What type of income is considered ordinary income?

Interest income is considered ordinary income because it is derived from the interest earned on savings accounts, bonds, and loans, and is typically taxed at the individual's ordinary income tax rates. Ordinary income includes wages, salaries, commissions, and interest, all of which are subject to regular taxation without the special treatment that some other types of income receive.

On the other hand, capital gains from investments are categorized differently. They occur when an asset is sold for more than its purchase price and can be taxed at preferential rates depending on how long the asset was held. Dividends from stocks can also have different tax treatment; qualified dividends may be taxed at a lower rate than ordinary income. Therefore, while interest income fits neatly into the ordinary income category, capital gains and certain dividends operate under different tax rules.