Are unemployment payments earned income for Federal tax purposes?
Maybe more helpful is the reason I ask. A friend is receiving unemployment payments but also owns some stock in Borders. She would like to sell this stock and deduct the loss from her taxes on her unemployment payments.
So, 1st, is unemployment earned income?
2nd, can she deduct the loss from her federal taxes when her income is unemployment (and negligible interest income)?
It's ordinary income, but I don't think it's earned income. But for her purposes, I don't think the difference matters (it's mostly only important for eligibility to make IRA contributions). There are a few exceptions, see:
You can deduct up to $3K of net capital losses against ordinary income, it doesn't matter the form of income. The remainder has to be carried forward to future years.
No it is not earned income. It is taxable gross income that she reports on Line 19 of Form 1040.
Her Net Capital Loss from Line 21 of Form 1040 Schedule D, gets posted to Line 13 of Form 1040. However, it is limited to a maximum of -$3000 unless she files as married-separate )-$1500). Any net loss in excess of $3000 can be carried forward to the next tax year.
So.... yes she can deduct her capital losses from her other gross income.
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