Earned Income
Candlefocus EditorIncome from investments and government benefit programs, such as Social Security, are not considered earned income. This is because these types of income are not directly dependent on working, and are usually taxed at different rates.
When it comes to taxation, earned income is taxed differently from unearned income. For example, interest from investments, like bonds and stocks, are typically taxed at a higher rate than earned income.
Individuals with lower incomes may be eligible for an earned income tax credit (EITC). The EITC can significantly reduce taxes for individuals and families, potentially resulting in a refund. Unlike most U.S. tax credits, the EITC is refundable, meaning that any remaining credit can be refunded even if the individual’s taxes owed are zero. To take advantage of the EITC, individuals must have earned income and pass a few other requirements.
Most individuals receive the majority of their income from earned income sources. Given its importance, understanding how it is taxed can save individuals from paying unnecessary taxes and take advantage of available tax credits. Individuals should consult a knowledgeable tax agent, accountant, or financial advisor to ensure all credits are received.