Ordinary Income

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Defined by the internal revenue code to include salaries, fees, commissions, interests, dividends, and many other items. Taxed at regular tax rates. Contrasted with long-term capital gains, which receive more favorable tax treatment.


Example: Abel would prefer to convert ordinary income into longterm capital gains. He wants to change the nature of property he has from inventory to investment.

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For tax purposes, income subject to being taxed at the highest rates, as opposed to capital gains, which may be taxed at lower rates. Generally, only capital losses may be deducted against capital gains, and only ordinary income may be offset by the other deductions. See income [ordinary income].

Income received that is taxed at the highest rates, or ordinary income rates. Ordinary income is composed mainly of wages, salaries, commissions and interest income (as from bonds).    Ordinary Income can only be offset with standard tax deductions, while capital gains income can only be offset with capital losses.

Investopedia Says:
The government wants citizens to be long-term investors, which is why the capital gains tax is lower than ordinary income tax rates. Dividend income was historically taxed at ordinary income rates, but wen the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) was passed, common stock dividends received the same tax rate as long-term capital gains, which is a lower tax rate than ordinary income. As a result, many companies raised or instituted dividends to make their stock more marketable to investors. 

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