When it comes to taxes, not all money is created equal. The Internal Revenue Service (IRS) sorts the money you make into different categories, and knowing which is which is key to understanding your financial picture. For the most part, income falls into one of three buckets: earned, passive, or portfolio.

This is the one most of us are familiar with. Earned income is money you get for work you actively do. It’s the direct result of your time and effort.

Common examples include:

• Wages and salaries from an employer.
• Tips you receive from customers.
• Bonuses and commissions.
• Profits from a business you run yourself, whether it's a freelance gig or a small shop.

Passive income comes from ventures where you aren't directly involved on a day-to-day basis. You might do some work upfront, but the income stream continues without your constant effort. It's money your assets make for you.

The most common example is rental income. You own a property and collect rent from tenants. While there's work involved in being a landlord, you aren't trading hours for dollars in the same way you do at a 9-to-5 job. Other examples include royalties from a book you wrote or income from a business you've invested in but don't actively manage.

Portfolio income is money generated by your investments. It’s not about active work or rental properties; it's about your money making more money. This category includes:

• Interest paid from a savings account, certificate of deposit (CD), or bond.
• Dividends distributed by companies to their shareholders.
• Capital gains from selling an investment—like a stock or a piece of real estate—for more than you originally paid for it.

Understanding these categories is the first step in properly reporting your income to the IRS. Now, let's see if you can tell them apart.

Knowing where your money comes from helps you understand how it's treated at tax time.