Unearned income is money received without performing active work or services.
It typically comes from investments, benefits, or other passive sources and is taxable in most cases, though different rules may apply depending on the type of income.
📋 Common Examples of Unearned Income
Unearned income may include:
- 💰 Interest income
- Savings accounts, certificates of deposit (CDs), bonds
- 📈 Dividends
- Paid from stocks or mutual funds
- 📊 Capital gains
- Profit from selling investments such as stocks or real estate
- 🏘️ Rental income
- Income from owning and renting property
- 👴 Social Security benefits
- Retirement, survivor, or disability benefits (may be partially taxable)
- 💼 Unemployment compensation
- 💔 Alimony
- Taxable only for divorces finalized before 2019
- 🎓 Taxable scholarships or grants
- Amounts not used for qualified education expenses
- ♻️ Retirement income
🧓 Is Retirement Income Earned or Unearned?
Retirement income is considered unearned income because it is not received in exchange for current work.
✅ Common Types of Retirement (Unearned) Income
- 👴 Social Security retirement benefits
- 🏦 Pension payments
- 💳 IRA or 401(k) distributions
- 🔁 Annuities
- 📤 Withdrawals from retirement accounts
⚠️ Note
If a retiree works part‑time or earns income through wages or self‑employment, that income is considered earned income, not retirement income.
🧠 Why Unearned Income Matters
- Some tax benefits and credits (e.g., EITC) depend on earned income only
- Unearned income may affect:
- ✅ Social Security taxability
- ✅ Eligibility for certain credits
- ✅ Medicare premium calculations
- ✅ Alternative minimum tax (AMT) exposure
- Children with significant unearned income may be subject to the kiddie tax