What constitutes earned income for tax purposes?

Earned income for tax purposes typically includes wages, salaries, tips, and net earnings from self-employment. This definition is crucial because earned income is subject to income tax and is also used to calculate certain tax credits and benefits, such as the Earned Income Tax Credit (EITC).

Wages and salaries come from employment, reflecting the compensation received for work performed, while tips are additional earnings from services provided. Net earnings from self-employment encompass the profits derived from running a business, which also fall into the category of earned income due to the active work involved in generating that income.

In contrast, dividends and interest, rental income, and investment income do not qualify as earned income. These forms of income are generally considered unearned income since they do not arise from active work or personal labor but rather from investments or assets. Thus, the focus on earned income is significant for understanding tax implications and eligibility for certain tax benefits.