What Is 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 your hard work for you.
Types of Unearned Income
Unearned income is similar and sometimes the same as passive income. Passive income is generally any money made from activities that are not traditional work and often generates income from not doing anything. The most common forms of passive income are stocks, interest, dividends, and capital gains. Tip: Maximize your income by working - whether self-employed or as an employee - while earning passive income with your invested money. Passive income ideas may be investing in a financial account that yields interest or putting money into a cryptocurrency and letting it grow in value without trading.
See also: Taxable income vs. nontaxable income.
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 besides 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 for the IRS and state, you do not have to worry about handling or mailing complicated tax forms.
The table below shows the various kinds of unearned income and a brief description. You can use this information to understand your tax situation to prepare for Tax Day. In comparison, here is a list of earned income. Use the FILEucator to determine if you must file taxes based on how much you made in both earned and unearned income.
Interest
Interest often accrues from investments, such as stocks. These may come regularly 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. See
how to add income from Form 1099-INT to your taxes. In some cases, you may be sent a
1099-OID.
Similar to interest, dividends are paid to you for your investments. When you are a company stockholder, they 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 while looking for work during the year, 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.
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 from the lottery, scratch cards, or casino, the income is typically taxable and reported to you on
Form W-2G. Don't confuse this 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 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 cash or currency above a certain amount may be taxable, unearned income. This gift can be from family for a holiday or other scenarios if 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 like 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 various passive income ideas, including small 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 that find coupons for you and sometimes earn you rewards.
- Move the money in your checking account to a high-yield savings account.
- Loan your 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 your property, like your tools, vehicle, bike, or storage/garage.
- Create a product that requires minimal management.
- Create a website, online course, book or eBook, blog page, nonfungible token NFT, or other digital assets 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.
If you are unfamiliar with unearned income and investments, consider opening an account with a robo-advisor. These are digital or robotic advisors that automatically invests your money over time. They are capable of moving your money from different stocks or other investments and some can maximize your tax-loss harvesting.
At the end of the year, gather all your forms and receipts that show your investment income and losses. Add these forms to your eFile account and let the tax app do the hard work for you to minimize your taxes.
See more details on taxable and nontaxable income.
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