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What is Unearned Income?

A profit earned from stocks is unearned income.
Unearned income is compensation that is received before the recipient actually delivers the good or service promised to the buyer.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 19 December 2014
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Unearned income is generally defined as any type of revenue gain or income that is not the result of the receipt of a wage, salary, or tips for services rendered. Within this broad definition, this type of income is also understood to be any type of unearned revenue that is collected in advance before contracted services are rendered. This would include deposits on construction or remodeling jobs that will be performed by professionals. At the point that the project is completed and the balance of the charge is paid in full, the deposit or advance would be classified as earned income.

For many people, unearned income takes the form of funds received as interest or dividends on an investment. The interest earned on a bank savings account or interest bearing checking account can be properly classified as this type of income, since the account holder did not earn the funds by rendering a service to the bank. In like manner, profits that are earned from stocks, bonds, commodities, or currency exchange deals would be considered unearned income.

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Property rental is also regarded as a source of unearned income. While the property is owned by the recipient of the income earned from rentals, the revenue that is generated is considered to have come about as a result of actions other than the recipient earning the funds by a direct personal effort. The term indirect income is sometimes used to describe the type of income that is generated by renting property.

It is important to note that this income is still considered to be taxable income in most countries around the world. This means that at some point in time, the recipient of the unearned income will have to account for the revenue and pay taxes on the funds received. Depending on the country of jurisdiction, the rate of tax applied may be more or less than taxes that are paid on wages, salaries, and tips. In other instances, the total amount may be bundled in with the earned income for the same period and taxed at the same rate.

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anon302416
Post 12

To answer your question: "Does anyone know if earned income and unearned income are taxed in the same bracket?" The opposite is true in the US now. Most unearned income from investments held over one year are considered Capital Gains and are taxed at the 15 percent rate, versus the typical 35 percent rate for earnings. That is why Romney only pays 17 percent on millions of income.

BoniJ
Post 11

Does anyone know if earned income and unearned income are taxed in the same bracket? It seems to me that unearned income - like interest, dividends, rental income, and other income that doesn't take a lot of effort - should be taxed at a higher rate than earned income.

I don't know how it works in this country. Maybe it has been tried a number of ways.

Bertie68
Post 10

@anon83884 - I have an annuity and it is considered unearned income. However, I only pay tax on the amount that I receive monthly throughout the year.

There are many different kinds of annuities. My guess would be that yours is unearned income. I would think that if you receive monthly payments, those would be unearned income and subject to income tax.

KaBoom
Post 9

@indemnifyme - I'm one of those people who gets scared about stuff like this -- that's why I could never prepare my taxes by myself. I normally use Turbo Tax which has specific sections relating to unearned income forms that actually prompts you to put the information in. These forms are also reported to the IRS so you will definitely get into trouble if you forget to add these to your yearly taxes.

indemnifyme
Post 8

People get really freaky about stuff like this, but actually, paying unearned income taxes is very simple. My brother is a tax preparer, so he laid it all out for me when I first started to earn dividends on my investments.

Here's how it works: you will usually receive a 1099-INT or a 1099-OID from the source of the unearned income unless it is rental income.

Then it is a simple matter of taking the form with you when you get your taxes done or plugging the numbers from the form into your preferred tax software. American taxpayers should make sure they have all their forms in order at the end of the tax season because as the article stated taxes are owed on unearned income.

anon177233
Post 7

is unearned income free?

anon83884
Post 5

is an annuity received from a settlement due to a car accident considered unearned income?

anon56978
Post 4

is an inheritance considered unearned income?

anon40326
Post 3

What is the maxium amount I can receive in ssi payments before I'm taxed?

harbals
Post 1

hi how is unearned income(eg. UK dividends and CGT) treated for non-resident US citizens?

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