Unearned Income
What it is:
Unearned income is an IRS term for income that is not obtained by participating in a business or trade (e.g., salaries and bonuses, wages, commissions and tips). It typically includes interest, dividends, pensions, social security, unemployment benefits, alimony and child support.
How it works (Example):
John Doe works in the marketing department for Company XYZ. His salary is $75,000 per year, and this year he also received a $5,000 bonus. His earned income is $75,000 + $5,000 = $80,000.
John Doe also owns some dividend stocks and receives a pension from his first career as a firefighter. He receives $200 a month in dividends and $1,000 a month from his pension. John’s unearned income is $1,200 per month x 12 months = $14,400.
Why it Matters:
Unearned income is different from earned income, which generally is income that is obtained by participating in a business or trade -- typically, this means salaries and bonuses, wages, commissions and tips. Union strike benefits are also considered earned income, as are long-term disability benefits received prior to minimum retirement age.
