Earned Income
Definition
Money you make from work — salary, wages, or self-employment income. Specifically, income from your labor, not investments. Your W-2 shows earned income. Investment income (dividends, capital gains) is not earned income.
Why It Matters
Certain tax rules only apply to earned income. You can only contribute to an IRA up to your earned income amount. HSAs require earned income. Understanding the distinction helps you maximize tax breaks.
Example
You earn $80,000 salary (earned income) and $20,000 in dividend income (unearned). Your earned income is $80,000. You can contribute max $7,000 to a Roth IRA and max $8,300 to an HSA based on earned income of $80,000.