What Is Unearned Income?
I was recently injured at work. I have just now started to receive my workers comp checks. last night my boyfriend mentioned something about unearned income on my taxes, something about the money I WOULD HAVE earned if i was not injured. I am confused. I know that generally, it means interest from accounts and stuff like that but is there some credit or something for my situation? I really don’t think so, but would like to get another opinion???
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2 Responses to What Is Unearned Income?
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FYI: Disability and worker’s comp payments are not taxable because you are UNABLE to work. Unemployment is taxable because you are ABLE to work.
Unearned income is income received without providing personal labor or services on your part. Such things as dividends, interest, rents, royalties, capital gains, etc. are all examples of unearned income.
Workers compensation payments could be classified as "unearned" income but more importantly it is non-taxable income. You won’t pay any income taxes on the WC payments so any classification of them as "unearned income" is a moot point. Under the law, it’s neither earned income nor unearned income but non-taxable income.
Where it would impact some taxpayers is when it comes to calculating the Earned Income Credit. Any amounts received under a state WC plan would not count as earned income for the EIC calculation. On the other hand, it would not count as unearned income (which can disqualify you from the EIC entirely if it’s high enough) or as part of your Adjusted Gross Income which again can disqualify you from the EIC if it’s high enough.
If you are collecting WC payments, there is no "imputed income" based upon what you might have earned had you not been injured. Your payments are fully tax free. See IRS Pub 525, page 17.