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What is Unearned Income?

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People will usually have different types of income. For instance, they may have their salary and other money they get for providing services. For tax purposes it is necessary to declare not only your earned income but also you unearned income. There can be confusion though, about what this unearned income actually refers to. In simple terms this unearned money is any money that you have been paid but you have not yet earned. For example, if you have been paid money in advance for some service that is not yet complete then this would be considered to be unearned income. There are also other types of unearned income that we will consider below.

Types of Unearned Income

As well as the money received for unfinished work there are also other ways that people can have unearned incoming including:

  • If you have made investments and these return a dividend then this can be classified as unearned income.  This includes foreign exchange deals and profits from shares and commodities. It also includes any interest you have made from your savings or checking account.
  • If you own some property and are currently renting it to another individual then this too can be considered unearned income. This type of money can also be referred to as indirect income. The fact that the owner of the property isn’t actually doing something to get the money is why it is referred to as unearned.
  • Alimony and other types of support can also be classified as unearned
  • Gifts could also fall into this category
  • Money obtained as a prize for winning something
Simplified version:

These are just some examples of unearned income and there are many more. It is always a good idea to consider any money you get from anywhere other than work as unearned income.

Things to Consider with Unearned Income

Even though this money is unearned it still needs to be declared to the tax people. On the tax form there is actually a category for earned and unearned money. Not only does this money need to be declared but it is usually taxable as well. This tends to be the same amount of tax as you pay on your regular earned income – although this can vary between different jurisdictions. In some countries they can even tax unearned income at a much higher rate because it is felt that the individual did not have to work hard to get it.

Most individuals will usually have at least some unearned income. This might only be something like a bit of interest from a savings account. It is easy to forget about this when it comes to paying taxes, but failing to declare it could lead to problems later on. There are also certain types of unearned income where there won’t be an expectation to pay any tax. Some prizes and awards may be given tax free, but it is important to always be sure about where you stand in regard to tax. The information you need is easy to obtain on the web.

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Meet the Author

Anthony Carter currently resides in Fife, Scotland with his wife Lisa, and their three wonderful children. As a senior editor for various publications, if he's not reading and writing, you would find him photographing and traveling to some of the most far-flung locations around the world.


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