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Earned Income Is Taxed Differently Than Unearned Income

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Definition:

Earned income is the money you earn from working. It includes wages, salaries, tips and net earnings from self employment income.

Earned income does not include investment income like annuities, pension income, withdrawals from IRAs and other retirement accounts, capital gains distributions, and passive income generated from rental real estate.

Taxes on Earned Income

  • You will pay FICA taxes (sometimes called payroll taxes) on your total earned income.
  • You will not pay FICA taxes on unearned income.

When you retire you will make a shift from relying on earned income to relying on passive income.

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