Unearned income tax definition

The Internal Revenue Service draws a distinction between two basic types of income for tax purposes: Earned income is money you make through employment or running a business, such as wages, salaries, tips and business profits. Unearned income describes passive sources of income that you gain without having to work. Some unearned income, but not all, is subject to income tax; it is not, however, subject to payroll taxes -- that is, Social Security and Medicare taxes.

When you save money at a financial institution such as a bank or credit union, your account may accrue interest over time, which is credited to your account.

Similarly, when you buy stocks, you may receive cash payments called dividends from the corporation that issued the stock, simply for being a shareholder. Both interest income and dividends are considered forms of unearned income for tax purposes.

What Is an Unearned Income Tax Return? | seboxinero.web.fc2.com

Retirement typically marks an end to having earned income, so retirees tend to rely on variety of sources of unearned income. Retirement income, such as money you receive from a company pension, payments received from an annuity and money you withdraw from a retirement account are forms of unearned income. Social Security benefits are also a form of unearned income. Essentially any sum of money or property you receive without working for it is considered a form of unearned income.

If someone gives you a gift of cash or property, the gift is unearned income. Similarly, unearned income also includes inheritances, awards, prizes and money gained from gambling. Unearned income includes a variety of other income sources that do not involve active work or business activity.

Other types of unearned income include alimony, child support, workers' compensation, unemployment benefits and pay received as an inmate at a penal institution. The distinction between earned and unearned income can have important tax implications.

For example, you can only contribute to an IRA if you have earned income. Even if you have sufficient unearned income to live on, and want to save some for retirement, you cannot use an IRA to do so -- and to take advantage of the tax benefits and IRA provides -- unless you have some earnings. Gregory Hamel has been a writer since September and has also authored three novels. He has a Bachelor of Arts in economics from St.

Hamel maintains a blog focused on massive open online courses and computer programming. Each week, Zack's e-newsletter will address topics such as retirement, savings, loans, mortgages, tax and investment strategies, and more. At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system.

These returns cover a period from and were examined and attested by Baker Tilly, an independent accounting firm.

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Visit performance for information about the performance numbers displayed above. Skip to main content. What Is Unearned Income When It Comes to Taxes? More Articles How Much Should I Save From Each Paycheck for Taxes When Working for a ?

What Can You Write Off as Business Expenses as an Independent Contractor? Earnings Subject to Social Security Tax Can Georgia Charge Income Taxes on Income From Florida? Interest and Dividends When you save money at a financial institution such as a bank or credit union, your account may accrue interest over time, which is credited to your account.

Retirement Benefits Retirement typically marks an end to having earned income, so retirees tend to rely on variety of sources of unearned income. Gifts, Prizes and Inheritances Essentially any sum of money or property you receive without working for it is considered a form of unearned income.

Other Unearned Income Unearned income includes a variety of other income sources that do not involve active work or business activity. Considerations The distinction between earned and unearned income can have important tax implications.

References 6 Internal Revenue Service: What is Earned Income?

Supplemental Security Income SSI Social Security Administration: Publication - Main Content Internal Revenue Service: Publication Minnesota Department of Human Services: Earned and Unearned Income. About the Author Gregory Hamel has been a writer since September and has also authored three novels. Related Articles How Much Tax Do You Get Back for Every Deduction?

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