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hi and welcome if you're new i'm lena i'm a certified public accountant please remember to support my channel subscribe ring the bell to turn on video notifications and give this video a thumbs up in today's video i will walk you through what ordinary income is the tax season is right around the corner and before you even start thinking about your tax return there are several basic concepts that are absolutely important that are key to understanding how your taxes work ordinary income is one of them and if you want to learn more please take a look at a variety of videos i have already uploaded before here on my channel i have several that will walk you through tax avoidance techniques i have one for small business owners and a second video for individual tax filers i will link those videos in the description below i want to first answer a question that some of you may have at this point why is it important to understand what ordinary income is one thing that sets apart ordinary income is the way that it's taxed ordinary income is distinguished from long-term capital gain not only in what it is but also in how it is taxed so by understanding several key concepts that i'm about to share with you in this video i can guarantee that you will become more familiar with how you can time your significant purchases and expenses so that you can actually get the benefits that you're entitled to in broad terms ordinary income is money earned from working and from certain types of investments ordinary income can be personal or business related in addition to wages salary tips and commissions other types of ordinary income that individuals can receive include bonuses annuity and retirement plan distributions interest income as defined by the irs rental property income royalties short term capital gains and ordinary or unqualified dividends as you can see 9 out of 10 income sources that you may have would be categorized by the irs as your ordinary income the concept of ordinary income excludes anything that can be classified as long-term capital gain which in most cases refers to the sale of a property at a gain and the income derived from that transaction the irs will treat the gain on property such as real estate vehicle or land as long term if you hold the property for at least one year or longer before you sell it i do have a video that explains capital gains tax in detail i will link it below what are good examples of ordinary income for an average person much if not all of the money he or she earns is considered ordinary income for example if you have a job for which you get paid by the hour your hourly wage is considered ordinary income this applies to your entire paycheck and all of the money that you make from this job including any tips or commissions this also applies if you own your own business for example if you are a business owner income that you earn from that business falls under the classification of ordinary income moving on let's talk about how your ordinary income is taxed ordinary income is subject to the federal tax rates based on your annual earnings the rate is of course set by the internal revenue service and is adjusted for inflation on an annual basis this rate called a marginal tax rate raises with higher levels of income there are seven tax brackets for most ordinary income for the 2021 tax year 10 12 22 24 32 35 and 37 percent your tax bracket depends on your taxable income and your filing status whether you're single married filing jointly or qualifying widow a widower married filing separately and head of household generally as you move up the pay scale you also move up the tax scale the schedule you should be seeing on your screen right now will help you identify the tax rate that's applicable to you based on your tax bracket the first column shows the rate and moving from left to right the irs listed tax filing status for example if you're married filing with your spouse merit filing jointly that is and your combined annual income is two hundred thousand dollars the irs will tax your ordinary income at 24 i want this video to be relevant for a while so let me show you the newly announced 2022 tax brackets these are going to be the tax brackets that you will use when you prepare your 2022 tax return in the spring of 2023 you can use the schedule to see if you'll be taxed at a higher tax rate next year you're welcome to pause this video and take your time to identify what your tax bracket is now i always say that you should practice tax avoidance not to be confused with tax evasion of course tax avoidance is perfectly legal and should be encouraged so with that in mind let's quickly chat about how you can get into a lower tax bracket essentially you have two main ways to do so by taking the tax credits and the tax deductions that you qualify for if you're not too sure what the difference between the two is and how they work please watch a separate quick video in which i share the main key facts about these tax breaks i will link that video in the description below you're welcome to watch it next essentially tax credits are a dollar for dollar reduction in your income tax bill if you have a five thousand dollar tax bill for example but you're eligible for let's say one thousand dollars in tax credits your bill will drop to four thousand dollars tax credits can save you more in taxes than tax deductions generally but a lot does depend on your individual circumstances your filing status and other tax breaks that you may be eligible for so here i will include several tax credits such as education tax credits tax credits for the cost of child care and dependent care and tax credits for having children to name a few make sure that you research these many states also offer tax credits so it's definitely worth doing a quick research to understand what is available in your situation now while tax credits reduce your actual tax bill tax deductions reduce the amount of your income that is taxable if you have enough deductions to exceed the standard deduction for your filing status you can itemize those expenses to lower your taxable income i hope this quick video helped clarify the concept of ordinary income remember to support me here on youtube hit the subscribe button ring the bell to turn on video notifications enabling video notifications will allow you to watch the videos when they're uploaded and not when youtube decides to suggest them to you and also remember to give this video a thumbs up if you learned something new these things really do support me here and i appreciate your support and your time thank you all for watching i will see you in my next one
Thanks for your comment Tristan Roberta, have a nice day.
- Analisa Esterline, Staff Member
Thanks for this interesting article
Thanks Lazaro your participation is very much appreciated
- Analisa Esterline
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I've studied south african history at Clark Atlanta University in Atlanta and I am an expert in intercultural communication. I usually feel chipper. My previous job was criminal investigator (detective) I held this position for 15 years, I love talking about kombucha brewing and live streaming. Huge fan of Madelyn Cline I practice racquetball and collect steiff teddy bears.
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