Unearned Income
Unearned income is income from sources other than personal services, including interest, dividends, capital gains, rental income, royalties, pensions, and Social Security. It is subject to the 3.8% NIIT above certain thresholds and kiddie tax rules apply to children.
Exam Tip
Unearned = not from services. NIIT 3.8% above $200K/$250K. Kiddie tax on children's unearned income > $2,500. SS and pensions = unearned but NOT subject to NIIT.
What is Unearned Income?
Unearned income (also called investment or passive income for NIIT purposes) is income not derived from active work or services.
Types of Unearned Income
| Type | Examples |
|---|---|
| Interest | Bank accounts, bonds, CDs |
| Dividends | Qualified and ordinary dividends |
| Capital gains | Stocks, real estate, other assets |
| Rental income | Net rental income |
| Royalties | Patents, copyrights, minerals |
| Pensions/annuities | Retirement distributions |
| Social Security | Benefits (0-85% taxable) |
Net Investment Income Tax (NIIT)
3.8% surtax on unearned income for taxpayers with MAGI above $200,000 (single) or $250,000 (MFJ). Tax applies to lesser of NII or excess MAGI over threshold.
Kiddie Tax
Children under 19 (or under 24 if full-time student) with unearned income above $2,500 (2025) are taxed at the parent's marginal rate on the excess.
Exam Alert
Unearned income includes interest, dividends, capital gains, rent, royalties. Subject to 3.8% NIIT above $200K/$250K. Kiddie tax applies to children's unearned income above $2,500 at parent's rate. Social Security and pensions are unearned but NOT subject to NIIT.
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Related Terms
Net Investment Income Tax (NIIT)
The Net Investment Income Tax (NIIT) is an additional 3.8% tax on investment income for individuals with modified adjusted gross income (MAGI) exceeding $200,000 (single) or $250,000 (married filing jointly).
Social Security Benefits Taxation
Up to 85% of Social Security benefits may be taxable based on provisional income (AGI + tax-exempt interest + 50% of Social Security benefits). Thresholds are $25,000/$32,000 for 50% inclusion and $34,000/$44,000 for 85% inclusion (single/MFJ).
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