ShmoopTube

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finance a la shmoop what is unearned income all right wait how can you not [Man discussing unearned income]

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earn income you have coming like is that a thing or is unearned income like the

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dough all dead uncle Larry left you for bringing him his Scotch when you were [Girl gives uncle larry glass of scotch]

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told and you know you were seven maybe not so let's start with earned income

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like you mowed lawns all summer and you earned income on which you then paid [Boy mowing a lawn]

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taxes got a nice tan and like what's better than the smell of fresh-cut grass

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in the morning in the summer if you were in the lawnmowers Union and you struck [People protesting]

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and then you got Union striker emergency monies that's earned ish got any tips

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for doing all that mowing ten fifteen twenty percent yep earned got disability [Boy takes cash]

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payments for when the mower ran over your foot and you know defeated you [Lawnmower runs over boys foot]

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painful but well that'd be earned okay so then unearned income comes from

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things like investment income realize a gain on a sale of stock that's unearned

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even though yes you worked hard to save the money you invested it with risk and

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you were smart and or lucky and it went up and then you sold it for a tidy [Share price graph appears]

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profit but yes that's considered unearned because you just sat on your

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fat Duff and collected your dough same deal with dividends your stock throw off

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unearned you just sat there bond interest comes to you doing nothing for

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it unearned like it's how rich people get richer are you an old geezer now in [An old man holding a fork]

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your 70s well then your IRA distributions back to you their unearned

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even though you never paid ordinary income taxes on them in the first place

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that dough would have been considered earned income if you had not put it in

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the IRA and just paid taxes on it and kept it same thing for any other pension

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like funds you might have like a Keogh or a Cloverdale or something like that

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and for insurance trusts as well that are basically just investments with

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different colored wrapping paper yeah like plaid we like plaid so all of [Gifts with wrapping paper appear]

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that is unearned well why does it matter like why do we even care whether

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something is earned or unearned in the first place well

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generally you pay taxes on a couple of flavors of earned income there are [Person scooping ice cream]

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social security taxes which include things like Medicare and those are

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called FICA and other similarly evil sounding terms in theory they're just [Uncle Sam poster on a wall]

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deferred savings that are forced upon you by the government so you get them

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taken out of your paycheck as a tax but we at shmoop here aren't holding our [Pay check appears and tax highlighted]

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breath that will ever see Social Security holdings given back to us

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without a large oxygen tank in our hand so yeah FICA futa that's just more tax [Man holding large oxygen tank]

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so that's the first type of tax on earned income the other comes from

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normal vanilla state income taxes well then we have unearned income taxation [Vanilla state income tax ice cream scoop]

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which is a different animal altogether it's only taxed based on gains and

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carries the vastly simpler investment system of Taxation which does not

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include death by a thousand cuts in taxes in the form of Medicare Social [Taxes cut by scissors]

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Security and all kinds of other government entitlement taxes that you

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know turn your once lovely paycheck that you earned into an anemic thirsty camel [Camel drinking water]

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so what go save a lot of money get a lot of unearned income so you can put your

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feet up and watch football day in your seventies [Person with feet up watching TV]

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