Unearned Income

Unearned Income -An individual's income derived from means other than the provision of personal efforts (Salaries), such as that derived as dividend, interest, or rent. Pensions and royalties, however, are not considered unearned income.

Examples of unearned income include interest from a saving account, bond interest, tips, alimony, and dividends from stock. As long as this income is "realized" then it is taxable.

INTEREST
Interest is money paid or received for the use of money. Banks pay interest on money their customers deposit; governments and corporations pay interest on bonds they issue; insurance companies pay interest on money left on deposit. The sources of interest income are almost unlimited. Most of the interest we received is taxable, but some is not. See  Form 1099-INT.

Payers of interest of $10 or more to any one person during the year generally required to report such payments to the IRS and furnish the recipient with a statement of total interest received for the tax year. If less than $10 interest was received from any payer, that interest is also taxable to the taxpayer, even though a reporting form is not required from the payer. In some cases, especially with loans or contracts, the taxpayer must determine the amount received from his own records (for example, from an amortization schedule).

When the taxpayer receives taxable interest totaling more than $400, it must be listed on either Form 1040A, Schedule 1, or Form 1040, Schedule B. Interest totaling $400 or less can be listed in the Interest Income section of the Income Compilation Worksheet.

If a taxpayer sells his home to a buyer who uses the home as his residence, and the seller finances part or all of the mortgage, the seller must report the interest he receives each year on Schedule B, Form 1040, or Schedule 1, Form 1040A. Additionally, the seller must report the buyer's name, address, and social security number on Schedule B or Schedule 1. The seller is also required to provide the buyer with his name, address, and social security number.