What Is Unearned Income?

Unearned income refers to any income that is earned passively, without performing work or providing a service. In contrast to earned income, which comes from wages, salaries, and business activities, unearned income is derived from investments or other sources where no labor is involved. Common examples of unearned income, or 澳洲幸运5官方开奖结果体彩网:passive income, include interes🌸t from savings accounts, dividends from stocks, and r🌄ental income from properties.

Understanding Unearned Income

Unearned income is typically earned through investments, such as interest on savings, dividends from stocks, or income from rental properties. Unlike 澳洲幸运5官方开奖结果体彩网:earned income, which includes wages and self-employ🧜ment earnings, unearned income is not tied to labor.

Unearned income cannot be contributed to 澳洲幸运5官方开奖结果体彩网:individual retirement accounts (IR💫As). According to the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS), earned income includes wages, salaries, tips, and self-employment income.

Taxation differs for unearned income and earned income due to qualitative differences. The 澳洲幸运5官方开奖结果体彩网:tax rates also vary among unearned income sources. Most unearned income sources are not subject to 澳洲幸运5官方开奖结果体彩网:payroll taxes, and none of it is subject to employment taxes, such as Social Security and Medicare.

Types of Unearned Income

Unearned income can fall into a number of different categories. Below a🐭re some of the most common types:

Interest

Interest income from savings accounts, bonds, loans, and 澳洲幸运5官方开奖结果体彩网:Certificates of deposit (CDs) is considered unearned income. This type of income is typically taxed as 澳洲幸运5官方开奖结果体彩网:ordinary income.

There are certain exceptions to this rule, including interest earned on 澳洲幸运5官方开奖结果体彩网:municipal bonds, which is exempt from 澳洲幸运5官方开奖结果体彩网:federal income tax.

Dividends

澳洲幸运5官方开奖结果体彩网:Dividends, which are income from investments, can be taxed at ordinary tax rates or preferred 澳洲幸运5官方开奖结果体彩网:long-term capital gains tax rates. Investments typically yield dividends payable to shareh෴olders on a regular basis. Dividends may be paid to the investment account mont🔴hly, quarterly, annually, or semi-annually.

Taxation of dividends is based on whether the dividend is or🌱dinar♚y or qualified:

• 澳洲幸运5官方开奖结果体彩网:Ordinary dividends, the more common form of dividends that investors receive from a company, are taxed at ordinary tax rates.
• 澳洲幸运5官方开奖结果体彩网:Qualified dividends are taxed at the more favorable capital gains tax rates. In order to qualify as qualified dividends, they must be issued by a U.S. corporation or qualified foreign corporation, the investor must own them for at least 60 days out of a 121-day holding period, and they cannot be in a category of dividends otherwise excluded from the qualified dividend classification.

Other Sources of Unearned Income

You may get unearned income from other♉ sources, such as:

• Retirement accounts like 401(k)s, pensions, and 澳洲幸运5官方开奖结果体彩网:annuities
• 澳洲幸运5官方开奖结果体彩网:Inheritances
• Alimony
• Gifts
• Lottery winnings
• Veterans Affairs benefits
• Social Security benefits
• Welfare benefits
• 澳洲幸运5官方开奖结果体彩网:Unemployment compensation
• Property income

Benefits of Unearned Income

Unearned income can serve as a supplement to earned income before 澳洲幸运5官方开奖结果体彩网:retirement, and it is often the only source of income in postretirem𝕴ent years. During the accumulation phase, taxes ar♐e deferred for many sources of unearned income.

Sources of unearned income that allow a deferment of income tax include 澳洲幸运5官方开奖结果体彩网:401(k) plans and annuity income. As a result, participants avoid IRS penalties and higher tax rates.

Examples of Unearned Income

Here are a couple of hypothetical exampl꧋es to show how unearned income actually works.

Example 1

Let's say Jan invests $50,000 in a CD. The interest she derives from her investment is considered unearned income and must be reported to the IRS for taxation at the ordinary income rate. She also wins $10,000 on a game show, but she does not get the full amount of her winnings. Why? Because the IRS deducts taxes from it, treating the amount as unearned income.

Example 2

Let's suppose Michael buys an investment property with the intention of renting🐟 it out for additional income. He fixes it up and converts it into two apartments: the main unit and the basement as a separate studio. He signs leases with two different tenants who pay their rent to Michael on the first of each month. The tenants' rent payments are considered unearned or passive ♓income because Michael isn't doing any work to earn them.

The Bottom Line

Unearned income isn't a term with which most people are familiar. You may know it as passive income or money that you acquire without providing a service. Put simply, you make this money without actually working for it.

Sources of unearned income may include interest income from interest-paying accounts, dividends, and rent from tenants if you have an investment property. Just because it means it is earned passively doesn't mean you don't have to report it on your 澳洲幸运5官方开奖结果体彩网:tax return. In fact, the opposite is true. Be sure to check with the IRS or the issuer of the unearned income, or you can consult a tax professional if you're unsure of what your unearned means𝐆 to your tax liability.