Paying taxes on monies received can be confusing. This is because there are various ways in which you might receive funds.
There are capital gains, representing the profit on a capital asset sale. There are also dividends, the result of corporate profits and stock ownership.
Then there is ordinary income.
Ordinary income is the money you receive in exchange for providing services or via the sale of goods. Wages, salaries, and commissions fall under the ordinary income category. So are royalties and bartering. Interest payments you receive from bonds or similar investments are also considered ordinary income as is the sale of virtual currency.
According to the IRS, any ordinary income you receive is taxable, and must be reported on your return.
The IRS determines federal tax rates based on annual earnings. These are known as tax brackets. The 2022 federal income tax brackets and rates are as follows:
Tax Rate |
Single Filer |
Married Filing Jointly |
Head of Household |
10% |
$0 to $10,275 |
$0 to $20,550 |
$0 to $14,650 |
12% |
$10,275 to $41,775 |
$20,550 to $83,550 |
$14,650 to $55,900 |
22% |
$41,775 to $89,075 |
$83,550 to $178,150 |
$55,900 to $89,050 |
24% |
$89,075 to $170,050 |
$178,150 to $340,100 |
$89,050 to $170,050 |
32% |
$170,050 to $215,950 |
$340,100 to $431,900 |
$170,050 to $215,950 |
35% |
$215,950 to $539,900 |
$431,900 to $647,850 |
$215,950 to $539,900 |
37% |
$539,900 or more |
$647,850 or more |
$539,900 or more |
Keep in mind that federal income is taxed at a marginal rate. As an example, if you are a single filer who earns $85,000 in 2022 as a single filer, you won’t be taxed 22% on the entire amount. Instead:
Additionally, 43 states levy taxes on ordinary income in addition to the IRS requirements.
It is possible to reduce your ordinary income through certain tax shelters. Examples of these include defined contribution accounts (like traditional 401(k) or 403(b) retirement accounts), workplace benefits, and even real estate. It was indicated above that rental incomes are taxed as ordinary income. But certain deductions exist for real estate ownership, including mortgage interest and property taxes.
The overall takeaway is that just about anything you earn from income, wages, and interest falls under the category of ordinary income. And ordinary income is taxed at the ordinary income tax rates. For help in reducing your ordinary income, talk to your tax advisor or financial professional.