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Unearned Income

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Unearned income is any income that comes from sources other than employment (work). Examples of unearned income include interest from bonds, savings accounts, and other sources; dividends from stocks; capital gains from selling investments at a profit; and income from rental property. Some unearned income is taxed at the regular income tax rate; other unearned income is taxed at a lower rate, often to encourage further investment. Proceeds from retirement plans and Social Security payments are also treated as unearned income, even though they derive in part from the earned income of an individual's prior employment. Gifts, inheritances, royalties, in-kind support, awards, and prizes are considered unearned income. As such, they are treated differently from earned income for tax purposes.

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