What is Unearned Income and Earned Income?

Earned Income Vs Unearned Income

It is confusing for most of us, earned income vs. unearned income. Do these two have any differences? Yes, a clear one. As we shed more light on the difference and similarities between this unearned revenue and earned revenue, this text also reveals quick tips on how you can maximize your revenue on both factors in tax matters.

What is Earned income

An earned income, also referred to as unearned revenue, is the money you make from work you do or get from payment for being disabled. Examples of this income include;

  • Salaries
  • Tips
  • Union strike benefits
  • Wages
  • Long-term disability reimbursements
  • Self-employment earnings
  • Nontaxable combat pay:  In case you chose to have it treated as earned income

Relevance of earned income

You work for a living, to put bread on your table, and to sort your bills. Beyond this, however, there is the greater importance of your earnings;

  1. You make contributions to IRA or Roth IRA except when you are also paying for a non-employed spouse.
  2. Earned income attracts other benefits, which include; Earned Income Tax Credit, and a special tax break for low

Note that the earned income can affect your Social Security benefits concerning when you started the collection. Usually, you may face a reduction in your benefits following he Social Security earnings limit. Such situations arise when there are simulations work and collection early before reaching retirement age. The assumption is that one would have already earned it.

What is Unearned Income?

Other money you receive not from working or disability plan are termed as unearned income. The various examples include;

  • Annuity payments
  • Unemployment compensation
  • Distributions from retirement accounts
  • Capital gains
  • Pension income
  • Interest income
  • Real estate income
  • Alimony
  • Dividends
  • Taxable Social Security benefits

An overall claim on unearned money is that they do not qualify for compensation to contribute to IRA. The only exception available is with alimony.

Unearned income does not subject to payroll taxes; however, it still contributes to your tax burden since it comprises the calculation of adjusted gross income (AGI).

The AGI is helpful in the calculation of tax liability and the determination of one’s eligibility for certain deductions and credits. Find it online 11 of 2020 Form 1040 when completing the federal tax return.

Most unearned income gets taxed at a marginal tax rate, the percentage of tax one pays at each tax bracket. For instance, particular types of revenue get taxed at a lower rate, qualified dividends, and capital gains.

By knowing all about what unearned income is, making the rest of tax decisions always remains easier.

Earned vs. Unearned Income

Whether earned or unearned revenue, both remain highly significant to our lives. The idea of focusing on reducing tax liability on any of them therefore, always keeps us afloat with our money. As part of exceptional advice, therefore, your career focusing on earned income must be the best at the early stages of your career. This resolution, however, may not be absolute, especially when the focus is on minimizing tax liability.

Conclusion

Work with a dependable tax expert to help you calculate the right amount of payroll tax if you become self-employed, so there won’t be any eventualities come to Tax Day. A direct link you can get on this is via quality Bookkeeping services. Get started with free sign-up.

Abdul Ghaffar
Abdul Ghaffar

Graduated Cum Laude Major in Bachelor of Science in Accountancy. My Accounting Degree leads me to become a bookkeeper as a profession.

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