Updated: Jun 15
As you increase you financial literacy, you will learn about the three type of income.
1. Earned Income: The majority of Americans fall into this category. Also called active income. This income or money comes to you from a job (salary, wages, bonuses or tips). If you are self employed or independent contractor you are in this category as well.
TAXED: Highest level
2. Portfolio: Also called investment income. This income is from investments, interest income, capital gains and dividends. This category is different, each of the examples are taxed at different rates.
- Interest Income: Which is taxed as ordinary income( checking/savings acct, CD's and bond interest) Municipal Bonds are exempt from federal income taxes.
- Capital Gains: Which comes when you sell an asset, for more than what you paid for it. It will be axed two different way, depending on how long yo help the asset. A year or less, will be taxed as ordinary income, past one year, then taxed at preferential rates. Check the IRS tax table for latest rates.
- Stock Dividends: Are taxed like long term gains and fall into the preferential rates. Exceptions: (REITS)Real Estate Investment Trust & (L.L. P's) Limited Liability Partnerships
3. Passive: This income comes from real estate investments. This includes investment in actual properties, and includes the dividend income received from REITS. Rental properties fall into this category as well. This also include intellectual property(books, patents, internet content, etc.
Passive income is generally recurring income (recurs month after month)