Introduction On What Is Unearned Income
What is unearned income, you ask? Well, it’s basically the best kind of income you can get, because it doesn’t require any work from you! That’s right, unearned income is money that you receive without lifting a finger. Sounds awesome, right? Oh, sorry for being rude. Hello, dear reader! Welcome to my blog where I share with you the secrets of financial freedom and success. Today, I want to talk to you about a very important concept: unearned income.
What Is Unearned Income? Is It Like Earned Income?
Unearned income is the opposite of earned income, which is the money you get for doing a job or providing a service. Earned income is what most people rely on to pay their bills and expenses, but it also comes with a lot of drawbacks. For example, earned income is usually limited by your time, skills, and market demand. It also depends on your employer or clients, who may not always be reliable or fair. And let’s not forget about taxes, which can take a big chunk out of your paycheck.
But with unearned income, you don’t have to worry about any of that. Unearned income is money that you generate from sources that are not related to your work. For example, you can earn unearned income from interest on your savings account or bonds, which is money that the bank or the government pays you for lending them your money. You can also earn unearned income from alimony, which is money that your ex-spouse pays you after a divorce. Or you can earn unearned income from dividends, which are payments that companies make to their shareholders for owning their stocks.
What Is Unearned Income And Some Examples.
These are just some examples of unearned income, but there are many more. In fact, some people have built entire empires of unearned income by creating passive income streams that generate money for them 24/7. Think of famous authors, musicians, or inventors who receive royalties for their books, songs, or patents. Or think of successful entrepreneurs who have created online businesses that run on autopilot and bring in cash every day. These people have achieved what many of us dream of: financial independence and freedom.
But how can you do the same? How can you create your own sources of unearned income and enjoy the benefits of passive income? Well, that’s what this blog post is all about. In the next sections, I will explain to you the different types of unearned income, how they work, and how you can start earning them today. I will also share with you some tips and tricks to maximize your unearned income and avoid some common pitfalls. By the end of this post, you will have a clear understanding of what unearned income is and how it can change your life for the better.
What Is Unearned Income And Can Animals What?
But before we dive into the details, let me share with you a funny and nice fact about unearned income: did you know that some animals also earn unearned income? Yes, it’s true! For example, some ants farm aphids and collect their honeydew as a source of food. Or some birds steal fish from other birds and eat them as a snack. Or some monkeys use tools to crack nuts and enjoy them as a treat. These animals are smart enough to use their environment to their advantage and get free food without working for it. Isn’t that amazing?
And speaking of amazing, let me also share with you a book passage that relates to the topic of unearned income. This passage is from the book “Rich Dad Poor Dad” by Robert Kiyosaki, which is one of my favorite books on personal finance and investing. In this passage, the author explains the difference between earned income and unearned income using an analogy of two types of rats:
“There is a difference between being poor and being broke. Broke is temporary. Poor is eternal.” The speaker was Robert Kiyosaki’s rich dad.
“The poor and the middle class work for money,” he often said.
“The rich have money work for them.”
He explained that by simply having two different types of workers in his warehouse.
“One type I hire for their physical labor,” he said.
“The other type I hire for their ideas.”
He pointed to his left.
“The people on this side work for money.”
He pointed to his right.
“The people on this side have money work for them.”
What Is Unearned Income And Its Types
Interest
If you’re looking for some easy money, you might want to check out interest and dividend income. These are the most common forms of unearned income, which means you don’t have to work for them. Sounds awesome, right? But don’t get too excited, because the IRS still wants a piece of the pie. That’s why they charge you an unearned income tax on this kind of earnings. Interest income is usually taxed as ordinary income, which means the same rate as your wages or salary. You can get interest income from various sources, such as:
- Bank accounts: Whether it’s a checking or savings account, you can earn some interest on your deposits. Just don’t expect to get rich from it, because the rates are usually very low.
- Loans: If you lend money to someone else, you can charge them interest for the privilege. This could be a personal loan, a business loan, or even a peer-to-peer lending platform.
- CDs: These are certificates of deposit that pay a fixed interest rate for a certain period of time. They are usually safer than stocks or bonds but also offer lower returns.
- Municipal bonds: These are bonds issued by state or local governments to fund public projects. They have one big advantage over other types of interest income: they are exempt from federal income tax. That means you can keep more of your earnings.
Dividends
Another way to make money without lifting a finger is to invest in dividends. These are payments that companies make to their shareholders out of their profits. Dividends can be a great source of passive income, especially if you reinvest them to buy more shares. Dividends can be paid at different intervals, such as monthly, quarterly, yearly, or twice a year.
However, not all dividends are created equal when it comes to taxes. Dividends can be classified as:
Ordinary Or Qualified Dividend
- Ordinary dividends are the most common type of dividends that investors receive. They are taxed at the same rate as your ordinary income, which could be as high as 37%.
- Qualified dividends are the ones that get preferential treatment from the IRS. They are taxed at the lower capital gains tax rates, which range from 0% to 20%. To qualify for this benefit, you need to meet some requirements: the dividends must come from a U.S. or qualified foreign corporation, you must own the shares for at least 60 days out of a 121-day period, and they must not fall into any excluded categories.
Other Sources
There are many other ways to get unearned income that don’t involve interest or dividends. Some examples are:
- Retirement accounts: If you have a 401(k), a pension, or an annuity, you can receive regular payments from them after you retire. These payments are usually taxable as ordinary income, unless they come from a Roth account.
- Inheritances: If someone leaves you money or property when they die, you can inherit it as unearned income. However, you don’t have to pay income tax on it, unless it generates income itself (such as rent or interest). You might have to pay estate or inheritance tax though, depending on the state and the amount.
- Alimony: If you get divorced and receive alimony from your ex-spouse, that’s also unearned income. You have to report it as income and pay tax on it. The same goes for your ex-spouse who pays it: they can deduct it from their income.
More Sources
- Gifts: If someone gives you money or property as a gift, that’s another form of unearned income. You don’t have to pay tax on it either unless it exceeds the annual gift tax exclusion ($15,000 per person in 2021). The giver might have to pay gift tax though, if they go over the lifetime exemption ($11.7 million in 2021).
- Lottery winnings: If you’re lucky enough to win the lottery, congratulations! You just got a huge amount of unearned income. But don’t forget to share it with Uncle Sam: lottery winnings are taxable as ordinary income at both the federal and state level.
- VA benefits: If you’re a veteran and receive benefits from the Veterans Affairs (VA), such as disability compensation or pension payments, that’s also unearned income. However, most VA benefits are not taxable, so you don’t have to report them on your tax return.
- Social Security benefits: If you’re retired and receive Social Security benefits, that
What Is Unearned Income And Its Benefits
If you want to boost your earned income before you say goodbye to your job, unearned income is your best friend. And when you finally retire, unearned income is your only friend. That’s because unearned income lets you save on taxes while you pile up the cash. How? By using smart strategies like 401(k) plans and annuities that delay the taxman’s visit.
These sources of unearned income let you keep your money in your pocket until you need it. And they help you avoid nasty IRS penalties and sky-high tax rates. Sounds good, right?
What Is Unearned Income And Do I Have to Pay Tax?
You might be wondering: Do I get to keep all my unearned income? Well, not exactly. Uncle Sam still wants his share of your money, even if you didn’t work for it. Unearned income is usually taxable, except for some lucky cases like life insurance payouts. And you don’t have to worry about employment taxes or payroll taxes on your unearned income. That’s a small consolation, right?
How Much Tax Do I Need To Pay on Unearned Income?
Now you might be thinking: How much tax will I pay on unearned income? Well, it depends. Unearned income is not a one-size-fits-all category. Some types of unearned income are taxed like regular income, while others get special treatment. And some types of unearned income let you postpone your tax bill until later. That’s pretty sweet, huh?
What Is Unearned Income And Its Tax Treatment for a Child?
What about your kids? Do they have to pay tax on their unearned income? Well, it depends on how much they make. If they have more than $2,200 in unearned income, such as interest or dividends, they might have to pay a special tax called the kiddie tax. Ouch! But if they have less than $11,000 in unearned income, you can report it on your own return instead of theirs. That might save you some hassle and money.
Before You Go
To sum it up, unearned income is money that you get without lifting a finger. You might call it passive income or free money. It can come from interest, dividends, rent, and other sources. But don’t think that you can hide it from the IRS. No way! You have to report your unearned income on your tax return. And you might have to pay tax on it too. So don’t be clueless about your unearned income. Check with the IRS, the payer of the unearned income, or a tax pro if you need help. Trust me, you don’t want to mess with the taxman.
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FAQ
Here is a possible FAQ on the topic:
1. What Is Unearned Income?
Unearned income is money that you receive without providing a service or doing a job. It can come from various sources, such as interest, dividends, alimony, inheritance, lottery winnings, and more.
2. What Are The Benefits Of Unearned Income?
Unearned income can help you supplement your earned income before retirement and provide you with a steady income after retirement. It can also help you save on taxes by using strategies that defer or reduce your tax liability.
3. Do I Have To Pay Tax On Unearned Income?
Usually, yes. Unearned income is generally treated as taxable income, except for some exceptions such as life insurance proceeds. However, the tax rate and treatment may vary depending on the type and amount of unearned income.
4. How Much Tax Do I Need To Pay On Unearned Income?
It depends. Some types of unearned income are taxed as ordinary income, which means the same rate as your wages or salary. Some types of unearned income are taxed at lower capital gains tax rates, which range from 0% to 20%. And some types of unearned income allow you to defer your tax liability to a later date.
5. How Does Unearned Income Affect My Child’s Tax Situation?
It depends on how much unearned income your child has. If your child has more than $2,200 in unearned income, they may have to pay the kiddie tax, which is a higher tax rate on their unearned income. If your child has less than $11,000 in unearned income, you can choose to report it on your own return instead of theirs. This may save you some time and money.
