Do You Know the Different Types of Income?

Not all income is treated the same by the IRS. There are actually multiple types of income that you could generate and which are taxed differently from one another. For example, the income your generate from working is looked upon differently by the IRS than income generated from the sale of stock. Thus, it’s important that you understand the different types of income and how they are taxed. I’m not going to get into a detained examination in the blog post, but I will describe them in a nutshell. The first type of income is ordinary income, which includes things like wages and retirement income (i.e. distributions). The next type of income is capital gains income, which is income that is generated from the sale of certain assets, such as bonds, stocks, and some forms of real estate. The third type of income is interest income, which is just what it sounds like, it’s income generated from assets such as savings accounts, CDs, and money market accounts. Now keep in mind too that there may be various ways that income within each group is taxed. For example, within the capital gains group, income generated from the sale of a stock will most likely be taxed differently than income generated from the sale of real estate. Understanding that there are different types of income can be important in retirement planning because you may need to calculate those taxes as part of your savings. A good examples of this is if you are planning on selling stocks or bonds to help pay for things in retirement, it’s good to know how much you will pay in taxes on such a transaction. Finally, I want to remind you that taxes are tricky and complex, so be sure to consult with a certified tax expert when trying to figure out what your tax situation is and how much you may owe to the IRS.