Earning Income
In this section, you will learn how income is produced and what factors can affect it.
Earned Income
This is money you earn by actively working. You trade your time, energy, or skills for pay. It can come from hourly jobs, internships, or side gigs. Most people start with this kind of income.
Unearned Income
This is money you receive without doing any work in the moment. It could come from gifts, government benefits, or money your savings make through interest. You didn’t “earn” it actively.
Passive Income
Passive income keeps coming in after you’ve done the initial work. You may not need to work daily to keep earning. It often takes time or investment to set up, but it pays off long-term.
Business Income
This is money you make from running your own business. You're responsible for the work, planning, and earning. This can be full-time, part-time, or just something you do on the side.
How do taxes affect income?
When you earn money from a job, you don’t get to keep all of it—taxes are taken out first. These taxes help pay for things like schools, roads, and hospitals. Here's how it works:
Gross V. Net Income:
Gross
Net Income
This is your total earnings before any deductions or taxes are taken out. It's the amount your employer says you earned.
This is the money you actually take home after taxes and other deductions. It's what you see in your bank account.
Types of income deducted from your paycheck:
Federal Income Tax
Goes to the U.S. government. The amount depends on how much you earn—the more you make, the higher the percentage. You’ll fill out a W-4 form when you get hired to help your employer figure out how much to take out.
State Income Tax
Not all states have it, but if yours does, a portion is also taken out for your state government. Used for things like state schools, public parks, and safety services.
Social Security Tax
Usually 6.2% of your paycheck. Goes to support retired workers, people with disabilities, and survivors of deceased workers.
Medicare Tax
Usually 1.45% of your paycheck. Helps pay for healthcare for people over 65 and some younger people with disabilities.
Tax-Saving Strategies:
1. Use Student Tax Credits
Credits like the American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit can lower your tax bill if you’re paying for school. These credits cover tuition, books, and other school-related costs.
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2. Track Education Expenses
Save receipts for tuition, books, supplies, and even software or tech used for school. These can help you qualify for tax deductions or credits when it’s time to file.
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3. Contribute to a Roth IRA
If you have earned income, opening a Roth IRA lets your money grow tax-free over time. It’s a smart long-term move and can offer tax-free withdrawals later in life.
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4. Take Advantage of the Standard Deduction
If you earn less than the standard deduction amount (about $14,600 in 2024), you may not owe any federal income tax. It reduces your taxable income automatically—no extra paperwork needed.
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5. Claim Yourself on Your Tax Return (if allowed)
If your parents don’t claim you as a dependent, you may be able to get a bigger refund. Check what works best for your family’s situation before deciding.
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6. Use Free Tax Filing Services
Don’t spend money on filing—IRS Free File and tools like TurboTax or H&R Block Free Edition are available if your income is below a certain limit. These tools guide you step-by-step and help maximize your refund.
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7. Deduct Charitable Donations
If you donated money or items to a registered charity, you may be able to deduct their value from your taxable income. Be sure to keep a receipt or record for each donation.