What is Unearned Income?
Unearned income refers to the type of income that individuals generate without actively working for it. This contrasts with earned income, which includes wages, salaries, tips, and compensation from professional services. Unearned income typically includes income from investments, savings accounts, rental properties, dividends, interest, royalties, and pensions.
Examples of Unearned Income
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Dividends: Payments made by a corporation to its shareholders, usually in the form of cash or additional stock, from the company’s profits.
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Interest: Earnings accrued from savings accounts, bonds, and other interest-bearing investments.
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Rental Income: Money received from tenants renting out personal or commercial property.
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Capital Gains: Profits from the sale of stocks, bonds, or real estate.
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Royalties: Earnings received from intellectual property such as books, music, patents, or natural resource exploitation.
Frequently Asked Questions (FAQs)
What is the difference between earned and unearned income?
Earned income is derived from active work or business activities, such as wages, salaries, and profits from a business. Unearned income, on the other hand, comes from passive sources like investments, interest, and dividends.
Are there different tax rates for unearned income?
In many countries, unearned income may be taxed differently than earned income. For instance, in the U.S., capital gains and dividends can be taxed at lower rates compared to salary or wages. However, specifics may vary depending on local tax laws and regulations.
Can unearned income be included in retirement accounts?
Unearned income such as interest and dividends can be included in certain types of retirement accounts, like IRAs or 401(k)s, where they may benefit from tax-deferral or tax-free growth until withdrawals are made in retirement.
How is rental income treated compared to other forms of unearned income?
Rental income is considered unearned income and is subject to income tax. Expenses associated with maintaining the rental property may be deductible, which can reduce the taxable amount.
What are the common sources of unearned income for retirees?
Common sources of unearned income for retirees include pensions, social security benefits, dividend income, and interest from savings and fixed-income investments.
Related Terms
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Earned Income: Income derived from active work or business activities, including wages, salaries, tips, and professional fees.
Example: A salary from a job or earnings from a business.
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Passive Income: Income from activities in which one is not actively involved, such as rental income, limited partnerships, or other enterprises where the individual is not actively engaged.
Example: Earnings from a rental property or dividends from stock ownership.
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Investment Income: Earnings from interest, dividends, and capital gains associated with investment activities.
Example: Interest earned on a bond or profits from selling a stock.
Online References
Suggested Books for Further Studies
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“The Intelligent Investor” by Benjamin Graham
- A classic book on value investing that provides insights into generating unearned income through dividends and interest.
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“Rich Dad Poor Dad” by Robert T. Kiyosaki
- Focuses on financial independence and passive income streams through investing and entrepreneurship.
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“Passive Income, Aggressive Retirement” by Rachel Richards
- A guide to building passive income streams that lead to early and sustained retirement.
Unearned Income Fundamentals Quiz
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