Passive income is the regular income that an individual gets from a project without the need for material participation or actual presence on his part.
Passive income differs from “active” positive income, and despite its name, it does not mean sitting without work waiting to earn money, but this income requires investment, time and money at least in the beginning, and it is also subject to taxes.
There are many ways to earn passive income, and in a report published by the American “Investedwallet” website, writer Prakash says that the sources of passive income are different from the source of fixed income that you receive from working in a full-time job.
Revenue from this type of income source is considered unearned income.
What is unearned income? How is it different from earned income?
*** Unearned income
It is income from sources unrelated to work or personal effort. On the other hand, salary, tips, self-employment and some other sources are earned income. Making money blogging is also an earned income, although some bloggers may think of it as passive income.
The list of sources of unearned income includes: investment, dividends, capital gains distribution, retirement, Social Security benefits, unemployment compensation, alimony, child support, gifts, inheritance, veterans benefits, real estate income, fringe benefits and others.
It is important to know the difference between earned and unearned income because they are taxed differently in many countries.
*** Types of unearned income
The list below represents the most common types of unearned income:
* Investment income
Investment income represents the revenue generated from the sale of real estate or stocks. An investor who sells an asset for a profit is making a capital gain. To the IRS, capital gains are considered unearned income. Investment income includes interest from savings and money market accounts, certificates of deposit, and bond dividends. The tax rates on capital gains and interest income are different.
In another report published by Investopedia, author Joella Kagan identified other types of passive income.
* Long term capital gains
Mutual funds pay capital gains to shareholders, and this money comes from the sale of stocks, bonds, or other assets owned by the mutual fund. Profits are distributed to shareholders as capital gains. If the mutual fund falls under a taxable account, the shareholders must pay taxes on this unearned income.
* Dividend
Dividend income comes from money paid out to shareholders from dividends paid by companies. An investor can generate passive income and may live off dividends. In terms of taxation, it depends on whether the dividend is ordinary or qualified. Ordinary dividends are subject to the ordinary income tax rate, while qualified stock dividends are subject to tax at 0%, 15% or 20%.
* Retirement income
Retirement income is derived from pensions, annuities, distributions from retirement plans, and individual retirement accounts. Social Security retirement benefits fall into this category.
Traditional financial IRA contributions are paid without any tax withholding, and taxes are levied when withdrawn, meaning this type of IRA is tax-deferred, and the investor receives a tax deduction when making the contribution.
* Income from rental properties
Income from renting real estate is considered unearned income, but it is still taxable. Real estate rental expenses can be deducted from income and include advertising, maintenance, insurance, taxes, utilities, supplies, repairs, etc.
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