Unearned Income: 9 Types You Need to Know About

Many people dream about living off passive income. The concept of working hard and creating a perpetual stream of income is appealing. Instead of working eight hours per day or more, you can work much less.

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.

Types of Unearned Income

1. 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. Investment income includes interest from savings, money market accounts, CDs, and dividends from bonds. The tax rates on capital gains and interest income may be different.

2. Long-Term Capital Gain Distributions

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.

3. 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.

4. Retirement Income

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. Additional types of retirement income include railroad retirement benefits,

5. Unemployment Benefits

Unemployment benefits are paid to individuals who lose their jobs through no fault of their own.

Unearned income is an involved topic. Despite receiving income from a passive activity, the money, stock, property, or asset can still be subject to federal taxes. In some cases, the taxes must be paid in the current year.