Unearned Income

Updated: Aug 14, 2019

If the money you generate does not derive from someone who pays you, from a business activity, or from farm revenue, that money is most likely unearned income. Unearned income is usually income received from income-producing property such as:

  • Interest Income

  • Dividend Income

  • Capital Gain income

  • Inheritances

  • Gifts and Prizes

  • Forgiven debts

  • Certain distributions from a trust

According to the IRS, examples of income that are not earned income also include:

  • Pay received for work while an inmate in a penal institution

  • Retirement income

  • Social security

  • Unemployment benefits

  • Alimony

  • Child support.

Certain types of unearned income are taxed differently than earned income. For example, long term capital gains have their own tax rates. A $20,000 capital gain might be taxed in the 15% capital gains tax bracket, while a $20,000 payment for services might be taxed in the 22% ordinary income tax bracket.

Understanding the tax implications of your earned and unearned income is key to successful tax planning. It is important to understand the different tax rates applicable to your various sources of income.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers before engaging in any transaction.

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