What does investment income include?

Investment income encompasses various types of earnings generated from investments, which typically include taxable interest and dividends. Taxable interest arises from the return on savings accounts, bonds, or other interest-bearing accounts, while dividends are payments made by corporations to their shareholders, representing a share of the company’s profits. Since both taxable interest and dividends contribute directly to a taxpayer's overall income from investments, this choice correctly defines what constitutes investment income.

In contrast, capital gains refer specifically to the profit from the sale of an asset, rather than income generated from holding an investment. Income from wages and salaries is classified as earned income and is not considered investment income. Passive activity losses pertain to losses incurred from activities in which the taxpayer is not actively involved, such as certain rental activities, and do not fall under the category of investment income. This context clarifies why the correct answer focuses on taxable interest and dividends as essential components of investment income.