Question

How does earned income differed from unearned income like interest or rental income?

Answer 1

Earned income and unearned income are two distinct types of income that individuals can receive, and they differ primarily in how they are generated.

### Earned Income:
1. **Definition**: Earned income refers to the money earned through active participation in work or business activities. This includes wages, salaries, bonuses, commissions, and self-employment income.

2. **Sources**:
- Employment (e.g., salaries, hourly wages)
- Self-employment (e.g., profits from a business)
- Freelancing or contract work
- Tips and bonuses from work

3. **Taxation**: Earned income is typically subject to income tax and may also be subject to payroll taxes, such as Social Security and Medicare taxes in the United States.

### Unearned Income:
1. **Definition**: Unearned income is money earned without actively working or providing services. It usually derives from investments or other passive sources.

2. **Sources**:
- Interest from savings accounts and bonds
- Dividends from stocks
- Rental income from real estate properties
- Capital gains from the sale of assets
- Royalties from intellectual property (e.g., books, music)

3. **Taxation**: Unearned income is generally taxed differently from earned income. For example, long-term capital gains may be taxed at a lower rate than regular income, and certain types of unearned income might be subject to different rules or exemptions.

### Summary:
- **Earned Income**: Generated through active work; taxed as ordinary income.
- **Unearned Income**: Generated from investments or passive activities; may have different tax treatments.

Understanding the differences between the two types of income is important for financial planning, investment strategies, and tax considerations.