Income Definition

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on January 11, 2021

Define Income In Simple Terms

Income is revenue that an individual or business earns in exchange for providing a good or service, or through investing capital. 

Income can come from a variety of sources and may be taxed at different rates, depending on the source. 

For individuals, this is primarily in the form of a wage or salary, but pensions, dividends, interest, and stock options are also sources of income. 

What Does Income Mean In Finance?

Earned income is revenue that an individual receives from performing their job. This is also called ordinary income. 

It is distinct from unearned income, which is considered to be any and all sources of income outside of regular employment, such as long-term capital gains.

The reason that this distinction exists is because of the tax implications of each type of income.

Ordinary income is subject to full taxation by the government, but certain sources of unearned income may be tax exempt or taxed at a lower rate.

Income Example

For example, qualified dividends and long-term capital gains made on investments are taxed at a lower rate than ordinary income. 

Income from social security is sometimes taxed at a lower rate as well, depending on the amount of income an individual receives from other sources.

Some income may even be tax exempt. 

Examples of tax exempt income are US treasury securities, which are exempt at the state and local levels, and interest payments on municipal bonds, which may be exempt at the federal, state, and local level, and capital gains that are offset by capital losses.

Disposable income is the personal income that an individual has remaining after paying income taxes. 

This income is spent on necessities such as food, clothing, transportation, and so on. 

Discretionary income is the money remaining after paying taxes and after purchasing necessities. 

This is the money people spend on things like vacations, luxuries, and other nonessentials.

Income Definition FAQs

Income is revenue that an individual or business earns in exchange for providing a good or service, or through investing capital.
Earned Income is distinct from unearned income, which is considered to be any and all sources of income outside of regular employment, such as long-term capital gains. The reason that this distinction exists is because of the tax implications of each type of income.
Income can come from a variety of sources and may be taxed at different rates, depending on the source.
Earned income is revenue that an individual receives from performing their job. This is also called ordinary income.