Unearned income is a type of income that is received by an individual but is not the result of active work or labor. It can include rents, dividends, interest payments, capital gains, pensions, and other distributions from investment. Unearned income does not typically refer to income received as salary from a job, wages from hours worked, commissions from sales, or self-employment profits, which are all considered to be earned income.
Examples of Unearned Income
Common sources of unearned income include rental income from a property, pension payments from a former employer, savings account interest, inheritance income, capital gain distributions from investments such as stocks, mutual funds, and annuities. Also, alimony or other sources of income related to a divorce are considered unearned income.
Tax Implications of Unearned Income
The taxation of unearned income varies depending on the source and the country of origin. Most governments tend to tax unearned income either at a flat rate or at the marginal rate – the same rate as earned income, depending on the context. In the United States, the government taxes unearned income at different rates than earned income, with higher taxes on passive income like rents, interest, and dividends.
The Difference Between Unearned and Earned Income
While unearned income is commonly associated with investments and passive income, earned income is associated with active labor and work. Unearned income is passively received, while earned income must be actively pursued. It is important to note that both types of income can have positive or negative ramifications when it comes to taxation, depending on the source and other factors.