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For anyone that needs to file taxes, it's important to know what qualifies as earned income because it's subject to being taxed by the government. On the other hand, unearned income, such as income from unemployment or social security, is treated differently by the IRS. In addition, those that do not make enough to need to file a tax return may still qualify for the earned income tax credit. Learning what earned income is will help you not only save money and possibly qualify for the tax credit, but it is also necessary to properly file your tax return.
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Understanding Earned Income
Earned income is all the taxable income you earn from home or work. This income includes money that is paid to you by someone or from a business that you own.
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Taxable Earned Income
Wages, salaries, and even tips are considered taxable earned income. Commissions and bonuses are included as earned income. Union strike benefits and long-term disability benefits paid prior to reaching the minimum age of retirement are also considered earned income. If you are self-employed, your net earnings are your earned income. For those in the armed forces, combat pay is taxable earned income. In this case, you may choose to have the nontaxable combat pay included in your earned income for the earned income tax credit (EITC), which may increase--or decrease--your EITC.
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What is Not Earned Income
Interests and dividends received, social security money, pensions, unemployement benefits, alimony, and child support are not considered earned income, and thus do not qualify for the EITC. Any money that derives from investments or sources other than active work are considered "unearned."
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Earned Income Tax Credit (EITC)?
The EITC is a refundable tax credit for low to moderate income individuals and families that work. When the EITC is greater than the amount owed on your federal tax return, a refund results. Taxpayers may qualify for the EITC even if they didn't make enough money to require filing a tax return.
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"What is Earned Income?" IRS.gov. 11 December 2008. 31 March 2009. http://www.irs.gov/individuals/article/0,,id=176508,00.html
"It's even easier to find out if you qualify for EITC." 06 February 2009. 31 March 2009. http://www.irs.gov/individuals/article/0,,id=96406,00.html
"Unearned Income." Investopedia.com. 31 March 2009. http://www.investopedia.com/terms/u/unearnedincome.asp