Earned income is any type of income that is earned through participation in a trade, business, or profession. This type of income can be generated from salaries, hourly wages, commissions, self-employment, or any other type of wage-based work.
There are many forms of income that can be earned, each of which are taxable as income and must be reported on personal income tax returns. The most common form of earned income is salary. Other forms of earned income are alimony, tips, bonuses, overtime, stock options, and company stock.
Earned income is different from passive income, which is income that is generated from passive sources, such as rental property, dividends, capital gains, and annuities. Passive income does not require active participation and is taxed differently than earned income and is preferred by many investors as a source of income.
It is important for investors and professionals to understand the difference between earned and passive income. Earned income is taxed according to the individual’s marginal tax rate, whereas passive income is taxed at the lower capital gains tax rate. Furthermore, passive income can provide investors with greater flexibility in terms of when it is recognized and taxed.
In addition to understanding the differences between earned and passive income, it is important for investors and professional to be aware of the various deductions and credits related to earned income. This includes deductions for business expenses, child care expenses, and charitable contributions, among others. Taxpayers should also be aware of the Earned Income Tax Credit (EITC), which provides tax relief to working individuals with low to moderate incomes.
Finally, to ensure that any form of earned income is reported correctly on tax forms, it is important to have a basic understanding of the proper procedures and financial protocols for proper record keeping. This includes keeping track of receipts, verifying information, and submitting tax documents in a timely manner. By doing so, taxpayers can ensure that they are in compliance with the law and maximize their returns.
Conclusion
Having a basic understanding of earned income is essential for anyone who participates in a trade, business, or profession. Being aware of the various deductions and credits related to earned income, as well as the proper financial protocols for record keeping, can help investors and professionals ensure that their earned income is reported correctly and maximize their returns.