7+ Forms of Income You Need to Know

Your income is one of the most important aspects of Personal Finance. Income is the fuel that creates the movement to propel you on your journey to being Financially Grounded. Income, or the lack thereof, has a tremendous effect on what you can and cannot achieve at any given moment in finance.

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Can I afford to go on vacation this year? Do I have enough money on hand to go out to dinner rather than cooking tonight? Do I have the means to replace something which has been broken?

These are the questions you ask yourself that take into account income. If the answer to these types of questions is “No” then you will have to wait to save up for them or you may end up putting them on credit.

There are many forms that Income can take. Look at the following to determine which you have. You may be surprised that you have multiple income streams available to you that you may not have been aware of.

For a full list as described by the Internal Revenue Service (IRS), please see Topic No. 400.

Earned Income

All of the wages, salaries, bonuses, and tips that you receive for performing services as an employee of an employer is Earned Income. The majority of us receive (or have) this type of income as it is the most common type of income, and it is gained through contract work or W-2 work.

Business Income

Income that you receive from the sale of products or services is considered Business Income. Note, if your business is a real estate business, the rental income that you receive is business income.

Interest Income

This form of income is earned from bank accounts, money market accounts, certificates of deposit, corporate bonds, and insurance dividends. It is paid based on percentage rate yields and paid for a certain type period (ex. monthly or annually). Interest Income may be taxable, please see IRS Topic No. 403 for additional information.

Capital Gains

Almost anything you own for personal or investment purposes is a capital asset. When you sell a capital asset, the difference between the amount initially paid and the amount the asset was sold for is a capital gain if there is a profit. Capital gains are typically taxed at a lower rate than earned income.

Dividends

Dividends are distributions from a corporation in which you own stock. Dividends are paid in cash, which can either be paid directly to you or used (sometimes) to purchase additional shares, known as dividend reinvestment. If you stay invested in the same corporation over a long period of time, the amount that is invested from the dividends you receive can become far higher than the amount you yourself invest.

Pensions and Annuities

Pensions and Annuities are retirement benefits that you may receive from a qualified employer retirement plan. All or some portion of the money you receive may be taxable, please see IRS Topic No. 410 for additional information.

Rental Income

Rental Income is the fair market value you receive for another’s use of real estate that you own is rental income. Rental income includes not only the rent paid monthly, but also any money received from security deposits that are not returned, expenses paid by a tenant, advance rent, and amounts paid to cancel a lease.

Other Income

Other forms of income that you may be receiving can include alimony, child support, combat pay, court awards for damages, disability benefits, garage sale proceeds, gambling income, gifts received, and inheritance received.

Conclusion

As you can see there are many different forms of income that can be used in your journey to being Financially Grounded. You are likely receiving one, if not more, of these different forms of income.

What other forms of income can you think of that were not mentioned here? I look forward to hearing what you have to say in the comments.