what exactly is unearned income? I was recently injured at work. I have just now started to receive my?

Question

workers comp checks. last night my boyfriend mentioned something about unearned income on my taxes, something about the money I WOULD HAVE earned if i was not injured. I am confused. I know that generally, it means interst from accounts and stuff like that but is there some credit or something for my situation? I really dont think so, but would like to get another opinion???

Answer 1

Unearned income is income received without providing personal labor or services on your part. Such things as dividends, interest, rents, royalties, capital gains, etc. are all examples of unearned income.

Workers compensation payments could be classified as "unearned" income but more importantly it is non-taxable income. You won't pay any income taxes on the WC payments so any classification of them as "unearned income" is a moot point. Under the law, it's neither earned income nor unearned income but non-taxable income.

Where it would impact some taxpayers is when it comes to calculating the Earned Income Credit. Any amounts received under a state WC plan would not count as earned income for the EIC calculation. On the other hand, it would not count as unearned income (which can disqualify you from the EIC entirely if it's high enough) or as part of your Adjusted Gross Income which again can disqualify you from the EIC if it's high enough.

If you are collecting WC payments, there is no "imputed income" based upon what you might have earned had you not been injured. Your payments are fully tax free. See IRS Pub 525, page 17.

Answer 2

Here is what Wikipedia has about it:

Unearned income refers to income that is not a wage.

It includes interest, dividends or realized capital gains from investments, rent from land or property ownership, and any other income that does not derive from work.

Unearned income has often been treated differently for tax purposes than earned income, in order to redistribute income. Such a tax structure is most often seen implemented by a socialist government. For instance, income tax on high unearned incomes reached 98% in the United Kingdom in 1979. Supporters of this say that the people who obtained this income did not work to get it and that it should be used to benefit the general population.

In more recent times the pendulum has swung the other way, and most western countries tax unearned income more favourably than income from work.

Some economists claim that unearned income is compensation for deferring consumption, freeing up those resources to be invested in improving the future, by funding research and development of new technologies and services, capital equipment and education to improve the productivity of labor and so forth. This view also holds that unearned income provides an incentive to save, and capital markets facilitate allocation of resources to those enterprises which will provide the best economic benefit. Extra taxes on unearned income can interfere with these mechanisms. This point of view also asserts that all income is ultimately earned, and ask why tax should be higher on work that was done 100 years ago than work that is done today.


Hope it helps!

Answer 3

Income subject to tax is classified as "earned" or "unearned" because the tax treatment of income is different depending on whether the income was earned or unearned.

Nontaxable income is not classified as "earned" or "unearned." Workers compensation is nontaxable. It has no bearing on your tax return.

Answer 4

It means you are receiving unearned income. You are receiving pay you didn't have to work for. It also means you either don't or you do have to pay taxes on this amount cause they don't take any out of this amount. I don't remember which. No, there is no credit for this.