Unearned income is income that you did not generate from providing services. For example, interest and dividends are unearned income. This concept can be important for tax considerations like the Kiddie Tax (how income of children under 18, or 24 if full time students) is taxed. A child may avoid the Kiddie tax if their earned income exceeds 1/2 of the amount of their support. The Kiddie Tax won't apply to the first tier of unearned income. In 2008 this tier was $1,700, but this will change over time.
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