Unearned Income: 9 Types You Need to Know About

Unearned income is income from sources, not from employment or a job. The IRS views unearned income as income from sources other than personal effort.

It is essential to know the difference between earned and unearned income since they are taxed differently in the US. Earned income is subject to regular income tax and employment taxes. Social Security and Medicare are types of employment taxes.

On the other hand, unearned income is not usually subject to ordinary income tax but is subject to capital gains tax. However, there are instances when unearned income is taxed like regular income in the US. Moreover, people do not pay employment taxes on unearned income. 

Investment Income

Investment income is the profit generated from the sale of real estate or stocks. An investor selling an asset for profit will generate capital gains from the sale. The capital gains are considered as unearned income by the IRS.

Mutual funds pay capital gains distributions to shareholders. This money comes from selling stocks, bonds, or other assets owned by the mutual fund. The profits are distributed to shareholders as capital gains. 

Long-Term Capital Gain Distribution

Dividend Income

Dividend income results from money paid to stockholders from the dividends paid by companies. An investor can generate passive income and possibly live off dividends. For tax purposes, dividend income is taxed differently depending on whether the dividends are ordinary or qualified.

Retirement income is derived from pensions, annuities, and distributions from 401(k) plans and Individual Retirement Accounts (IRAs). Social Security retirement benefits are included in this category. 

Retirement Income

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