What is earned income?

It helps to think of earned income as money you work for, as opposed to passive income like interest, dividends, or rental income if you're not in the business of renting out properties.

The IRS defines earned income as:

• Taxable income you earned as an employee, such as wages, salaries, commissions, and tips
• Profits from operating your business or farm
• Long-term disability pay, if received before the minimum retirement age
• Union strike benefits

The IRS also gives you the option of treating nontaxable combat pay (code Q in box 12 of your W-2) as earned income for the Earned Income Credit (EIC).

Workers' comp, unemployment, and pensions don't count as earned income.