| 2024 Tax Year | ||
|---|---|---|
| Income Individual Single Taxpayer | Income Married Couples Filing Jointly | |
| 37% | Over $609,350 | Over $731,200 |
| 35% | Over $243,725 | Over $487,450 |
| 32% | Over $191,950 | Over $383,900 |
| 24% | Over $100,525 | Over $201,050 |
| 22% | Over $47,150 | Over $94,300 |
| 12% | Over $11,600 | Over 23,200 |
| 10% | Less than $11,600 | Less than $23,200 |
Examples
Individuals
Ordinary income for individuals typically consists of the salaries and wages earned from their employers before taxes. A person who holds a customer service job at Target and earns $3,000 per month will have a calculated annual ordinary income of $36,000, or $3000 X 12 months.
This $36,000 is taxed on their year-end tax return as gross income. If the individual also owned rental property and earned $1,000 a month in rent, ordinary income would increase to $48,000 per year ($36,000 plus $12,000).
Deductions can reduce the amount of ordinary income subject to tax.
Businesses
A company's ordinary income is the pretax profit from selling its products or services. Retailer Target made $109.1 billion in total revenue in its fiscal year (FY) ending Jan. 28, 2023. However, those sales cost money to generate.
The company claimed costs attributable to the production of goods sold (COGS) were $82.2 billion. Target also spent $20.6 billion on selling, general, and administrativeexpenses (SG&As). Factor in depreciationandamortization, and ordinary income or operating income totals $3.9 billion, the amount of income subject to taxation.
Dividends and Taxes
Most stock dividends on long-term investments are subject to a lower rate than ordinary income.The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) reduced the tax on most dividendincome and some capital gainsto 15%. This change prompted companies to increase or pay dividends instead of holding onto their cash.
In 2017, President Donald Trump signed the Tax Cuts and Jobs Act (TCJA) into law, which changed the tax rate on qualified dividends to 0%, 15%, or 20%, based on an individual’s taxable income and filing status. Unqualified dividends include those paid out by real estate investment trusts (REITs), income paid on employee stock options (ESOs), and dividends paid by tax-exempt companies and on savings accounts or money market accounts.
Regular dividends paid out to shareholders of for-profit companiesusually qualify for taxation at the reduced capital gains rate, but investors must adhere to minimum holding periods.For common stock, a share must be held for more than 60 days during the 121-day holding period that begins 60 days before theex-dividend date. For preferred stock, the holding period is longer, beginning 90 days before the company’s ex-dividend date.
What Is Taxed As Ordinary Income?
Most of an individual's income will be taxed at the regular marginal tax rates. There are exceptions where income won't be taxed. These exceptions include long-term capital gains and qualified dividends, both taxed at more favorable rates.
Is Rent Ordinary Income?
Rental income is defined by the IRS as “any payment for the use or occupation of property” and is generally taxed as ordinary income. However, landlords can deduct certain costs from this income to reduce the figure at which the income is taxed. Deductible expenses may include mortgage interest, property tax, repair costs, advertising, maintenance and cleaning, condo fees, and homeowners insurance.
Do Individuals Have to Report Interest Income?
Most interest is taxed as ordinary income and subject to ordinary income tax rates. Notable exceptions include interest earned from a Series EE or Series I bond issued after 1989 to pay qualified higher educational expenses, interest on insurance dividends left on deposit with theU.S. Department of Veterans Affairs, and interest on some bonds used to finance government operations. However, even when it’s not taxable, interest must be reported.
The Bottom Line
Ordinary income is taxed at marginal rates. Individuals pay taxes on ordinary income, such as salaries, tips, rent, and interest. Businesses earn ordinary income from business operations while supplying goods and services.
