Income Overview: What Are the Types of Income?

What is income?

Income is money that’s earned from an activity such as a job, business venture, or investment. It can be in the form of wages, profits, rents, interest and dividends. It is what allows us to pay for goods and services and survive financially. In most countries income is taxable by law, meaning that money must be paid to the government in exchange for what is earned. Income is an important factor in determining the economic well-being of a person or household, as it contributes to their ability to cover basic costs such as food, housing and health care.

Additionally, income can also be used to fund savings or investments that can provide financial security in the future. Understanding what income is and how it can be generated is essential for anyone looking to secure their financial future.

What are the types of income?

The types of income can vary depending on what type of activity is generating the money. Generally, income can be broken down into three main categories: earned income, passive income and portfolio income.

Earned Income

Earned Income is what most people think of when they hear the word ‘income’. This refers to money that has been earned from an activity such as a job, freelancing or self-employment. This type of income is what most people rely on to pay for everyday expenses and is seen as the foundation for most financial plans.

Passive Income

Passive Income refers to money that is earned without directly being involved in the activity that generates it. For example, interest from investments or rental income from real estate. This type of income is what many individuals strive to build up over time in order to achieve financial freedom and create additional sources of income.

Portfolio Income

Portfolio Income is what is earned from investments or a portfolio of assets such as stocks, bonds, mutual funds and exchange-traded funds (ETFs). Portfolio income can be generated through capital gains, dividends, interest and royalties. This type of income is what savvy investors use to build wealth and secure their financial future.

What are Examples of income?

Active Income is what is earned from a job, typically through wages and salaries. This is what most people rely on to make ends meet. Examples of active income include: wages from a full-time job, income from freelance work or self-employment ventures, commissions from sales and tips received for services provided.

What are examples of passive income?

Passive Income is what is earned without actively participating in the activity that generates it. Examples of passive income include: rental income from real estate investments, royalties from intellectual property such as books or music, interest payments on investments and dividends received on stocks.

What are examples of portfolio income?

Portfolio Income is what is earned from investments or a portfolio of assets. Examples of portfolio income include capital gains from buying and selling stocks, bonds, and mutual funds, dividends received on stocks, interest payments on investments, and royalties from intellectual property such as books or music.

How do taxes affect the three types of income?

Taxes have a significant effect on each of the three types of income. Earned Income is typically subject to what is known as ‘ordinary income tax’, meaning money must be paid to the government in exchange for what is earned in this category.

Passive and portfolio income may be taxed at different rates depending on what type of activity is generating it, what country the income is being generated in, and what type of asset or investment is generating it.

It is important to understand what type of taxes apply to what types of income so that you can properly plan for how much money will ultimately be available after taxes are paid.

Common asked questions about Income

What is Fixed income?

Fixed income refers to investments that provide a steady stream of income over a specified period of time. Typically, these investments have predetermined interest rates and payments that are made on a regular basis such as monthly or quarterly. Examples of fixed-income investments include bonds, government securities and certificates of deposit (CDs).

Is there any tax on income?

Yes, most countries tax income in some form or another. The type of taxes and the rate of taxation varies by country. Generally, income is taxed at progressive rates meaning that higher incomes are typically subject to higher tax rates than lower incomes. It is important to understand what types of income are taxable and what kinds of deductions may be available in order to minimize the amount of taxes paid.

What is Per capita income?

Per capita income is an economic measure of a country’s average income per person. This figure is calculated by dividing the total national income by the population of the country. Per capita income can be used to compare different countries and regions in order to get an idea of their relative wealth and quality of life.

What is Disposable income?

Disposable income is what is left over after taxes and other mandatory deductions have been made from an individual’s gross income. This amount can be used to purchase goods and services or saved for future use. Disposable income is a key indicator of the financial well-being of individuals, households, businesses, and governments.

What is Accrued income?

Accrued income is what is earned over a period of time but has not yet been received. This type of income can come from investments, such as interest payments on bonds or dividends on stocks, or from services rendered such as freelance work. Accrued income must be reported to the government for taxation purposes even if it has not yet been received.

What is the Income effect?

The income effect is an economic concept that refers to how changes in income can cause a person to alter their consumption patterns. When incomes increase, people tend to purchase more goods and services than what they had been purchasing before the change in income. Conversely, when incomes decrease people will often reduce their spending on certain items as well. This can have a profound effect on the economy as a whole.

What is National income?

National income is a measure of all the income earned within an economy over a period of time. This figure includes wages and salaries, profits from businesses, rents from land owners, interest payments on investments, dividends from stocks and bonds, and any other type of money received by individuals or corporations. National income figures are often used to gauge the overall health of an economy.

What is Gross income?

Gross income is what people earn before deductions or taxes are taken out. This figure includes wages, salaries, bonuses, commissions and other forms of compensation. It also includes any money earned from investments such as rent payments, interest payments, dividends, etc. Gross income is what you declare when filing taxes and what your tax liability will be based on.

Net income is what remains after all deductions and taxes are paid. This amount can be used to purchase goods or services or saved for future use. Net income may also include any benefits from an employer such as health insurance, 401(k) contributions, etc. that may lower your tax liability. It is important to understand what types of deductions may be available in order to minimize the amount of taxes paid.

What is Capital income?

Capital income is what is earned from the ownership of assets such as stocks, bonds, and real estate. This type of income typically comes from investments that have been held for a period of time. Capital income includes things like dividends, interest payments, and capital gains on the sale of assets. This type of income is generally taxed at a lower rate than what would be applied to wages or salaries. Understanding what types of investments may be eligible for tax deductions can help you minimize your overall tax burden.

What is Residual income?

Residual income is what is earned from investments or businesses that are partially owned. This type of income can come from rental properties, franchises, or any other type of asset that generates money without the need for active involvement. Residual income can be a great way to supplement other forms of income and provides an opportunity to build wealth over time.

What is Tax-Exempt Income?

Tax-exempt income is what is earned but not subject to taxation. This includes things like social security benefits, pensions, interest payments from certain government bonds, and other types of income that are exempt from taxes under the law. Tax-exempt income can provide a great way to supplement your other forms of income while also reducing your overall tax burden.

What is Business Income?

Business income is what is earned from running a business. This can include profits from operations, revenues from sales, or any other type of money that the business generates. Businesses are typically taxed at a higher rate than what individuals are subject to and it’s important to understand what types of deductions may be available in order to minimize the amount of taxes paid. Understanding what type of business structure may be best suited for you can also help reduce the tax burden associated with running a business.

In conclusion

Understanding what income is and what types are out there can help individuals plan for their financial future and provide them with the opportunity to build wealth over time. Being aware of what kind of income is taxable and what types of deductions may be available can also help reduce taxes paid on income. With this knowledge, individuals can create a plan to generate income and build their financial security.