what is Ordinary Income

**Ordinary Income: Definition, Sources, and Taxation**

1. **Definition and Sources**:
- Ordinary income encompasses various earnings from employment and business activities, including wages, salaries, tips, bonuses, commissions, and rental income.
- It also includes self-employment earnings and interest income from investments.
- For businesses, ordinary income is derived from the day-to-day operations, excluding gains from the sale of long-term capital assets.
2. **Taxation**:
- Ordinary income is taxed at marginal tax rates, with the tax rate varying based on the individual's or business's income bracket.
- The Internal Revenue Service (IRS) publishes income ranges for tax brackets, which can range from 10% to 37%.
- Deductions for ordinary income are generally limited to standard business expenses, such as mortgage interest and property taxes.
3. **Comparison with Capital Gains**:
- Ordinary income is distinct from capital gains, which are taxed at different rates and are generated from the sale of capital assets.
- Capital gains tax rates are typically lower than ordinary income tax rates, especially for long-term capital gains.
4. **Significance in Tax Planning**:
- Understanding ordinary income is crucial for individuals and businesses to properly withhold taxes, manage payroll, and ensure compliance with tax laws.
- Tax advisors often advise on strategies to minimize ordinary income, such as optimizing deductions and planning income distributions.

In conclusion, ordinary income is a broad category of earnings that includes most income from employment and business activities, excluding capital gains. It is taxed at marginal rates, which can range from 10% to 37%, and is a significant consideration in tax planning and compliance.