The IRS determines your responsibility to file based on your gross income, which consists of both earned and unearned income. This is especially important if you can be claimed as a dependent on someone else’s tax return. Your eligibility for certain tax credits and IRA contributions also depends on how much earned income you have. This article will help you determine the difference between earned and unearned income.
Obviously, any income you earn by working for someone else will be considered earned income. Salaries, wages, tips, professional fees, business income (from self-employment), and farm income all count as earned income. Those are pretty straightforward.
But there are a few tricky ones. For example, alimony counts as earned income. (I’m talking about true alimony – you can’t count child support for this.) Also, income from partnerships, S corporations, trusts, and estates can only count as earned income if they are considered “non-passive”. For the most part, this means you must have actively participated in the business that provided the income. There are special rules relating to rental real estate on this issue. If you’re not sure about your situation, you need to consult a tax professional. Finally, taxable scholarships and fellowship grants can also count as earned income.
That’s pretty much it for earned income. One last note – any earned income that you exclude under the Foreign Earned Income rules does not count as earned income for your IRA contributions. Again, this is another complicated situation that may require talking to a tax professional.
Calculating unearned income is very important if you can be claimed as a dependent on someone else’s tax return. You’ll want to know how much unearned income you have so you can figure out if you’re required to file a tax return. Also, if you’re looking to make IRA contributions, none of these items will count. Here are most of the items that are considered “unearned income” by the IRS:
- Interest & Dividends
- Capital Gains
- Retirement Income (IRA distributions, pensions, and annuities)
- Rental Real Estate Income
- “Passive Income” from partnerships, S corporations, trusts, and estates
- Unemployment Compensation
- Social Security Benefits
- Gambling Winnings
- Cancellation of Debt
- Excluded Income under Foreign Earned Income rules
- and a few others…
Your gross income is the combination of both your earned and unearned income. Knowing what counts for these amounts will help you figure out if you are required to file a tax return and if you’re eligible to make IRA contributions.
Get More Tax Tips!
If you want to get more tax tips, make sure you sign up for free updates to Provident Planning. If you have any questions about earned or unearned income, leave a comment and I’ll do my best to help you!
If you enjoyed this, you might like:
- Why Hiring a Tax Professional Could Work in Your Favor
- Would Jesus Support the Buffet Tax Law?
- Tax Tip: Combine a Traditional IRA Deduction with the Retirement Savings Contribution Credit
- Is Renting Throwing Away Money?
- The Hobby Loss Rule: What It Is and Why You Don't Want to Break It
I am retired and my pension is unearned pay, but I also receive a W-2 that reports the “Taxable cost of group-term life insurance over $50,000” (box 12a Code C on W-2). Is this considered Earned Income by the IRS? Tax software gave me a Making Work Pay credit based on it. I do not get Social Security and am not a government retiree. If it is earned income for Making Work Pay, would it also count as earned income so I can contribute to an IRA?
Thanks for your question, Barbara. The taxable cost of your life insurance should also be included in Box 1 of your W-2. If it is, then it will count as W-2 wages which are considered earned income. Assuming there is nothing else disqualifying you from the Making Work Pay credit or from contributing to an IRA, then it will count as earned income for both purposes. Hope this helps!
If I take an early withdrawal from my IRA, is it considered earned or unearned income?
Any distribution from an IRA is going to be considered unearned income, Beverly.
I live on a combination of Social Security and SSI. I am disabled and unable to work. I have no assets, rent an apartment using section 8 voucher. I am getting medicaid as only insurance and food stamps. I will be getting an inheritance from parents who are now deceased. Will that be considered passive income? I am below the poverty level income-wise $694. monthly total so don’t pay income tax. I need to know if I must spend the inheritance down to 0 in order to retain the benefits I need to survive as mentioned above. And if I must pay federal income tax on the inheritance amount as well. Thank you.
Two part question. I was disabled at work and retired under a disabilty retirement. My income is limited 28% of my pension + 5000$. It says that is based off my “Gross earned income or Self employed Net income” If I own a house and rent out rooms to roommates, does this money fall under unearned income? Also, If I start my own LLC, and give my self no salary and just keep the money revolving through the company, is any of that considered earned income?
Hi, Snickers Mom! An inheritance will not increase your income taxes, and this year there is no estate tax. (There is no federal inheritance tax.) The main problem you’re going to face is the asset maximums that are in place for Medicaid and other aid programs. You’ll most likely have to spend down those assets before you can receive Medicaid and other aid benefits again. However, I’m not an expert on this so I recommend you try to find someone local who can help you with understanding the requirements for Medicaid and the other aid programs you’re using right now.
Hi, Eric! Without being able to review the documents for your disability benefits, I can’t reliably tell you if that definition of income will include rental income. In the IRS’s eyes, rental income is not earned income in most cases (probably not in yours). However, your disability benefit program can define income any way it likes, so you need to carefully review those documents and ask questions of the provider to get the right answer.
I’m not sure what you mean about starting an LLC. If it’s only a shell corporation that you’ll use to cover your personal expenses, it won’t fly with the IRS at least.
I am unemployed my only source of income is child support, can i still claim my two children?
Leslie, yes you can claim your children assuming they live with you and meet all the other tests. But it won’t matter for something like the Earned Income Credit because you need earned income for that credit. Unfortunately, child support doesn’t count as earned income. You’d still be eligible for the Child Tax Credits though.
Thank you. I will seek out an attorney who specializes in how medicaid and the law relates to inheritance.
If my exhusband took an IRA distrubution from an IRA that he got as part of our divorce settlement after the divorce was final, will that be included in what determines his child support? Also, if my exhusband has a rental property that has an income of $16,000 but has a mortgage against for $12,000, is it concidered income on the $16,000?
Hi, Toni! I appreciate your questions, but unfortunately I don’t have any experience with child support determinations. I can tell you how those items will probably be considered by the IRS though. Assuming the IRA is a traditional IRA and it has no basis (meaning no non-deductible contributions were ever made to it), then the IRS will consider any distribution he takes from that to be taxable income (but not earned income).
The rental property will be handled on Schedule E. Only the net income after expenses will be considered taxable. Whether it’s earned income or not depends on how “actively” he participated in running the rental.
Sorry I can’t be of more help!
What is the most you can make that will disqualify you from earned income credit?
Hi, Linwood! It depends on your filing status and number of children (under 17 as of the last day of the tax year). If you let me know that, I can tell you the max.
I am currently eligible for earned income credit I have one child under 17 and I make 32K a year. I am going to recive a 99k inherintance from sale of prop. next week. Will the 99k count against my EIC FTY 2010
As long as it’s not income in respect of a decedent the inheritance shouldn’t affect your eligibility for the EIC, Craig. That doesn’t sound like the case in your situation, so I think you should be fine.
I’m a single mother of 2 . I can’t work cause of medical problems . I get dss and child support anand waiting to hear about ssi . I get a very low income of 800 a month . 600 for rent and the rest for rg&e . So would I be qualify .
Hi, Mistie. I’m assuming you’re asking if you’d be eligible for the Earned Income Credit. Unfortunately, if you don’t have earned income you can’t claim the credit. Child support doesn’t count as earned income. Alimony would count as earned income for IRA contributions but not for the Earned Income Credit. From the sound of it, I don’t think your disability payments would count either.
I was wondering, I am about to move in with a friend in a few more months, I draw social secruity disability, I also have medicaid medicare and foodstamps, i currently live with both parents as of right now, if i move in with my friend thats a roommate will his income count against, i am a seperate household on my foodstamps and im disabled. I live in Kentucky
Hi, Mckenzie! I’m not an expert on disability, food stamps, and Medicaid, but I do not think your friend’s income should affect your ability to get those benefits. You should check with people who work in those areas in your state to double check though.
I just received a 1099int, for interest court ordered child support which the interest income I received 5k, my aig is currently 10k, with a refund of 1700, after eic and self employment taxes (I am independent contractor) If I enter the interest income under schedule b, it eliminates my eic of 3300 and has me paying back 1200. This defeat the purpose of him paying interest I mine as well not be receiving it. It penalizes me and is making me pay a very high tax bracket when it was the courts that ordered it. Can you tell me is there another area I can enter this as income, because it wasn’t from investments and alimony recipients don’t get penalized with eic. Please any advice? Thank you.
Hi, Lynn! Thanks for your question. Unfortunately, I believe that interest is taxable and the only place you should report it is on Schedule B as you mentioned. The reason it eliminates your EIC is because it puts you over the investment income limit, which is $3,300. I agree that it stinks, but you’re still coming out ahead. ($5000 – $1700 – $1200 = $2100)
I think you’ll find this document helpful: http://facpa.com/documents/HT_1204C.pdf
It’s a very similar situation to yours and cites the case law supporting the fact that you must report the interest as taxable interest income. If you do not enter it correctly, you will very likely get a letter from the IRS challenging your tax return and requiring you to pay what you owe in addition to possible penalties and interest. I would report the interest on Schedule B if I were you.
i am using my mother as a dependent, she 90 yr she live next door, does she qualify for unearned income. her income is social security
Hi, Barbara! I’m not sure I understand your question. Social Security income is considered unearned, but that wouldn’t qualify your mother for anything special.
I recieved a distribution from a Public Employees Retirement System (pension) when I ended my employment. they took out Federal Taxes-does this count towards Earned Income Credit?
Hi, Robin! Pension income does not count toward earned income for the EIC even though they withheld federal taxes. Pension income is unearned income but it may still be taxable income, which is why they withheld taxes for you. If you do not need to have taxes withheld (i.e., you own no tax), then you should contact PERS to eliminate the withholding. Thanks for your question!
I was wondering because I earned less than $8,000 in 2010. I have 2 children who qualify as dependents…husband gets SSI (disability) that doesn’t get taxed. So is there any chance I’ll get what they took out in Federal taxes in my refund? Also how much is the child tax credit this year? If it varies state by state, I live in California. Thanks.
Well, it sounds like you probably won’t owe any tax, so you’ll get back any federal taxes that were withheld. The child tax credit is $1,000 per child but it only reduces tax you owe. If you don’t owe any taxes, the only way it can help is if you’re eligible for the additional child tax credit (because it’s refundable…the regular child tax credit is not). There’s a separate calculation for the additional child tax credit, but it’s equal to the lesser of the unallowed child tax credit, or 15% of your earned income that is more than $3,000. If you don’t have earned income, you won’t be able to get the credit at all.
To get the EIC you’ll need earned income. So that might be a possibility if that $8,000 you earned was from a job and not just your pension. Hope that helps!
I’m a naturalized citizen. Before I immigrated here I had a pension fund back in my country. Once I get my citizenship i was able to get my money from that pension fund. Is this an unearned income?. Can I discount all my contributions to calculate the net unearned income? Should I just pay taxes over the gains since I start living here? Thanks!
Hi, Wilfredo! Yes, that would be considered unearned income. There are methods of accounting for the taxable portion of a pension based on your contributions and a number of other factors, but they’re too complex to address in a comment. Since you’re a naturalized U.S. citizen, you’ll be taxed just like any other U.S. citizen – so treat your pension according to the same rules. If you’re not able to figure out how to account for everything on your own, I’d recommend hiring a tax professional to help you figure it out.
Hi, I was wondering if rental income is considered investment income? My reason for this question is that my tax advisor is claiming my rental income as investment income. And in order for me to receive the earned income credit I cant have investments in the amount of $3,100 or more.
Hi, Michelle. Your tax preparer should be putting the rental income on Schedule E. But that won’t help you for the EIC. Rental income is considered “investment income” for the EIC limit. So you’ll either need to make sure you write off every legitimate expense to reduce the net income from your property, or you’ll need to sell it so you don’t have this problem next year.
Thanks for the prompt response! My next question to you is what types of “legitimate expenses” could I write off? Would the property taxes tied to the land be something I could write off? I rent a portion of my property to this tenant. So essentially the property taxes I pay are for my house, and all the land that is partially rented by the tenant? So would that qualify?
No problem, Michelle. To make sure you use all legitimate expenses, I’d recommend reading over Schedule E and the instructions. Also, your tax preparer should be able to help you with any questions you have (and better than I can since they’ll know your situation better).
As far as property taxes go, you can deduct a portion of them on Schedule E and the rest on Schedule A as an itemized deduction. To allocate the portions, divide the square footage of the rental part of your property by the total square footage of the property. Multiply that by your total real estate taxes and that’s the portion you can deduct on Schedule E. The rest goes on Schedule A. You’ll use the same method for any expense that’s shared between your rental property and the part you use for personal purposes (mortgage interest is another common example).
You’ll really need to work with your tax preparer to make sure you don’t miss anything.
I manage an apartment complex and get free rent. My company says it is up to me if I report as income or unearned income. How do I handle? I’ve been getting this perk for over 20 years and have never reported.
Hi, George. You don’t need to worry. Housing that’s provided for the convenience of your employer (which is true in your case) is considered a nontaxable employee benefit. It is not considered income (earned or unearned).
I am the custodian on my daughter’s account for some shares of stock, she is 19 now and a fuul time college student, based on california law since she is above 18 I have to pass that to her. The total amount will be $ 5600.00, I called the company who holds the stock to sell the the stocks, they said they will and they will notify IRS using her SSN. My question is if she is totaly dependent to me for support, 1) does she have to file Taxes, she has not had any other income of any type. 2) The stocks were purchased many years ago for about $ 4500.00, so there is about $ 1100.00 gain. 3) can I add this gain on my TAX returns so she does not have to deal with filing taxes
Hi, Vince. Because your daughter is your dependent and has more than $950 in unearned income she should file a return. However, she won’t owe any federal tax (there may be state tax due…I’m not familiar with CA). You can choose to report her capital gains on your tax return by using Form 8814 so she doesn’t have to file, but then you’ll end up paying a 10% tax on the amount over $950 in gains up to $1,900. (So about $15 in tax…) If your daughter files her own return, there won’t be any federal tax due.
She should qualify for the free file program or you could use TaxAct which is free for everyone (Federal only…state you’d have to pay, just like with the free file program). It’s not a big amount either way, so you may want to use Form 8814 and just pay the extra $15 in taxes.
Hope that helps!
I collect a 70k on a pension and 30K on Social Security (SS)at the age of 71 year old, married.
Am I in a 25% tax bracket?
I heard that SS is tax at 50% if you have an earn income of 24K-35K and SS is tax at 85% if you have an earn income of 35K and up.
Is this true?
Can you explain how SS is being tax?
Does my pension consider as an earn income?
Hi, Loi! The amount of your Social Security that is taxable is figured using the calculation outlined on this page: http://www.irs.gov/publications/p915/ar02.html#en_US_2010_publink100097869
Because of your pension, you’ll probably have to include 85% of your Social Security as taxable income. The pension is not earned income, but the calculation to determine what portion of your Social Security is taxable includes all sources of income. Hope that helps!
Hi, I’m not sure if you’re the right person to go to with this. I just did my sister’s taxes for her. We live in MA and she makes under 10,000 a year. I believe that puts her under the 100% federal poverty level. She is single with no kids, but still has trouble with bills. Are there any programs (ex: welfare) that would apply to her. Everything I found only seems to apply if she had dependents.
Hi, Kyle! I’m not extremely familiar with those types of programs, but I wouldn’t be surprised if your sister would at least qualify for food stamps – even without dependents. My recommendation would be to look up social services/welfare offices near you and get in touch with them. They’ll be your best source of information and help.
I collect SS (no earned income), and claim that as income joint filing with my wife who works. Our minor children also get social security benefit payments that total %7,500+ each. I believe that is unearned income which is in excess of what we can include on our joint filing. Do we have to file tax returns for the girls, if so what type, and can they still be claimed as dependents on the joint return (clearly more than half their support for the year).
Hi, Tom. You won’t need to file returns for the girls unless they have other taxable income and would be required to file. Just Social Security benefits is not enough. To figure out if they provided more than half of their own support, you’ll need to read through this webpage and work through worksheet 3-1 near the bottom: http://www.irs.gov/publications/p17/ch03.html#en_US_2010_publink1000170967
I know the explanation on the IRS site is tedious, but that’s the best answer I can give you because each situation is going to be different. If you did not provide more than half of their support, then you cannot claim them as your dependents.
I have a house that I was given the house in my divorce. I am currently renting out that house and my ex-husband is saying that I need to claim that rent as income to re-calulate our child support. thank you.
Hi, Tazzy. Unfortunately, this sounds like a legal issue. I recommend you consult with an attorney on this. I’m afraid I can’t help you. Sorry!
I was working 2 part time jobs and making approx. 700.00 per month. The state was giving me around 400.00 in cash aid and food stamps. I lost my job but it wasn’t my fault so I was given unemployment. I make 500.00 per month now and the state is stopping my cash aid completely. How can this be logical. If I hadn’t worked to earn the right to recieve unemployment, I’d never be able to get it. I earned that unemployment benifit by working. Also they take taxes out of it. There is no way I can survive and support my child on 500.00 per month. I was just getting by when it was 1100.00 per month. Without the cash aid the state is putting me and my daughter in the streets, my rent is more than that. There has to be a way to fight this and I have a hearing on the 17th to argue my case. Can you help in any way????
I am one of the beneficiaries on a variable annuity of a recently deceased relative. I am to receive roughly $11k, of which ~$3200 is taxable capital gains.
What type of income will this be considered and what type of tax form should I receive reporting it? Will just the taxable portion be included, or will the entire amount be reported as income, but only the gains taxed?
I have been sent a form and asked to specify how much tax to withhold from the distribution. I am assuming that the capital gains will be considered investment income and will disqualify us from the EIC that we received last year (true?). Will our AGI be increased by the entire 11k or just the 3k? How can I determine what our tax rate will be based on this new “income?”
Any help you can offer or sources you can point me to would be greatly appreciated. I have spent hours on the internet trying to figure this out and while I have learned a few things, I am still utterly confused. Thanks!
Hi Lois. I’m so sorry to hear about your situation. I’m not sure what state you’re in or why their aid programs would stop because you went on unemployment. But my recommendation is to look for advocacy services in your area that will help you work through the problems you’re having with the aid system. Because these programs can vary by state (and sometimes locality), you’ll get the best information from someone who is familiar with the particular rules.
Other than that, just don’t give up. Keep working and talking with people and present your case patiently and politely.
Hi, Jill. I can try to help you, but without having all the pertinent information I can’t guarantee anything. You’ll need to work with a tax pro in your area to be sure of what you should do.
Annuities typically don’t have capital gains. Distributions are either a return of capital or treated as ordinary income. In your case, you need to know what the deceased person’s cost basis in the annuity was on the date of death. Your cost basis will be equal to the proportion you inherited (if you split it 50/50 with someone else, you get half the deceased person’s cost basis). Any distribution you get that is more than this cost basis will be taxed as ordinary income to you (specifically as income in respect of a decedent). Anything up to the cost basis is tax free and will not show up on your tax return as taxable income (assuming you report it correctly by taking the cost basis into account). Your AGI will only be increased by the part that exceeds the cost basis.
The portion that exceeds the cost basis will be considered unearned income and could disqualify you from the EIC. There’s no way around that.
Hope that helps!
I received social security in 2008 and worked part-time, never making above the monthly gross limit. However, I did receive a stock distribution (retention grant) from my former company (retired 2006) in January 2008 which would put me over the limit for that month. It showed up on a W-2. Does that count as earnings against the social security benefit? i admit I forgot all about it when declaring my wages. Thanks!
Hi, Ellie. Those earnings shouldn’t hurt you for Social Security. Social Security only considers wages that you actually earned while you are receiving your retirement benefit. Deferred compensation and retirement benefits are not generally counted as wages. You can always call the Social Security Administration to check just to make sure though. Hope that helps!
In 2008 and 2009 my sole income was $1200/month Spousal Support ($14400/year).
Was I required to pay income taxes? I did, but it came to $1400, which I cannot afford. I am already in the poverty level and cannot live on less.
I am a named beneficiary on my Grandfather’s retirement account..Am I going to have to pay taxes on it? There are seven beneficiaries and the total was less than $1,000,000?
Hi, Janice! Yes, you would be required to report alimony as taxable income on your tax return. However, I do not believe your tax due would be $1,400. Assuming you qualify for the standard deduction and one personal exemption each of those years, I think your total combined tax due would be around $1,000. However, I can’t know that for sure without doing your tax return – it’s just my estimate.
If you cannot pay the tax you owe, you’ll need to look at doing an Offer in Compromise with the IRS. But be aware that those offers are limited to people who really cannot pay their taxes any other way. The IRS will look at your assets, income, and potential to earn income to determine if they should accept your Offer in Compromise. It sounds like you may qualify though.
Hi, Baruch! It depends on the type of retirement account you’re talking about. If it’s a traditional IRA, 401(k), 403(b), or similar plan, then yes you will have to pay income taxes on the money when you withdraw it (and you’ll likely have a required minimum withdrawal you’ll be required to take). If it’s a Roth IRA, then you won’t have to pay taxes when you withdraw the money.
My stbx offered me a settlement of $1,750/month and $10,000 cash. That’s it. After 30 years married. I am 58. My husband keeps his medical practice, Corp, and LLC (Medical Building) He spent all our retirement.
How much tax will I be paying on $1750/month ($21,000 year)?
What should I do with the $10,000? Put it in a CD or MM?
Life is not fair and I am trying to pay the least amount in taxes that I can.
I got a letter from the IRS asking for w-2’s and 1099’s for earned income verification on my 2010 1040EZ, however, the only income I had last year was from misc. helping of family and friends where I was paid anywhere from $50 to $3000. for help with fixing plumbing, holes, carpet, cleaning, organizing, yard work, trash, and moving, etc.totaling about $6500. In some cases I stayed with them while completing the work and I received no 1099’s or W-2’s. What are your suggestions?
p.s. Do you think any of these should be listed as “HSH” income as on line 10 of the 1040 form.
Tru Vail, I would explain your situation in writing to the IRS. You may have to go back and get appropriate forms from the people who paid you. As to whether it should be considered household employee income or not, your best bet is to consult the IRS’s publication 926 (http://www.irs.gov/publications/p926/ar02.html#en_US_publink100086722). Hope that helps!
My son cashed in series ee bonds without my knowledge, I was wondering if the interest is counted as income or unearned income? Now I know that bonds are not counted as state or local tax but if he is a dependent full time student does he need to file a tax return?
Hi, Nick. If you don’t qualify to exclude the interest under the education savings exclusion, then it will be considered unearned income taxed at your ordinary rate. You’re right that it is not subject to state or local tax. If you owned the bonds, the interest will be taxable to you. If your son owned them (which I assume is unlikely), then it’s taxable to him. Whether or not he should file a tax return depends on all his sources of income. See the IRS website: http://www.irs.gov/ita/article/0,,id=219890,00.html It’s a Q&A system that will tell your son if he needs to file. The amounts will be a little different for 2011 but close to 2010. (They don’t have their 2011 calculator out yet.)
For more info on the EE bonds, check out: http://www.treasurydirect.gov/indiv/research/indepth/ebonds/res_e_bonds_eetaxconsider.htm & http://www.treasurydirect.gov/indiv/planning/plan_education.htm
Hi,I’m disabled and currently receive workers compensation. I live in Texas. I own a home in the state of Michigan,and I rent it out monthly. Will I be able to file a return using only the rental income,and if I can what forms do I use. And is that considered federal or state. If I can file can I file here in Texas or do I have to go to Michigan. If I can file using only property rental would I make credits on my Social Security. I would also like to know,can I file taxes using my workers compensation income,a lot of people have told me no,is this true.
Hi, Margarita. I’ll try to answer your questions.
Generally, workers comp benefits are not taxable. However, if they reduce your Social Security benefits then they may be taxable. See http://www.irs.gov/publications/p525/ar02.html#en_US_2010_publink1000229331 for more information.
Assuming you have enough income that you’re required to file, you’ll need to file a Federal tax return to report your net rental income. See http://www.irs.gov/individuals/article/0,,id=96623,00.html to figure out if you need to file.
As far as I know, Texas does not tax income, so you would not need to file a return there. However, it’s very likely you’ll need to file a return in Michigan. You’d be considered a non-resident with tax producing property in Michigan, which means you need to pay MI income taxes. You can find their income tax information here: http://www.michigan.gov/taxes/0,1607,7-238-43513—,00.html
You can certainly file the required returns yourself if you want, but I’d strongly recommend hiring a tax professional in your case.
Finally, your rental income will not increase your credits for Social Security. It is not taxed as self-employment income or as earned income except under rare circumstances. (You have to be in the business of dealing real estate – not just investing in one or two rental properties.)
Hope that helps!
i am 62. i want to open an S Corp so i can get passive income that wont reduce my social security benefit. if i open the S Corp and earn 62k, will this count towards the 14K limit on earnings for early retirement? also if i work somewhere else and make 62k, does social security cut in half that amount and therefore my salary for the purpose of earnings limit would be 31k? do i have this right?
Hi, James. You’ve only got part of it right. Only your S-corp distributions would be excluded from the earned income test for Social Security. The problem you’re going to run into though is the IRS requirement that you pay yourself a reasonable salary from your S-Corp before you take any distributions. That salary will get reported on a W-2 and will count toward the earnings limit for Social Security.
Any income you earn while taking Social Security benefits and while you’re under your normal retirement age will reduce your benefits. This is how it works. The first $14,160 (limit for 2010 & 2011) you earn will not lower your benefits at all. Anything you earn over that amount will reduce your benefits. They reduce your benefits by $1 for every $2 you earn over the limit. So in your scenario of earning $62k, they’d ignore the first $14,160 and then reduce your Social Security benefits by $23,920 (half of $47,840). If that’s more than your total Social Security benefit, then you just won’t get any benefits that year.
If you’re going to keep working, I’d recommend delaying your benefits at least until you’ve reached full retirement age and possibly later. There are a lot of variables that go into deciding how late you should delay Social Security, but if you can afford to wait, are healthy, and have a history of long lives in your family then waiting can drastically increase your Social Security benefits.
Hi,I have my house for sale in Houston Texas. I don’t work so I don’t file taxes,but I was wondering once my house sells do I have to file a tax return for the profit I will make with the sell of my house. Are the profits considered earned income? If I can file a return with the profit I will make,will I get points or credits on my social security
Hi, Margarita! Assuming you qualify for the exclusion on the gain from the sale of a home, you won’t need to file a federal tax return unless your gain exceeds the exclusion amount. The full exclusion is $250,000 if you’re single and $500,000 if you’re married. That’s an exclusion on the gain not the selling price. To find out if you qualify, check out these IRS resources: http://www.irs.gov/taxtopics/tc701.html & http://www.irs.gov/pub/irs-pdf/p523.pdf
Even if you can’t exclude all of your gain, any excess gain will be treated as unearned income. You won’t get any credits for Social Security on that gain because you don’t pay Social Security tax on it. Hope that clears things up a bit!
Paul, Just wanted to give you an up-date. I had my hearing with the county and even though the judge totally agreed with me, he said he didn’t have the authority at his level to over turn a case. He said it was a state stature that makes unemployment unearned and suggested I go to the next step and appeal it to a higher court. Oh, by the way I’m in CA…..I know good luck huh!!! If you happen to know any attorney’s that do pro-bono and want to fight city hall(as they say) please let me know. Thanks again
I’m sorry, Lois. I don’t know any attorneys in CA. I hope you’re able to get this resolved though!
For early retirement and the limit of $14,160 rule, does earned income include rental income (gross rents collected) without any deductions???. In another words, is “earned income” not AGI on your filed tax return? What line on the return is total earned income?
Rental income is not typically considered earned income for most people. Typically, it will be unearned income. There are some rare circumstances where it is considered earned income, but it typically only applies to real estate professionals or people who have made a business out of renting properties out. So I doubt it would count against you. Also, even if it were considered earned it would be the net income after expenses and not the gross receipts.
There isn’t really a line that shows what your earned income is on your tax return. Some tax software programs will show this for you though. The reason there isn’t a line is because of things like I noted above – sometimes a certain type of income is considered earned and other times it’s considered unearned.
Hi, my father has a government (EEOC) retirement annuity which pays out at $21,000 a year. He has been struggling live off this meager so I’ve been supplementing his living expenses (house note/ utilities/ insurance / food etc..)to the tune of proximately $15,000 a year over the past couple years. I’d like to claim him as a dependent but he has unearned income in excess of $3650. How can I claim him to get a tax break or claim myself as Head of household with him as a dependent? Thanks in advance.
Hi, MCCJr. If the retirement annuity is considered taxable income, then you won’t be able to claim your dad as a dependent. If it’s not, then you may be able to claim him if you meet the other criteria. I don’t know of any way around the gross income test in this case though. Sorry!
I am currently early retired at 64 and receiving social security; if I take a $10k distribution from my traditional IRA, will this go against the $14,160 that I could earn this year?
I know I have to pay taxes on the IRA, but do I have to pay SUTA,FUTA,& medicare, etc. in addition to federal/state taxes?
Hi, Lois! No need to worry about your IRA distribution going against the earnings limit for Social Security. You will have to pay income taxes on it, but no other taxes will be due on the distribution. The only way the IRA distribution might affect your Social Security is when it comes to calculating how much of your Social Security is subject to income taxes. Other than that, you’ll be fine!
I am living overseas many years and have never filed a tax return (I know I should before they come looking for me, lol) because my foreign earned income is less than the deduction. However, I have been unemployed these last 2 years and have received unemploment benefits. If I understand correctly, the deduction is not applicable and I need to pay taxes on the unearned income exceeding $8,000???!!!
Can you please confirm or clarify for me? Thank you!
Hi JPS, if you’re a US citizen and you would have needed to file without the Foreign Earned Income Exclusion, then you should have filed all of those years. I would recommend filing the returns you failed to file – you don’t want the IRS coming back on you on these issues.
As far as unemployment benefits go, I do believe they’re only considered unearned and therefore wouldn’t qualify for the Foreign Earned Income Exclusion. Unemployment benefits are taxable. I’m not sure if there’s a different treatment for foreign unemployment benefits, but I doubt it. Sorry I don’t have better news for you!
I’ll try to make this quick.
Basics: I’m 30, male, single, no dependents, in good health & have zero debts. I live in colorado and do not have any other source of taxable income besides daytrading stocks.
I make $200,000/year average, in short-term only trades (no long-term investments) in a personal brokerage account which are all filed as personal short-term capital gains.
Ok. With that…
1. Which of these 2 vehicles, either an S-corp or single owner LLC (and elect it to be taxed as an S-corp), compared numerically side by side, would save me more in taxes each year if i do all trading through either of these vehicles? Let’s assume that I take a $45,000/year salary & receive distributions on the remaining profit.
2. How much numerical savings in taxes would there actually be for going through the hassle of starting a S-Corp or LLC as opposed to simply paying personal capital-gains tax on my trades like I’ve been doing?
3. Is it beneficial to start these entities in states that do not tax corporations nor personal income tax (*such as Washington, S.Dakota, Wyoming, etc)?
Thanks in advance,
Hi, Stephen! I see no benefit to you incorporating for your day trading activities unless you want to pay Social Security and Medicare taxes. An S-corp and an LLC (taxed as S-corp) will both flow through to your tax return. This means the character and amounts of your gains will remain the same. The only thing that would change is the fact that you’d have to pay yourself a salary or guaranteed payments. Doing so would require paying payroll taxes or self-employment taxes on income that would otherwise not be subject to such taxes. If you’re looking at doing this solely to lower your taxes, I’m afraid there’s not much benefit here.
The one way you could benefit is by using your salary to fund a retirement plan setup through the S-corp. You could elect to contribute 100% of your salary and effectively lower your income taxes. However, you’ll still have to pay Social Security & Medicare taxes on the amount you defer. You could contribute some without any taxes by making employer contributions though.
To answer your specific questions:
1. Neither will save you more taxes. The main difference between an S-corp and an LLC taxed as an S-corp is complexity of setting up, maintaining, and managing the entity. LLC’s are simpler. But if you elect to have the LLC taxed as an S-corp, there’s not really a difference for tax purposes.
2. Hard to say…none though unless you take advantage of retirement plan options.
3. No. Setting up as an S-corp or LLC in another state just makes things more complicated. There may be some benefits but it’s unlikely in your case. If you did this you’d end up having to register as a foreign corp or LLC in Colorado (if it’s like Pennsylvania). But I’d recommend meeting with an accountant in CO to know for sure.
Best recommendation I can give you overall is to go meet with a CPA or EA (even better, one who specializes in taxes for day traders) before making any major decisions. Hope that helps!
Hi Stephen: I am an EA. I am perplexed about an EIC client as follows. Married with 4 children under 17 – somewhat down & out last year. Earned income from W-2s 25,000. Withdrew (early) 23,500 from retirements (taxable). That’s it. My program won’t give them an EIC. It is clearly stating they are over the AGI limit. Is that because of the “taxable” withdrawals from pensions? Rules say pensions are not counted in the calculation. But, what about early withdrawals from IRAs and pensions? I appreciate your professional opinion on this. Thanks.
I receive 19,000.00 a year in a pension from my ex husband. I pay state and federal taxes on that. I need to get some medical help. Everytime I try to get help they say it is too much income. If this is unearned income why do I have to put that down as any income at all? I live in Indiana.
Hi, Bob. I assume you’re directing your question to me even though my name is not Stephen. 😉
I’m not familiar with any exceptions to the AGI limit. It is very straightforward. (See here: http://www.irs.gov/publications/p596/ch01.html#en_US_2010_publink1000167202 ) Since the early withdrawal would be part of AGI, your client is going to be over the limit – and just barely at that. I think the exclusion you are referring to is for Rule 7, which is merely about whether or not you have earned income. In other words, you can’t have just pension income to qualify for the EITC. (See here: http://www.irs.gov/publications/p596/ch01.html#en_US_2010_publink1000167228 )
The only solution I can see would be to lower his AGI by finding an above-the-line deduction, but that sounds unlikely in this case. Sorry I don’t have any better ideas for you!
Hi, Donna! While pension income isn’t considered earned income for tax purposes, it may very well be included in the definition of income for the medical help benefit you’re trying to get. That is left up to the aid organization you’re working with. If they say you must include pension income in the income calculation, then I’m afraid there’s no way around it. However, I would strongly encourage you to talk with someone involved with the program as the rules can vary quite a bit. Best to get verification from them. Hope that helps!
I’m thinking of taking a buyout from GM. I would get $65,000 in 2012. In Feb of 2012 I will be 62 years old. I will start drawing social security. Will the IRS classify that as an income and therefore reduce my s.s. payments. Thanks for any info you can give me.
i was wondering i have two minor children and my wife and I recieve social security. can we file a tax return to get the unearned tax credit for the children or do you have to have income from a job to be able to do this?
Hi! Quick question – My husband and I own a house on 10 acres in South Dakota. The house sits on 3 acres and there are 7 acres of tillable land in back. We rent the 7 acres to a farmer for about $565 per year. Do we have to claim the $565 as income? Basically I’m wondering if there is an amount of rental income below which you don’t have to claim it. The farmer doesn’t send us a 1099 for this.
Hi, Shawn! Yes, you should be reporting that income on your tax return. It doesn’t matter if you’re issued a 1099 or not. The IRS requires you to report all sources of income. Hope that helps!
I’m sorry it took me a while to get back to you. I’m just returning from a retreat.
The big question is whether the IRS will consider the buyout earned income or unearned income. This is something you might be able to check with your employer about. If it’s unearned then it won’t affect your SS benefits. If it’s earned income then it will. Based on what I read online about government buyouts for early retirement they consider those earned income. It’s likely that the same would be true for your GM buyout. However, this may not matter at all for you if you don’t start your Social Security benefits until after you receive the buyout. See this page on the SSA’s website: http://ssa.gov/pubs/10069.html#special
Hope that helps!
Hi, Corey. I believe you’d need to have more than $3,000 of earned income before you could get anything. You would most likely qualify for the Additional Child Tax Credit and the Earned Income Credit if you had some earned income. Otherwise, you won’t be able to get anything from these. Since you are on Social Security with minor children, you may want to check to see that you are receiving all eligible benefits. There are often benefits for minor children of parents on Social Security. Hope that helps!
Hi! Quick question if I may. I would like to claim my mother, who is over 65, whom I fully support financially, and who lives with me as a dependent. The only income she has is from her trading account (dividends) and interest on her CDs – all of those will come up to about $3500 for 2011. I was wondering whether I can claim her given that this is unearned income? Also, what is the maximum in unearned income is for her to be eligible to be a dependent? thank you!
The taxable income limit for a qualifying relative is $3,700 for 2011. See this page for figuring out whether you can claim your mother as a dependent: http://www.providentplan.com/1421/lower-your-taxes-claim-all-eligible-dependents/ It sounds like you probably can.
Hi If there is a charge for this service, please do not reply,
I am in rodeo and I had a sponsor. He sponsored me and purchased a horse trailer for me to use during my sponsorship. He put this trailer title in my name.
He is no longer sponsoring me. He has sold the horse trailer for more money so I am signing the horse trailer over to the person that bought this horse trailer from him.
My question is…Can he give me a 1099 for earned income on the horse trailer that he provided to me? What can I do to prevent this if that is the case? Do I need to get a notarized lette?
Please help me I appreciate it.
In your situation, I would strongly recommend meeting with a CPA, Enrolled Agent, or attorney. Your situation is too complicated to be answered in comments on a blog post. Sorry I can’t be of more help!
I am currently working part-time (approx. 10 hours/week); last year I took several early withdrawals from my IRA (awarded as a marital property allocation upon dissolution). We are now back in court because my ex-husband is insisting that my withdrawals are considered gross income, not just for income tax purposes, but for child support calculation. This is turning into quite the headache…any clarification you can provide would be greatly appreciated!
Angela, I’m sorry to hear about your situation. I honestly have no idea whether those withdrawals could be considered income for purposes of calculating child support. I would have difficulty seeing it that way since it was awarded as a property allocation, but that’s something you’ll have to leave up to the judge. I’m sorry I can’t be of more help!
Ive been on temporary State Disability in California most of the year except for 8 weeks. I made maybe $800-1000 while working part time before I was in a car accident. I have 1 “qualifying child” and 2 “other Children”. My boyfriend and I aren’t married so last year they said that his children aren’t qualifying for me. Can I count my disability when I file? I am Head of Household. My boyfriend had No income last year. I also receive money every month for my boyfriends Children, Survivors benefits from Social Security because their mother died. It comes in my name and theirs because I am the payee they’re both under 10yrs old. What counts and doesn’t count when I File?
Hi, Michelle. I’m not sure what you’re asking. Your disability income could possibly “count” or not count for several things. For income taxes, it’s going to depend on whether you paid for the disability insurance or if it was a benefit paid for by your employer. (If you paid, it doesn’t count as taxable income. If your employer paid, then it does count as taxable income.) However, regardless of how it is counted for income taxes, it may still count for the Earned Income Tax Credit. I’m guessing that’s what you’re asking. As long as you’re under normal retirement age, your disability benefits will count for the EITC. However, Social Security disability does not count as earned income for the EITC. I hope this helps. If you’re unable to figure out how to file your tax return yourself, I’d strongly recommend working with a tax professional near you.
I recieve social security disability and veterans disability so if I cash in my 401 what percentage of tax do I pay.
Hi, James. The amount of tax you’ll pay depends on three things: whether or not this is an early withdrawal (10% penalty), how much you withdraw, and your filing status. Other factors may also affect the total amount of tax due. Your disability payments are probably not taxable. Without knowing your full situation, I can’t give you an accurate estimate. If you want to plan on something, try taking the total amount you’re withdrawing minus your standard deduction. Then multiply by 25% if this is an early withdrawal or 15% if it is a regular withdrawal.
My dad’s house sold in July 2011 and the proceeds was split between the three of us kids…the property was in my dad’s name and the three of us kids names were all on the title…however we had no say until after he passed and of course we wouldnt have wanted it any other way. However we have received a 1099-s for the sale of the home….Will the amount that we received affect our earned income tax credit that we will receive…I know it has to be counted as income but not sure it will effect the amount we get for earned income tax credit….I live in Maine and appreciate any help you can give me….
It will only affect your earned income tax credit if it causes your investment income to exceed $3,100. The amount of investment income you received from it will depend on your basis and the price it sold for. Your basis will (most likely) be equal to the value of the home on the date your father died. To find your investment income, subtract your basis from the sale price of the home (and divide by three since it was split three ways).
If you have any capital losses from the year, they can offset this investment income and bring you under the $3,100 limit.
I would like to know if my unmarried partner and father of my baby which is due this year…giving me $260 a month qualifies as ”unearned income” and if I can file for that. He says that I can file it as self employment because the money comes from his self employed business but I am not working with him. I am currently unemployed and we are not living together. He cannot file taxes because he is an alien.
Unfortunately, your partner is incorrect. Unless that income is alimony, which doesn’t seem to be the case, you cannot count it as earned income. This money is a gift from him to you. It doesn’t matter how he earned it.
By the way, if he is a non-resident alien, he can and should file a tax return. He just won’t be eligible for certain tax credits.
Hey! I’ve been on unemployment all yr with taxes takin out..will I b able to get earned income and the child taxs credit on my refund…or anything!!??
Hi, Bethany! I’m sorry but unemployment is not considered earned income. It is, however, taxable income. So you probably still need to file, but you will not be eligible for the EITC. I believe you will be eligible for the child tax credit but not for the additional child tax credit.
Hi Paul, I was wondering? I too receive a pension from a Public Employee Retirement System, in addition I receive SSDI, and a military retirement. What of these are cosidered earned income for EITC? Thanks for any light you can shed on the subject!
I doubt any of your income is considered earned income. The only thing that might apply for you is your SSDI if you are under the normal retirement age. But if you use tax software to do your taxes it will account for this.
I have a quick question, I’m trying to figure out if we qualify for EIC…my husband lost work so his wages were in the bracket to receive the EIC, but he has a 401K…it’s small, but is that considered earned income? I mean, will it keep us from getting the EIC?
Hi, Tammy. I think you’re trying to ask if the 401(k) would be considered investment income – there’s a limit of $3,100 in investment income in order to qualify for EIC. The 401(k) won’t count as investment income, even if you took an early distribution from it. Also, a 401(k) distribution will never count as earned income. Hope that helps!
Mr. Williams, I need your help. We received a 1099-T for our child in college. 26K in box 5, scholarships and 14K in box 2, tuition etc billed. Several CPA’s have told me that all scholarships are tax free and that I need to do nothing further with this. I don’t think this is correct. I think that 12k is taxable, minus the cost of books and other “qualifying” expenses per IRS pub. 970.
I have a nephew who rooms with my son at college and has the exact same 1099-T numbers. My sister’s accountant has filed my nephew’s return this way for the past two years without any question. In fact, my sister has had 3 other children graduate college and their accountant always treated all scholarship money as nontaxable, even when in excess of qualified expenses and when they had also earned the max. allowable without paying tax at summer work in the same years.
I don’t want my child to have to pay any more tax than necessary, but think that this is incorrect and can’t figure out why the IRS has not flagged his returns. I should add that both boys earn 6k per year at summer jobs and have withholding at the single rate. I would love to just go to one of these accountants and save my son a bunch of money, but want to do what is correct.
Thanks so much for you help.
Hi! You are correct in thinking that not all scholarships are tax free. Scholarships are only tax free up to the amount that is used for qualified education expenses. For degree candidates, this includes tuition, fees, books, supplies, and equipment (including computers but only if they are required by the school for all students in the program – most require it now). Expenses not included are room, board, travel, and non-required equipment. If you spend scholarship money on those expenses, it should be included as taxable income.
For more information, check out IRS publication 970, specifically pages 4 & 5: http://www.irs.gov/pub/irs-pdf/p970.pdf
Hope that helps!
Hi Paul..I receive a tax free Police disability pension (NY) and awaiting a Social Security Disability decision (i”m age 62). I was wondering if you think the Police pension will count as income in determining if I will pay taxes on the SSDI. The PD pension is in excess of $50,000. Thanks for your time and reply.
Hi. I earned app $8,400 on a 1099 this year. The employer sent it to me with the earnings in box 1 of the 1099 listed under rent. (my earningsare for for services but the employer is difficult to work and communicate with). What will that mean for me if I file this way? Can I still deduct expenses and show my loss? I do not own any property, so the money I was paid was not for rent. I want to be able to maximize my deductions. It looks like I will need to file a schedule E rather than C.
I do have 2 dependants and my husband has his 2”s, plus I have 2 W 2’s for small amounts ( I got smart after I left this employer and said I would only teach if I was an employee with my taxes taken out!)
Not sure what to do about it being listed as rent.
Any advise would be helpful.
Well, James, based on what I can find on the IRS and SSA websites, I do not think your police disability pension would count for MAGI in figuring the taxability of your Social Security benefits. But this is just based on some quick research. I’d recommend meeting with a tax professional this year to figure it out. Then you can go back to doing taxes yourself after that. Also, most tax software would probably handle this correctly if you enter all your forms exactly.
You need to get them to issue a corrected 1099. If the money wasn’t for rent, you should not file it as such. If they will not cooperate, you can include a note with your tax return explaining the situation. But you’ll run into fewer problems if you can get them to correct it. It’s not a difficult correction to make.
Thanks for your reply. I think I came to the same conclusion based on my website searches but these rulings are always a little murky…hence the invention of Philadelphia lawyers…i’ll be seeing a CPA for sure this year…thanks again Paul.
No problem, James! I’m glad to help.
I am hoping to retire next January. My school district pays out for unused sick leave (which I believe would be unearned income) and I was hoping to apply that $15,000 to my 401K. Is this allowed even though my earned income for that month (and the whole year) would only be $5000?
My understanding is that sick leave will count as earned income. If your employer will let you do it, I see no problem contributing it to your 401(k). In fact, that’s a great idea.
I am a student at the University of Texas.
I recently had an adjustment in my federal aid which brought the total amount of aid I received (through scholarships and grants) to about $8,900. It was previously only $3,900 and $5,500 in loans. I still have the loans and the $5,000 increase in aid. I have already payed back $2,000 towards the loans out of pocket. Paying the loans with the increase would leave about $1,500. If I used the $5,000 to pay back the loans (federal loans used to pay my tuition) does any of this money count as unearned income? Note: Had I received the $5,000 initially I would not have taken any loans and all of it would have still gone to tuition. There would not be $1,500 left over as there is now.
Had I not payed any of the loan off and then received the increase I would be left with close to $0, since a large part of it was unsubsidized. The original $3,900 in aid and $5,500 in loans all went to tuition. This left a bit of tuition left to pay ($500 upfront) and no money for books.
Hi, scholarships and grants are only taxable income when they exceed your qualified education expenses (tuition, books, supplies, required equipment, and fees – does not include room & board). You do not offset this by any loans you receive. It sounds like you have nothing to report based on what you’ve told me in these comments.
My grandmother passed away this Jan. and left my half brother and I beneficiaries to her Annuity. I think it’s about 47k my half.My question is, i receive ssi for my son and i’m not working .. i have about 694 a month income … Do i pay taxes if i cash out this annuity? How much if any? I dont know too much about this stuff…. Help!
If my rentals are my business and I qualify as a ‘real estate professional’ is it still considered investment income and counted against the ‘earned income credit’?
Don’t know if anything was mentioned in other comments, but one glaring item sticks out in the text.
According to the IRS, ALIMONY is UNEARNED income, as is child support.