Oregon Tax Consultants Practice Exam

What is considered earned income for the purpose of the Standard Deduction?

1. Investment gains

2. Rental income

3. Salaries, wages, and taxable scholarships

4. Gifts and inheritances

The correct answer is: Salaries, wages, and taxable scholarships

Earned income, for the purpose of the Standard Deduction, refers to income earned from active participation in work or business activities. This includes wages, salaries, tips, and taxable scholarships, as these forms of income are directly tied to the provision of labor or services. Salaries and wages represent direct compensation for employment, reflecting a taxpayer's contributions through work. Taxable scholarships can also be counted as earned income to the extent that they represent payment for qualified work done as part of a scholarship program. Therefore, this category aptly fits the definition of earned income, as it involves an exchange of effort for financial compensation. Investment gains, rental income, and gifts or inheritances do not qualify as earned income. Investment gains are typically considered unearned income, as they arise from capital and not active labor. Rental income could be classified differently based on whether it comes from passive rental activities or active participation, but it generally does not fall under earned income in the context of the Standard Deduction. Lastly, gifts and inheritances are financial transfers without the expectation of repayment or work, thus they do not constitute earned income.