What does it mean if income is classified as 'unearned'?

Income classified as 'unearned' refers to income generated from investments or passive sources. This type of income typically includes dividends from stocks, interest from savings accounts, rental income from real estate, and capital gains from the sale of assets. Unlike earned income, which comes from direct efforts or employment (such as salaries or wages), unearned income is generated without the individual needing to actively engage in work.

Understanding the distinction between earned and unearned income is important for tax purposes, as they can be subject to different tax rates and reporting requirements. For instance, unearned income may be taxed at a lower rate compared to earned income, depending on various factors, including the taxpayer's overall income level. Recognizing this classification helps taxpayers manage their finances and understand their tax obligations more clearly.