What Is Unearned Income?

Unearned income is any income that you are not required to work for, such as money from investments, Social Security, pensions, or other forms of government benefits. This form of income is often received from money that was previously earned or from government assistance. Unearned income can be an important part of your overall financial plan, making it important to understand how it works and how you can best use it.

Types of Unearned Income

There are a variety of different types of unearned income, each with their own unique characteristics and tax implications. Generally, unearned income can be divided into two broad categories: passive income and non-passive income.

Passive income is any income that is earned without you actively participating. This could include investments, rental property, interest income, or royalties. These forms of income are not considered “earned” income, as you’re not actively working to earn them, rather they are provided passively.

Non-passive income is any income that must be actively worked for, but is not earned income. This could include Social Security benefits, pensions, and other government benefits. These forms of income are also not considered earned income, even though you may be actively working for them.

Tax Implications of Unearned Income

Unearned income generally has different tax implications than earned income. This is because, in most cases, the government does not tax the amount you receive from unearned income. However, there are few exceptions to this. For example, some types of unearned income may be subject to taxes such as capital gains taxes.

In addition, some types of unearned income may be partially or even fully taxable at ordinary income tax rates. For example, if you receive Social Security benefits, a portion (up to 85%) of those benefits may be subject to taxes. Similarly, if you receive income from a trust, you may be subject to taxes on that income.

When it comes to taxes, it is important to understand the different tax implications of unearned income, and to consult with a professional if you have any questions.

Maximizing Unearned Income

Unearned income can be an important source of income, especially for those who are retired or have limited earning potential. There are a few simple steps you can take to make the most of your unearned income.

First, make sure to diversify your sources of income so you are not solely reliant on one source. This will help to ensure that your income is not too heavily impacted by changes in the market.

Second, make sure to research any investments you make, so that you can make sure your unearned income is working for you in the best way.

Finally, it is important to set aside some of your unearned income for long-term investments, such as a retirement fund. This will help make sure that you are able to maximize your unearned income in the long run.

Conclusion

Unearned income can be an important part of your overall financial plan, and it is important to understand how it works and how to make the most of it. Remember to diversify your sources of income, do your research before making investments, and set aside some of your unearned income for long-term investments. With these tips, you will be able to ensure that your unearned income is working for you in the best way possible.