Definition
Income taxed at the regular federal bracket rates: wages, self-employment earnings, interest, short-term capital gains, and most traditional retirement account withdrawals. It contrasts with long-term capital gains and qualified dividends, which get lower preferential rates.
Why it matters
Which bucket income lands in changes the tax bill on the same dollars. Holding an investment past one year, or earning dividends that count as qualified, moves income from ordinary rates to the cheaper capital gains schedule.
Example
An investor sells a winning position after 11 months, so the $10,000 profit is ordinary income taxed at their bracket rate. Held five more weeks, it would have been a long-term capital gain at lower rates, often a savings of a thousand dollars or more on a gain this size.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.