Income

 

Income Tweet  2  Tweet

What it is: Income is an actual or recorded inflow of cash or other assets. The term is term is used in many different contexts.

How it works/Example: Let's say John Doe works for Company XY. !is salary is "#$$%$$$ per year. This is his income. &f the inflation  inflation rate is ( per  year % then the )alue of that "#$$%$$$ falls *y ( a year as +oods and ser)ices +et more expensi)e. ,s a result% after the first year on the -o*% John's salary is really only a*le to *uy "#$$%$$$  /( 0 "#$$%$$$1  "34%$$$ of +oods and ser)ices. &n year two% John's salary is then only worth "34%$$$  /( 0 "34%$$$1  "35%$3$. The lon+er this +oes on% the less John's "#$$%$$$ salary *uys. 6y the end of fi)e years% John's salary would *e 7worth7 only "89%84. !is 7real income7 is "89%84. taxes or  or ad-ustments. &n the accountin+ world% accountin+  world% +ross income is :ross income is income *efore taxes usually the same thin+ as +ross profit /that profit /that is% re)enue minus cost of +oods sold1. ;o let's assume restaurant chain XY sold "# million worth of food last year. The cost of that food was "$%$$$. Thus% the company's +ross income was "#%$$$%$$$ < "$%$$$  "=4$%$$$. >or indi)iduals% +ross income is not the same as taxa*le income. >or example% if John makes "#%$$$ a week and uses "29$ of that to in)est in his 5$#/k1 plan% plan% his +ross income would *e "#%$$$ *ut his taxa*le income would *e "49$. ?rdinary income is income that is not a  a capital  capital +ain +ain%% di)idend  di)idend or other income su*-ect to special taxation. &n the @nited ;tates% income is taxed pro+ressi)ely% meanin+ that there are a series of *rackets in which income is taxed. >or example% in 2$$=% the first "4%99$ of ordinary income reported  *y a sin+le person was taxed tax ed at #$(A then the income o o)er )er "4%99$ *ut *elow "$%=9$ " $%=9$ was taxed at #9(. The income o)er "$%=9$ *ut *elow "45%2$$ was taxed at 29(A the income o)er "45%2$$ *ut *elow "#95%8$$ was taxed at 28(A and the income o)er "#95%8$$ *ut  *elow "=%99$ was taxed at (. ,ny income o)er "=%99$ was taxed at 9(.

Why it Matters: Ba+es are the most common kinds of income. 7@nearned income%7 such as capital +ains% is taxed at different rates% as are di)idends. &nterest income is sometimes exempt from ordinary income taxes /as in the case of most municipal *ond in)estments1. *ond in)estments1. Di)idends paid to the shareholders of a company are another kind of income% and those in)estors mi+ht e)en rely

 

on those di)idend payments for their day<to<day li)in+ expenses. Di)idends usually come in the form of cash% *ut they can come in the form of stock% which can also *e re+arded as income for tax purposes. in in)estin+  in)estin+   nowin+ how taxes on taxes on income affect one's portfolio can make a *i+ difference in  decisions. >or example% one *i+ ad)anta+e to ownin+  ownin+  di)idend stocks di)idend  stocks is their +enerally fa)ora*le tax treatment. @ntil 2$$% di)idends were taxed as ordinary income << up to 8.=( +ains were  were taxed at a much lower 2$(. &n 2$$% the tax on most di)idend << and capital  capital  +ains income and some capital +ains fell to #9(. ot only did this encoura+e companies to Treasuries  increase di)idends% it encoura+ed stock  ownership *ecause interest income from Treasuries  and money market funds were still taxed as ordinary income.