Final answer:
Unemployment benefits are exempt from the definition of earned income, which means they do not count towards earned income, such as wages or salaries, and do not qualify for the Earned Income Credit.
Step-by-step explanation:
The answer to the question regarding unemployment benefits and earned income is A) Yes. Unemployment benefits are, in fact, exempt from the definition of earned income. Earned income primarily refers to compensation from employment or self-employment, including wages, tips, and salaries. Unemployment benefits are a form of unearned income since they are paid by the government to eligible individuals who are temporarily out of work, not as a result of labor or services performed. Furthermore, the Earned Income Credit (EIC), as a tax credit, is designed for people who have earned income; therefore, unemployment benefits do not count towards the EIC.
It is also important to distinguish that while unemployment benefits are a critical support for individuals who find themselves without a job, having these benefits does not impact the definition of an individual's employment status for the purpose of unemployment rate calculations. The unemployment rate considers whether a person is actively seeking work, not whether they are receiving benefits. The classification of an individual as unemployed is separate from the receipt of unemployment benefits.