What is Income? Definition & Examples

May 5, 2023

What is Income?

Income is the money, value, or other benefit from either investments or in exchange for work and/or goods.

An example of income is the amount of money you bring in from an Amazon FBA business or from your paycheck.

A simple definition of income is money collected through work, investments, or selling products.

Income synonym: earnings, profits, revenues

How to pronounce income: IN- kuhm

Income in a sentence: The income I bring in from affiliate marketing is not as much as what I earn with dropshipping.

Income plural: income OR incomes, depending on the context. 

Income is important because with it, you and your family can purchase the things you need to survive, like food, clothing, a home, and education. Once these necessities are met, you can use it to purchase things you want or leverage your income so that it brings in more income for you. This provides financial freedom.

To create income, you can get a job, sell a product, provide a service, promote another party’s goods, offer digital marketing services, invest, etc. In this article, we’ll cover many types of income you can add to your list of income streams.

Other Definitions of Income:

  • In a job, income is the money an employer pays you plus tips, bonuses, or any other additional pay. It does not include benefits, like medical, dental, or vision. These are tax-exempt.
  • Income definition economics- The total flow of money received for either products sold, time worked, or investments. Income effect is a microeconomics term that defines what happens when a change in income affects the purchase of goods.
  • Income definition accounting- The same as net income, meaning the gross profit earned by a company after expenses. Deferred income, a part of accrual accounting, refers to money paid in advance for products or services that have not been delivered to the customer. Accrued income is very similar- but refers to money from investments that have not yet been received.
  • Income definition business- Money received by a company (or individual with an LLC) from selling products or services.
  • Legal definition of income- “Money, goods, or other economic benefit received.”- The People’s Law Dictionary

Income definition IRS- When the IRS refers to income in income tax, they’re referring to gross income. Gross income is the same as total income. It includes all the money you have collected before taking out any adjustments, expenses, and deductions. Gross income does not include tax-exempt income. Adjusted gross income takes out some of this total with certain adjustments, like student loan interest or alimony payments.

Gross national income is the total amount earned by all the people within a country, including both what was earned within the country, plus the positive and negative balance from outside the country. 

Net income is total money minus costs, operating expenses, and taxes. It also includes possible depreciation of assets and write-offs. The net income formula is: Total Revenue - Total Expenses = Net Income. An income statement breaks these figures down.

Other Income Terms

  • Discretionary income definition- Money left over after taxes and cost-of-living expenses are taken out. This money is available for savings, spending, or investing.
  • Disposable income definition- The money you have left over after taxes ONLY. Disposable income does not include any other expenses taken out.
  • Residual Income definition- Available money after all obligations have been paid; taxes, cost-of-living expenses, debts, utilities, etc.

Types of Income Examples

To classify income, taxable and tax-exempt income are the two major categories. Taxable income is the total amount of money you’ve made after exemptions and allowable deductions are taken out. Taxable income includes any ordinary income, or earned income, that comes from your business, your job, or your investments. 

You can build taxable income with passive income, portfolio income, and active income.

Passive Income

Income without working is called passive income. The passive income definition is: Money brought in with little to no effort, from a source other than an employer. You can earn passive income by creating automatic income streams, selling certain products, or renting digital assets to small businesses.

Three other forms of passive income are:

Premium income- Money from a contract or insurance policy premium, where the customer pays a certain amount for coverage per month.

Rental income- Money collected from tenants living in a property your own or using your office space or land.

Royalty income- Money received from any unique intellectual property you own, like a book or song.

Leveraged Income

Leveraged income is money that you have increased and optimized by minimizing the time you’ve spent on earning that money. It’s a strategy for those who want passive income or mostly passive income. Leveraged income is also what we must focus on creating to escape the middle-class lifestyle. It's how the wealthy approach income differently.

In the book Rich Dad Poor Dad, Rovert Kiyosaki talks about how the rich dad gained income-producing assets while the poor dad bought liabilities. While the poor dad focused on income statements, while the rich dad focused on assets like real estate, stocks, and intellectual property. Simply, he created leveraged income alongside his assets in order to have more time to build more assets or simply enjoy life.
What is the median household income?
  • Low income- We classify low income as lower than 150% of the poverty level, which was $13,590/year in 2022. This means any individual making less than $20,385/year is a low income earner.
  • Lower-middle income and upper-middle income- According to Pew Research Center, the income definition of middle class is “two-thirds to double” the median household income nationwide. Middle class income is between $47,189 and $141,568.
  • High income- High class income, or upper class income, is greater than 50% above the median household income. So, in 2021, if a family made $106,176 or more, they fall into this high income category. A top 5% income was $343,000 in 2020, and to join the 1%, you’d need to make at least $824,000/year.

In the USA, the median household income in 2021 was $70,784. According to Nerdwallet, the average expenses of a family of 4 were $92,989 that same year. These expenses did not include debt payoff or credit card payments. Leveraging your income with time input is important because it can help you break out of the lower and.or middle-class lifestyle.

Income inequality is the measure of how uneven these numbers are. 

Note: These differ from income per capita, which is the amount of money made per resident in a certain geographic area. In the US, this number was $37,638 between 2017 and 2021, according to the US Census Bureau. Income distribution is the measure of how a country’s total Gross Domestic Product is divided among its citizens.

Portfolio Income

Portfolio income is all money collected from investments, interest, stocks, bonds, dividends, mutual funds, and other sources. Portfolio income is a source of unearned income. 

Investment income- Money from all investment sources, like:

  • Income from capital gains- Profits received after selling an investment. Depending on your income, you’ll pay a 0%, 15%, or 20% tax on capital gain income.
  • Dividend income- Money collected as a shareholder of a company or other entity, paid out from their profits.
  • Interest income- Money collected from debtors because of a loan, or from some bank accounts

Retirement income is often thought of in relation to investments and portfolio income. But retirement can include other income, like social security benefits, IRAs, profit-sharing plans, pensions, and more. You may also be familiar with the term fixed income. A fixed income is money that comes from an investment with a set payout.

Earned Income

Earned income, or active income, is money paid out by an employer for work. Hourly workers may collect earned income as minimum wage. Or, they might collect a salary.

Besides earned income from an employer, you can also earn:

Business income- Money earned through the business you own and run. It may come from selling a service, like roofing and plumbing. Or, your business may be in healthcare, child care, or education. Business income can come from selling products in a brick-and-mortar business, or selling items online like an e-commerce store. 

Online income- Money brought in by making money online, often through a small business or side hustle. Online income can be made by following various business models, like affiliate marketing, dropshipping, running a digital marketing agency, local lead generation, and many more.

Tax-Exempt Income

Tax-exempt income is money not taxed by the IRS. You keep all this money. Some examples of income exempt from federal income tax are:

  • Inherited income- money and assets handed down from a deceased party. However, some inherited income might fall under an estate tax, which is paid through the estate.
  • Supplemental security income- money paid from the government to individuals with a disability with limited income and resources. This differs from social security benefits, which are taxable.

What is NOT Income (for Income Tax Purposes)?

Cash rebates, alimony payments, welfare payments, and money reimbursed from adoptions are not considered income when you do your taxes.

How Do the Rich Approach Income Differently?

The rich approach income differently by reinvesting in valuable assets, diversifying income streams, and leveraging income. With the cost of living increasing nationwide and inflation skyrocketing, it's more important than ever for the lower and middle classes to follow suit.

With local lead generation, you can make leveraged, passive income by creating a digital asset, ranking it organically to the top of Google, and renting it out to small businesses. Once you have the site ranked, it requires little effort besides occasional maintenance. A single site can bring in thousands per month, and there’s no limit to how many websites you can set up. It’s the best way to earn passive income online in 2023.

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Ippei Kanehara

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