Finance: What is Unearned Income?

Unearned income is more than just the lunch money you stole on the playground. Hit play to find out more about unearned and earned income. And maybe send some apology notes to your elementary school classmates while you're at it...

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Transcript

00:30

taxes got a nice tan and like what's better than the smell of fresh-cut grass

00:34

in the morning in the summer if you were in the lawnmowers Union and you struck [People protesting]

00:39

and then you got Union striker emergency monies that's earned ish got any tips

00:46

for doing all that mowing ten fifteen twenty percent yep earned got disability [Boy takes cash]

00:51

payments for when the mower ran over your foot and you know defeated you [Lawnmower runs over boys foot]

00:56

painful but well that'd be earned okay so then unearned income comes from

01:01

things like investment income realize a gain on a sale of stock that's unearned

01:07

even though yes you worked hard to save the money you invested it with risk and

01:11

you were smart and or lucky and it went up and then you sold it for a tidy [Share price graph appears]

01:15

profit but yes that's considered unearned because you just sat on your

01:19

fat Duff and collected your dough same deal with dividends your stock throw off

01:23

unearned you just sat there bond interest comes to you doing nothing for

01:27

it unearned like it's how rich people get richer are you an old geezer now in [An old man holding a fork]

01:32

your 70s well then your IRA distributions back to you their unearned

01:37

even though you never paid ordinary income taxes on them in the first place

01:41

that dough would have been considered earned income if you had not put it in

01:45

the IRA and just paid taxes on it and kept it same thing for any other pension

01:49

like funds you might have like a Keogh or a Cloverdale or something like that

01:53

and for insurance trusts as well that are basically just investments with

01:57

different colored wrapping paper yeah like plaid we like plaid so all of [Gifts with wrapping paper appear]

02:01

that is unearned well why does it matter like why do we even care whether

02:05

something is earned or unearned in the first place well

02:08

generally you pay taxes on a couple of flavors of earned income there are [Person scooping ice cream]

02:13

social security taxes which include things like Medicare and those are

02:17

called FICA and other similarly evil sounding terms in theory they're just [Uncle Sam poster on a wall]

02:21

deferred savings that are forced upon you by the government so you get them

02:26

taken out of your paycheck as a tax but we at shmoop here aren't holding our [Pay check appears and tax highlighted]

02:30

breath that will ever see Social Security holdings given back to us

02:34

without a large oxygen tank in our hand so yeah FICA futa that's just more tax [Man holding large oxygen tank]

02:38

so that's the first type of tax on earned income the other comes from

02:42

normal vanilla state income taxes well then we have unearned income taxation [Vanilla state income tax ice cream scoop]

02:47

which is a different animal altogether it's only taxed based on gains and

02:52

carries the vastly simpler investment system of Taxation which does not

02:58

include death by a thousand cuts in taxes in the form of Medicare Social [Taxes cut by scissors]

03:02

Security and all kinds of other government entitlement taxes that you

03:06

know turn your once lovely paycheck that you earned into an anemic thirsty camel [Camel drinking water]

03:11

so what go save a lot of money get a lot of unearned income so you can put your

03:15

feet up and watch football day in your seventies [Person with feet up watching TV]