Quote from Shadetree42:
Can someone who knows define (per IRS rules) what exactly "earned income" is and is not? Is, say, gambling winnings considered earned income?
Pub 17 is the best place to go for these types of common questions. If is free from the IRS and your local library will usually carry them. Earned income can be classified as passive or active and depending on the type of credit (EIC) or how it is taxed is nuanced in its classification.
Gambling winnings are classified as passive income thus not EARNED for EIC or IRA considerations. However they are taxable. "Generally" you must have earnings that have social sec and medicare taxes taken out of to qualify for contributions to an IRA. If MFJ then only one spouse needs to have "earnings".
If you qualify for trader status then my GUESS is since trader earnings are NOT reported on a schedule C (only the expenses are) they would not qualify as earnings for purposes of an IRA.
http://www.irs.gov/pub/irs-pdf/p17.pdf
this passage details some of what you are asking about
edit...sorry thats the whole pub 17...look at pg 48
you can also order this pub
http://www.irs.gov/publications/p590/index.html
Generally, compensation is what you earn from working. For a summary of what compensation does and does not include, see Table 1-1. Compensation includes all of the items discussed next (even if you have more than one type).
Wages, salaries, etc. Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation. The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2.
Commissions. An amount you receive that is a percentage of profits or sales price is compensation.
Self-employment income. If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of:
â¢The deduction for contributions made on your behalf to retirement plans, and
â¢The deduction allowed for the deductible part of your self-employment taxes.
Compensation includes earnings from self-employment even if they are not subject to self-employment tax because of your religious beliefs.
Self-employment loss. If you have a net loss from self-employment, do not subtract the loss from your salaries or wages when figuring your total compensation.
Alimony and separate maintenance. For IRA purposes, compensation includes any taxable alimony and separate maintenance payments you receive under a decree of divorce or separate maintenance.
Nontaxable combat pay. If you were a member of the U.S. Armed Forces, compensation includes any nontaxable combat pay you received. This amount should be reported in box 12 of your 2013 Form W-2 with code Q.
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Gambling winnings are not specifically mentioned as either allowed or disallowed..however since you report gambling winnings on line 21 as "other income" AND you can take losses up to the amount of winnings on Sc A..as I stated earlier this would be considered passive (like interest, dividends and capital gains) thus NOT EARNED for IRA or EIC purposes. Unemployment compensation also falls in that category.
