Final answer:
Unearned income, considered by the IRS, includes interest and dividends, which is distinct from earned income that typically comes from employment. This classification is important for tax-related provisions such as the earned income tax credit (EITC).
Step-by-step explanation:
The IRS considers unearned income to be income that is not earned from a job or self-employment but comes from other sources such as investments and property. Specifically, according to the IRS, unearned income includes items like interest and dividends option (b), not money you owe for taxes (a) nor income from your salary, wage, and tips (c), which is considered earned income. Unearned income can also include other forms of passive income such as rental property income, alimony, and pension payments.
Understanding the difference between earned and unearned income is crucial for tax purposes because different tax rules may apply. For instance, earned income may be eligible for the earned income tax credit (EITC), an incentive designed to help low-income individuals and families reduce their tax bill and potentially receive a refund.