# Income By [Jo](https://paragraph.com/@jo-4) · 2022-07-15 --- What Is Income? --------------- Income is defined in different ways depending on the context—for example, for purposes of taxation, financial accounting, or economic analysis. For individuals and businesses, income generally means the value or amount that they receive for their labor and products. Individuals generally consider their gross income to equal the total of their earnings in the form of wages and salaries, the return on their investments and sales of property, and other receipts. Their net income is composed of their gross income reduced by costs incurred in producing the income. Similarly, businesses generally treat their total receipts from services, products, and any interest and dividends received with respect to their cash accounts and reserves related to the business as their [gross income](https://www.investopedia.com/terms/g/grossincome.asp). Businesses’ [net income](https://www.investopedia.com/terms/n/netincome.asp)—i.e., profit—is determined by reducing their gross income by their business expenses.   Economists study income in varied contexts that employ different definitions and ways of measuring income.  Whether their studies involve earnings, savings, consumption, production, public finance, [capital investment](https://www.investopedia.com/terms/c/capital-investment.asp), or other related topics and subtopics, their concept of income will correspond to the purpose of their research. While the measure of income on a macro level is critical to societal and policy studies, individuals are more focused on their personal and business income.1 ### KEY TAKEAWAYS * The term “income” generally refers to the amount of money, property, and other transfers of value received over a set period of time by individuals or entities as compensation for services, payment for products, returns on investments, pension distributions, gifts, and myriad other transfer of value. * There is no single, standard definition of income; income is defined, and its amount determined, according to the context in which the concept is used. * Taxable income is the result of determining the annual total or gross income of an individual or entity and reducing that amount by the exclusions, exemptions, and deductions allowed under the tax law. * Financial regulators, businesses, and investors focus on businesses’ annual financial statements, which are prepared in accordance with generally accepted accounting principles (GAAP), and start by determining all revenue and then adjusting that amount by expenses and losses to determine a net income figure. Income: Defined in Context -------------------------- In their day-to-day lives, individuals generally focus on both their levels of disposable income (that is, their total income minus taxes) and their discretionary income (that is, the amount, if any, left after payment of taxes and expenditures for necessities such as food, clothing, and shelter).2 In dealing with their personal, business, and investment activities, individuals are concerned with income as determined under tax rules and—especially in the case of business owners and investors—financial accounting rules. Although tax and accounting rules have similarities, each system has special rules reflecting its distinctive context and purposes. Generally, taxation and financial accounting measure income over a 12-month period. While financial accounting income is comprehensive, taxable income is calculated with special statutory exclusions, exemptions, and allowances that vary by tax status, income source, and individual and business decisions. Taxable Income -------------- For income tax purposes, the tax code attempts to define income to reflect taxpayers’ actual economic position.  In the interest of clarity, efficiency, and ease of administration, the law provides certain fixed allowances—for example, the personal standard deduction. The general tax framework applies to taxpayers’ personal revenue (other than tax-exempt income) from all sources and offsets such revenue with deductions for expenses and losses to determine taxable income. In addition, varied public policies underlie a wide range of tax rules that cause the calculation of taxable income to diverge from purely economic calculation. For example, such policies include helping to finance government by making government bonds tax-exempt; addressing social welfare needs through tax-free fringe benefits and tax-favored treatment for retirement savings; directing benefits to lower-income individuals by providing some tax credits that are phased out at higher income levels; and promoting energy efficiency through special tax credits.3 Three categories of income are of principal concern to taxpayers: ordinary income, capital gain, and tax-exempt income. ### Ordinary Income The tax law distinguishes ordinary income and loss from gain and loss on capital investments. Ordinary income encompasses earnings, interest, regular dividends, rental income, pension distributions, regular annuity and retirement account distributions, and Social Security income received by taxpayers whose total income exceeds certain thresholds. Ordinary income is taxed at rates ranging from 10% to 37% in 2022. Taxpayers whose net investment income exceeds specified thresholds pay an additional 3.8% net investment income tax. --- *Originally published on [Jo](https://paragraph.com/@jo-4/income)*