What is Unearned Income?

Unearned Income

You may be wondering: are my investments taxable? Are my gambling winnings taxed? How do I file my rental income? Use tax software like the eFile Tax App to answer simple questions and we will help report any taxable income on your individual income tax return. Sign up for a free eFile account and let us do hard work for you.

Types of Unearned Income

The table below shows the various kinds of unearned income accompanied by a brief description. You can use this information to understand your tax situation in order to prepare for Tax Day. In comparison, here is a list of earned income. Use the FILEucator to find out if you have to file taxes based on how much you made in both earned and unearned income.

Type
Description
Interest
Interest accrues often from investments, such as stocks. These may come on a regular basis throughout the year, like a monthly interest payment. When you receive interest, it is often reported on Form 1099-INT for a given tax year.
Similar to interest, dividends are paid to you for your investments. When you are a stockholder of a company, they made opt to pay you dividends. You can reinvest those dividends once received if you choose - they are typically small payments. You may receive a 1099-DIV reporting your dividends for the tax year.
If you receive unemployment benefits during the year while you are looking for work, you should receive a 1099-G reporting this income. Unemployment income is generally taxable and should be reported on your income tax return.
When you begin receiving your Social Security benefits at a certain age, you will receive Form SSA-1099 reporting the amounts of your payments. If you have other income, your benefits may be taxed - generally, if Social Security is your only income, it is likely not taxable income.
If you have forgiven debt in a given year, you should receive Form 1099-C reporting this unearned income. This amount is often taxable as part of an agreement to settle or forgive your debt for a loan, such as a credit card.
Retirement payments are considered unearned income; these are payments from Individual Retirement Accounts (IRAs), pensions, or other retirement plans. These amounts are reported via Form 1099-R and should be included on your tax return.
When you win money from gambling, whether it be from the lottery, scratch cards, or casino, the income is typically taxable and reported to you on Form W-2G. Don't get this confused with Form W-2 which reports earned income from wage or salary jobs!
Alimony and child support payments are usually direct payments from person-to-person and are not considered earned income. These payments may or may not be taxable depending on when the agreement for the payments was finalized - see the linked page for specific details.
Rental Payments
If you rent out your property (land, home, etc.) and receive income for this, you will report this unearned income on your tax return. For rental income in a given tax year, eFileIT IRS Schedule E.
Gifts in the form of cash or currency above a certain amount may be taxable, unearned income. This gift can be from family for a holiday or other scenarios as long as it is a cash gift given for nothing in exchange. View the linked page for details - keep track of your gift amount and consider the tax implications of it.
Veteran's Benefits
Services likes pensions, home loans, life insurance, education, healthcare, and disability compensation provided by the Veterans Benefits Administration may count as unearned income. This is income from certain programs for a taxpayer's service in the American Armed Forces - see details on military and taxes and review IRS Publication 3, Armed Forces' Tax Guide.

Passive or Unearned Income

To maximize individual profit during the year - or, to make the most money - individuals can combine their ability to work for income while investing their paychecks to make passive or unearned income. Start a side hustle or a simple way to make some extra cash in addition to your primary source of income. Use the ideas below for a variety of passive income ideas, including small investment and large investment opportunities.

  • Invest in a company, stock, virtual currency, etc.
    • These can be small or large investments, like buying a small stock in a startup company versus buying a stock in Tesla.
  • Download and use cash back apps which find coupons for you and sometimes earn you rewards.
  • Move the money in your checking account to a high-yield savings account.
  • Loan out your own money via money sharing apps or platforms, called peer-to-peer or P2P lending.
  • Rent out a spare room, home, or other living quarters.
  • Rent out your property, like your tools, vehicle, bike, or storage/garage.
  • Create a product which requires minimal management.
    • Create a website, online course, book or eBook, blog page, nonfungible token NFT, or other digital asset which you publish once and do not have to upkeep.
  • Allow a company to advertise their business on your car via vehicle wrap or other means.
  • Buy a billboard and allow companies to display their business for monthly or annual rates.
  • Invest in a real estate investment trust or REIT.
  • Invest in real estate.

Report your unearned income on eFile.com, including passive income investments, unemployment income, and other types of unearned income - sign up for a free account here. If you have income from a job in addition to unearned income from investments or other sources, we will help report these on the proper IRS and state forms. When you use tax software and eFileIT to the IRS and state, you do not have to worry about handling or mailing any complicated tax forms.

See more details on taxable and nontaxable income.

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