A Progressive Tax System

The United States federal tax system is progressive, which means that people who have higher incomes pay a higher tax rate on each additional earned.

Most income can be grouped into broad categories: ordinary income and capital gains. Each category receives its own income tax treatment.

For retirees, ordinary income most commonly includes earned income, taxable interest, rents, short-term capital gains, pension payments, and withdrawals from IRA accounts. The taxable portion of Social Security benefits is also treated as ordinary income.

Long-term capital gains and qualifies dividends to receive favorable tax treatment compared to ordinary income, with brackets considerably lower than those for ordinary income. These brackets, however, are tied to the amount of ordinary income a taxpayer has.