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Tax Glossary

Key Tax Term

Earned Income

Earned income is money you receive for working. It includes wages, salaries, tips, commissions, and self-employment income. It does NOT include investment income or passive income. Earned income is the foundation for many tax rules and credits.

💡Simple definition

Earned income is money you make by working-either for an employer or for yourself. If you actively do work to earn it, it's earned income.

What counts as earned income?

  • Wages from a job (Form W-2)
  • Salaries
  • Tips
  • Commissions
  • Bonuses
  • Self-employment or freelance income (reported on Schedule C)
  • Union strike benefits
  • Combat pay (elective for credit purposes)

What does NOT count as earned income?

These are not earned income because you didn't perform work to receive them:

  • Interest income
  • Dividends
  • Capital gains
  • Social Security benefits
  • Unemployment income
  • Pensions or retirement withdrawals
  • Rental income (unless you materially participate)
  • Child support or alimony (post-2018)

Why earned income matters

Earned income is used to determine:

  • Your eligibility for the Earned Income Tax Credit (EITC)
  • Your eligibility for the Child Tax Credit
  • Whether you can contribute to an IRA
  • Your Social Security work credits
  • Your taxable income and tax bracket

🧮Quick examples

Example 1:You work at a restaurant and earn $28,000 in wages + $4,000 in tips. → All of this is earned income = $32,000

Example 2:You are a freelance designer who made $55,000 last year. → All of this is earned income = $55,000

Example 3:You earned $500 in dividends from stocks. → This is NOT earned income (it's investment income).

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Disclaimer: This earned income overview is for general education and does not replace IRS rules or professional tax advice. Tax laws change frequently. Consult the IRS or a qualified tax professional for specific guidance.