Income

The definition of income depends on the context. There are definitions for tax purposes, financial accounting, or economic analysis. Individuals and companies receive income, i.e., a value or amount of money, for their labor and products.

Salaries, investment and property sales profits, and other revenues in total are an individual's gross income. To calculate net income, it is necessary to subtract expenses from gross income.

Businesses have similar calculations. For them, gross income is made up of payments for services, products, and interest and dividends received on their cash accounts and business reserves. To calculate a business' net income (profit), you must subtract the business' expenses from gross income.

Economics studies, defines, and measures income in a variety of contexts. The concept of income is always aligned with the purpose of the study. Social and political studies focus on measuring income at the macro level. Individuals focus more on their personal and business income.

Context definition of Income

Typically, people count total income after taxes and expenses for necessities such as food, housing, and clothing.

In personal, business, and finance, income is determined by rules of tax and financial accounting (especially for business owners and investors).

Rules of tax and accounting are similar, but each system has different rules to reflect its context and purpose. Generally, the measurement period for tax and financial accounting is 1 year. The financial accounting measurement of income is for the entire time period. Taxable income is calculated taking into account specific statutory exclusions, exemptions and allowances. They depend on tax status, income source, individual and business decisions.

Taxable Income

Within the income tax system, the tax code relates income to the actual taxpayers' economic situation. As part of the administration, the law provides specific fixed exemptions, like the personal standard deduction. Taxation applies to personal income from all sources (except nontaxable income) of taxpayers. Tax deductions keep income and losses in balance to determine taxable income.

The spectrum of tax rules is wide because the rules are very dependent on a variety of government policies. Because of it, the calculation of taxable income deviates from purely economic calculations. For example, there are 1) policies to help finance government by tax-exempting government bonds; 2) meeting social welfare needs by eliminating benefit taxes and retirement savings; 3) directing benefits to low-income families (providing special tax breaks that decrease as income increases); 4) encouraging energy efficiency (providing special tax breaks).

For taxpayers the most problematic categories of taxation are ordinary income, capital gains and non-taxable income.

Ordinary Income

Taxation distinguishes between ordinary income, income losses, and capital losses. Ordinary income includes income, rental income, interest, regular dividends, retirement benefits, regular annuities and retirement accounts, and Social Security income earned by taxpayers whose gross income exceeds certain income limits. The ordinary income tax range is 10% to 37% in 2022. If net investment income is higher than tax cutoffs, the taxpayer pays an additional 3.8% tax.

Capital gains

Gains and losses on the sale of capital assets are treated as capital gains or losses. Capital assets cover personal property and investments (real estate, stocks, bonds, and other financial instruments).

Dividends on shares of U.S. and some foreign companies that meet requirements for a maturity date are also taxed under capital gains rates.

Non-taxable Income

Interest on certain state bonds is considered tax-exempt income. Federal bond and treasury security interests are not taxable.

Interests on state and local government bonds are not subject to federal taxation; municipal bonds of private activity are not subject to ordinary federal income taxation, but are subject to the federal alternative minimum tax. Interests on state and local bonds in some states and local governments are also not taxed.