Unearned income is generally from passive sources of income and those other than employment (i.e., wages or self-employment). It is called passive income because the recipient of the income doesn’t have to be materially involved in the income source. Some examples of unearned income include interest from savings, bonds, and CDs. Appreciation and dividends from stocks, inheritance, royalties are also forms of unearned income. Unearned income is taxed differently than earned income. It is not subject to payroll taxes or employment taxes such as Social Security and Medicare. Additionally, long-term capital gains (a form of unearned income) is taxed at a lower rate than ordinary income.
