other than tax-exempt income) from all sources and offsets such as revenue with deductions for expenses and losses to determine taxable income.
There are various income levels that determine tax rates for income tax
Types of Income
Ordinary Income
Encompasses earnings, interest, regular dividends, rental income, distributions from pensions or retirement accounts, and SS benefits
Capital Gains
Gains from selling assets that have appreciated in value
In the US, Tax rates for Capital Gains on assets held for more than one year are 0%, 15%, and 20%.
Include personal residences and investments such as real estate, stock, bonds, or other financial instruments. Qualified dividends can also be taxed at capital gains rates.
Tax-Exempt Income
Interest paid on certain bonds issued by gov't entities is treated as tax-exempt income.
Interest on bonds issued by state and local gov't generally is not subject to federal taxation.
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