Unearned Income
Income from sources other than employment, impacting taxes and financial planning.
What You Need to Know
Unearned income refers to money received from investments, rental properties, or other non-employment sources. This type of income can significantly affect your financial situation, especially regarding tax obligations and investment strategies. For example, if you earn $10,000 from dividends or interest on your investments, this unearned income could push you into a higher tax bracket, resulting in a tax rate increase from 12% to 22% on your total income.
Many people mistakenly believe that unearned income is less important than earned income, focusing solely on their salaries or wages. However, understanding and managing unearned income is crucial for effective financial planning. For instance, if you have a rental property generating $1,200 monthly (or $14,400 annually), this income contributes to your overall financial health and should be considered when planning future investments or retirement.
To maximize the benefits of unearned income, consider strategies like tax-loss harvesting or investing in tax-advantaged accounts, such as IRAs or 401(k)s. These steps can help reduce your taxable income, allowing you to keep more of your earnings. The key takeaway is to treat unearned income with the same level of importance as earned income, ensuring it is factored into your overall financial strategy.
Related Calculators & Tools
Put your knowledge into action with these interactive tools:
Payroll Calculator
Calculate exact take-home pay after federal, state taxes, 401(k), health insurance, and all deductions
Retirement Planning Suite
Complete retirement dashboard: analyze savings gap, model withdrawal strategies with Monte Carlo simulation, and optimize Social Security claiming
Budget Planner
Simple budget tool that categorizes income vs expenses with visual charts
Related Terms in Taxes
Active Income
Active income is earnings from work, crucial for meeting immediate expenses and building wealth.
Discretionary Income
Discretionary income is the money left after essential expenses, crucial for saving and investing.
Earned Income
Earned income is money received from working, crucial for tax calculations and financial stability.
Effective Tax Rate
Your actual tax rate—total taxes paid divided by total income. Lower than marginal rate because of brackets and deductions.
Estate Tax
A tax on the transfer of assets after death, impacting wealth distribution and inheritance.
Estimated Taxes
Estimated taxes are prepayments of income tax owed, helping you avoid penalties and manage cash flow.