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. For example, income from a salary, wages, tips, self-employment, and a few other sources are earned income.
A person is paid $50,000 per year in salary, as shown in a W-2 form. The same person receives a bonus of $5,000, interest income from certificates of deposits or CDs of $2,000 and qualified dividends of $2,000.
In this example, the $50,000 salary and the $5,000 bonus are earned income. The $2,000 in interest and $2,000 in qualified dividends is unearned income. However, all sources of income in this example are taxable.
A retiree receives $37,776 per year in Social Security Benefit and $14,400 annually in pension payments. The maximum benefit at full retirement age is currently $3,148 per month ($3,148 x 12 = $37,776) in 2021. Both sources of income are considered 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.