Your finances are a big and growing puzzle. One of the most significant pieces of of the puzzle is your ordinary income, which is the cash flow that most people earn. If you're like most people, you probably have a vague idea that it has something to do with the money you earn. But there's more to it.
In this post, you will learn the specifics of what ordinary income is, the different types of ordinary income, and the 2023 tax rates on ordinary income. So, buckle up, grab a cup of coffee, and get ready for some critical knowledge.
Demystifying ordinary income
Ordinary income is like the bread and butter of your income; it’s the most common type of income that most people earn. It includes wages, salaries, tips, bonuses, and other types of compensation from employment. It also encompasses interest on savings, dividends from investments, rental income, and business income. Simply put, any income that isn't classified as a capital gain or gift is usually considered ordinary income.
The many faces of ordinary income
Now that we've defined ordinary income let's dive into the different types.
- Wages, Salaries, and Tips: This is the money you earn from your job. It's the paycheck that lands in your bank account every month. This is usually the bulk of ordinary income for most people.
- Interest Income: This is the extra money you earn from savings accounts or bond investments.
- Dividend Income: This is the money you earn from owning shares in a company. It's like a slice of the company's profit pie.
- Rental Income: This is the money you earn from renting out a property. It's like getting paid for letting someone else live in your house.
- Business Income: This is the money you earn from running your own business. It's the reward for your entrepreneurial spirit.
Tax rates on ordinary income for 2023
How much tax you pay on your ordinary income depends on how much you earn. The IRS has a set of tax brackets, and where you fall in these brackets determines your tax rate. When you get a paycheck that doesn't match your salary, it's because of these taxes!
Here are the tax rates on ordinary income for 2023:
- 10% on income up to $9,950 for single filers and $19,900 for joint filers
- 12% on income over $9,950 ($19,900 for joint filers) but not over $40,525 ($81,050 for joint filers)
- 22% on income over $40,525 ($81,050 for joint filers) but not over $86,375 ($172,750 for joint filers)
- 24% on income over $86,375 ($172,750 for joint filers) but not over $164,925 ($329,850 for joint filers)
- 32% on income over $164,925 ($329,850 for joint filers) but not over $209,425 ($418,850 for joint filers)
- 35% on income over $209,425 ($418,850 for joint filers) but not over $523,600 ($628,300 for joint filers)
- 37% on income over $523,600 ($628,300 for joint filers)
Next Steps
Now that you know what ordinary income is, its different types, and how it's taxed, you've established an important foundation for understanding your taxes and how to optimize them. Next you'll want to figure out how your investments fit into your overall income puzzle. The next piece of the puzzle is understanding how to manage and grow your income.
Remember, knowledge is power. The more you know about your finances, the better decisions you can make. So keep learning, keep asking questions, and keep striving to make the most of your money.
