I’m a big fan of passive income over here. Who doesn’t?
One of the main reasons I’m so in love with it is because it signals a degree of independence. While it’s a myth that you never have to do any work if passive income tax is involved, there is certainly a lot less effort involved!
But what exactly am I talking about when I talk about passive income? Over the past few years, it has become one of the loosest terms in the finance books.
A lot of people would define it only as a source of income in which you have no material participation. This is, in a sense, the most accurate way of describing it. Generally, it’s the income you stand to gain from
- and even capital gains.
A passive income is sometimes used to refer to incomes that you receive when working from home. However, as you’re still actively working for that income, it’s still a regular active income. It’s important to know the difference where business is concerned!
A lot of people prefer a passive income over a regular income. (Or, to refer to it with the more technical term, active income.) But is it possible to earn more with passive income versus an active income? Many people assume that passive incomes will always represent a lower total amount than active incomes. A lot of the time, this is true. But if you look at the two from a dollar for dollar standpoint? Then you’ll see that passive income actually earns you more than an active income.
The first thing to consider is taxes. I’m mentioning this first because people don’t always consider this area. (Or they make the big mistake of forgetting it entirely when they’re planning out a passive income!) The IRS certainly wants some of your passive income, and so you will have to pay taxes in most cases. But there are some forms of passive income that don’t get taxed at all. (These tend to be smaller amounts, though.) Even if you do get taxed (which is likely), the IRS will tax a passive income differently. The vast majority of the time, you’ll be taxed at a lower rate than that of an active income. To work out how the tax will be working for your specific income, you could work with a tax advice company like MCC4Tax.
There is, of course, all the material savings you make on a passive income. Again, a passive income will usually involve no material participation on your part. Consider the things you generally have to do to keep an active income. You have to travel to your job, right? That means you’re spending money in order to get that day’s pay. To get the most accurate look at your total earnings, you would have to subtract all those costs of actually keeping your job!
Another consideration, which won’t affect everyone, is your location. So many people are living in areas that are much more expensive than they’d like. They often feel they could live in a much nicer, roomier place for a lot less. However, they’re tied to that location because of their job. With that obligation removed, passive income sees an even higher return to you, dollar for dollar.