Unearned income is any earnings by a person that does not involve his direct efforts or labor. For example, wages and salaries are considered to be earned income, while the following items are considered to be unearned income:
- Capital gains
- Inheritance income
- Life insurance proceeds
- Lottery winnings
- Pension payments
- Rental income
- Veteran benefits
The individual income tax rate may be different for unearned income than the rate applied to earned income, since the assumption has been made that those receiving unearned income are the wealthiest people, and so should be taxed more.
In short, the concept of unearned income is used to separate wage and non-wage income at the individual level for the purpose of applying an income tax rate.
Unearned income is also known as passive income.