Ordinary Income Tax: This is what people mean when they talk about income tax. This tax applies to earned income from work, though other types of income also fall into this category.

How does Ordinary Income Tax Work? In the United States, we have a progressive tax system. As your income goes up, so does your tax rate. In 2026, federal income tax rates range from 10% to 37%. State and local governments can also impose income tax, but for simplicity, I will focus on federal taxes.

A common misconception is that taxpayers pay their top marginal rate on all their taxable income, but this is not true. To take a simple example, if a married couple earned $150,000 in taxable income in 2026 from working, they would be in the 22% marginal tax bracket. They would pay 10% on the first $24,800, 12% on the income between $24,801 to $100,800, and 22% on their remaining earned income.

What is Taxed at Ordinary Rates?

A lot! This is not an exhaustive list, but here are the most common types of income that are taxed at ordinary income rates.

• Wages from working

• Bonuses

• 1099 income from self-employment, freelancing, etc.

• Interest (CDs, taxable bonds, loans)

• Ordinary dividends (Qualified dividends are taxed at more favorable capital gains rates)

• Short-term investment gains (held for less than a year)

• Tax-deferred retirement account distributions (IRAs, 401(k)s, SEPs, etc.)

• Annuity payments (excluding your basis)

• Pension payments

• Real estate investment income

• Lottery and Gambling winnings

• Social Security Income (although not 100% is taxed)

• And more…

As you can see, many types of income are subject to ordinary income rates. Ordinary income rates are higher than the more favorable capital gains treatment. So, what is the deal with capital gains tax?

Capital Gains Tax

Investments that have been held for a year or more and sold for a profit are taxed at more favorable capital gains rates. Only the gain above the basis is taxed, not the entire value of the sale. This applies to stocks, bonds, real estate, businesses, etc. Gains from collectibles do not get capital gains treatment. They are taxed at a flat 28% rate.

The rates for capital gains in 2026 are 0%, 15%, and 20%, depending on your income. Single filers earning less than $49,450 will pay 0% capital gains tax. If your income is between $49,451 and $545,500, you are in the 15% bracket. Those with income above $545,500 are subject to the 20% capital gains rate. For anyone who is married and files a joint tax return, the 0% bracket is for those earning less than $98,900. Married folks with income between $98,901 - $613,700 fall into the 15% capital gains bracket. Couples who make more than $ 613,700 will pay the 20% capital gains rate.

Capital gains rates are more favorable than ordinary income rates, so a good tax-planning technique is to hold investments long enough to benefit from these lower rates when possible.

Note: Long-term capital gains won’t push you into a higher ordinary income tax bracket, but they can push you into a higher capital gains bracket. Short-term capital gains can push you into a higher ordinary income tax bracket.

All things tax-related can get complicated, so always ask your accountant or financial advisor if you have any questions about your specific situation.