Data annotation refers to the process of labeling or tagging data to provide context for machine learning algorithms. Annotations can include identifying objects in images, transcribing audio, or labeling text for sentiment analysis. This structured data enhances the ability of algorithms to learn patterns and improve their accuracy in tasks like classification and object recognition. Effective data annotation is essential for training machine learning models and ensuring that they perform well in real-world applications, serving as the foundation for AI advancements.