What Is Current Income? Types, Tax Rates, and Exemptions

Current income is the money you receive on a recurring basis from work, investments, or business activity during a tax year, as distinct from one-time proceeds like the sale of a house or an inheritance. Federal law treats almost all of it as taxable: the Internal Revenue Code defines gross income as “all income from whatever source derived,” and wages, interest, dividends, rents, and business profits fall squarely inside that definition.¹ Most current income is taxed at ordinary rates that reach 37% for 2026, while a few categories, notably qualified dividends, get the lower long-term capital gains rates topping out at 20%.²

“Current income” itself isn’t a term defined by the tax code. It’s a planning label that groups together the recurring cash you earn or receive in a given year, in contrast to gains realized when you sell an accumulated asset. The distinction shapes the rate you pay, the forms you file, and whether you owe quarterly estimated payments.

The Main Types of Current Income

Earned Income

Earned income is compensation for work you personally perform: wages, salaries, tips, bonuses, commissions, and professional fees. Employees see it reported in Box 1 of Form W-2, which shows taxable wages after pre-tax items like traditional 401(k) contributions and cafeteria-plan health premiums.³

If you’re self-employed, your net business profit is earned income, reported on Schedule C.⁴ The word “net” is doing real work: you subtract legitimate business expenses from gross revenue, and only the profit is taxed. Self-employment profit also triggers self-employment tax, covered below.

Portfolio Income

Portfolio income comes from investments you hold rather than work you perform. Interest from savings accounts, CDs, and bonds is reported on Form 1099-INT and taxed as ordinary income.⁵ Dividends from stocks appear on Form 1099-DIV.⁶ Both are reported on Schedule B when the annual total exceeds $1,500.

Dividends split into two categories with very different consequences. Ordinary dividends are taxed at your regular income tax rate. Qualified dividends, which require you to hold the stock for at least 61 days during the 121-day window surrounding the ex-dividend date, are taxed at the long-term capital gains rates of 0%, 15%, or 20%.⁷ For a single filer at $100,000 of taxable income, that’s the difference between 22% and 15%.

One boundary worth flagging: portfolio income sits outside the passive activity rules, so passive losses from rentals cannot be used to shelter it.

Passive Income

Passive income comes from rental real estate or business ventures where you don’t materially participate in day-to-day operations. Rental income is the most common example, reported on Schedule E.⁸ Income from limited partnerships and certain S-corporation interests also lands here.

The IRS defines material participation through seven tests. The most straightforward is spending more than 500 hours a year in the activity; miss all seven and the income is passive.⁹ The classification matters because passive losses can only offset passive income. A $10,000 loss on a rental generally cannot reduce your wages or dividends; it carries forward until you generate passive income to absorb it or dispose of the activity.¹⁰

Other Recurring Sources

Several regular income streams don’t fit the earned/portfolio/passive breakdown but still count as current income.

Retirement distributions from traditional IRAs and 401(k) plans are taxable as ordinary income when received. They appear on Form 1099-R and flow to lines 4 and 5 of Form 1040.¹¹
Social Security benefits are taxable in part depending on combined income. For single filers, the taxable portion begins at $25,000 of combined income, and 85% becomes taxable at $34,000. For joint filers, the thresholds are $32,000 and $44,000.¹²
Gig and app-based earnings are fully taxable regardless of amount. For 2026, third-party payment platforms send Form 1099-K only when gross payments exceed $20,000 and transactions exceed 200, but the income is owed either way.¹³

Ordinary Income Tax Rates for 2026

Most current income is taxed at the seven federal ordinary rates. For 2026 they run 10% to 37%.¹⁴

Single filers:

10%: Up to $12,400
12%: $12,401 to $50,400
22%: $50,401 to $105,700
24%: $105,701 to $201,775
32%: $201,776 to $256,225
35%: $256,226 to $640,600
37%: Over $640,600

Married filing jointly:

10%: Up to $24,800
12%: $24,801 to $100,800
22%: $100,801 to $211,400
24%: $211,401 to $403,550
32%: $403,551 to $512,450
35%: $512,451 to $768,700
37%: Over $768,700

These rates apply to taxable income, meaning gross income minus the standard or itemized deduction. For 2026 the standard deduction is $16,100 for single filers and $32,200 for joint filers, with an additional $2,050 (single) or $1,650 per qualifying spouse (joint) for filers 65 and older.¹⁵ A single filer earning $60,000 in wages subtracts $16,100 and pays tax on $43,900, keeping the entire amount in the 12% bracket or below.

Qualified Dividend Rates

Qualified dividends use the long-term capital gains schedule of 0%, 15%, or 20%. For 2026, a single filer pays 0% up to $49,450 of taxable income, 15% between $49,450 and $545,500, and 20% above that. For joint filers, the 15% rate starts at $98,900 and the 20% rate at $613,700.⁷ Payments from REITs, money market funds, and tax-exempt organizations are generally taxed as ordinary income even if reported near the qualified box.

Self-Employment Tax

If you’re self-employed, you owe both halves of Social Security and Medicare, combined as self-employment tax of 15.3% (12.4% Social Security plus 2.9% Medicare).¹⁶ The Social Security portion applies only to the first $184,500 of net earnings for 2026; Medicare has no cap.¹⁷ You can deduct the employer-equivalent half as an adjustment to gross income on Form 1040, which lowers income tax but not the self-employment tax itself.

W-2 employees don’t file this because the employer withholds 6.2% for Social Security and 1.45% for Medicare from each paycheck and matches the same amounts.¹⁸

Surtaxes on Higher Earners

Two additional taxes can stack on top of the regular rates. The 0.9% Additional Medicare Tax applies to wages and self-employment income above $200,000 for single filers or $250,000 for joint filers.¹⁹ Employers start withholding it once an individual’s wages cross $200,000 regardless of filing status, so joint filers whose individual wages stay below that line may need to reconcile at filing.

The 3.8% Net Investment Income Tax hits the lesser of net investment income or the amount by which modified adjusted gross income exceeds $200,000 (single) or $250,000 (joint).²⁰ Net investment income includes interest, dividends, capital gains, rental income, and royalties. It’s the surtax that catches portfolio and passive income which otherwise escapes Social Security and Medicare.

Current Income That Is Partly or Fully Tax-Exempt

Not every recurring dollar is taxable. Interest from municipal bonds issued by state and local governments is generally exempt from federal income tax, though it can be pulled into the alternative minimum tax in some cases. This exemption is what makes municipal bonds attractive to investors in higher brackets: a muni yielding 3.5% delivers more after-tax income than a corporate bond yielding 4.5% for someone in the 32% bracket.

Other common exclusions from gross income include qualified Roth IRA distributions, certain veterans’ benefits, life insurance proceeds received as a beneficiary, workers’ compensation payments, and most gifts. Interest from U.S. savings bonds used for qualified education expenses may also escape federal tax if you meet the income limits.

Estimated Tax Payments on Non-Wage Income

If you receive significant current income without withholding, such as self-employment profit, rental income, or investment earnings, you likely need to pay quarterly estimated tax. The IRS runs on a pay-as-you-go system, not a single settle-up in April.

You generally must make estimated payments if you expect to owe at least $1,000 after subtracting withholding and refundable credits, and your withholding and credits will cover less than the smaller of 90% of the current year’s tax or 100% of the prior year’s tax. If prior-year adjusted gross income exceeded $150,000, that second figure rises to 110%.²¹

For 2026, quarterly due dates are:

First quarter: April 15, 2026
Second quarter: June 15, 2026
Third quarter: September 15, 2026
Fourth quarter: January 15, 2027

Missing or underpaying triggers a penalty computed on each shortfall for the days it stays unpaid. The underpayment interest rate for individuals was 7% per year, compounded daily, as of early 2026, and it adjusts quarterly.²² People moving from W-2 employment into freelancing, or suddenly earning substantial investment income, are the most common to get caught by this.

Gross vs. Net Current Income

Gross income is the total before subtractions. For an employee, that’s Box 1 of the W-2, which reflects taxable wages after pre-tax items like 401(k) contributions and employer health premiums but before income tax withholding.³ For a self-employed person, gross income is total business revenue before expenses.

Net income is what’s left. For W-2 workers, take-home pay is gross wages minus federal and applicable state withholding, the employee’s share of FICA (6.2% Social Security and 1.45% Medicare), and any voluntary benefit or retirement deductions.²³ For a business, you start with total revenue, subtract cost of goods sold to reach gross profit, then subtract operating expenses to reach net profit. When you recognize that income depends on your accounting method: cash-basis taxpayers count income when it’s received, accrual-basis taxpayers when it’s earned.²⁴

1
Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined
2
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
3
Internal Revenue Service. Publication 17, Your Federal Income Tax
4
Internal Revenue Service. About Schedule C (Form 1040)
5
Internal Revenue Service. About Form 1099-INT, Interest Income
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Internal Revenue Service. About Form 1099-DIV, Dividends and Distributions
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Internal Revenue Service. Topic No. 404, Dividends and Other Corporate Distributions
8
Internal Revenue Service. Topic No. 414, Rental Income and Expenses
9
Internal Revenue Service. Publication 925, Passive Activity and At-Risk Rules
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Internal Revenue Service. Topic No. 425, Passive Activities – Losses and Credits
11
Internal Revenue Service. Form 1040 – 2025 U.S. Individual Income Tax Return
12
Internal Revenue Service. IRS Reminds Taxpayers Their Social Security Benefits May Be Taxable
13
Internal Revenue Service. IRS Issues FAQs on Form 1099-K Threshold Under the One, Big, Beautiful Bill
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Internal Revenue Service. Rev. Proc. 2025-32
15
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
16
Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
17
Social Security Administration. Contribution and Benefit Base
18
Social Security Administration. What Is FICA?
19
Internal Revenue Service. Topic No. 560, Additional Medicare Tax
20
Internal Revenue Service. Net Investment Income Tax
21
Internal Revenue Service. 2026 Form 1040-ES
22
Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026
23
Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
24
Internal Revenue Service. Publication 538, Accounting Periods and Methods