Jeffery Sparks 
Passive income refers to revenue generated through ventures that don’t require regular, active labor as defined by the IRS. Examples include rental property rentals, dividend stocks or peer-to-peer lending platforms.
Establishing multiple streams of passive income can help you reach your financial goals more quickly. The key lies in understanding its definition and any applicable tax implications.
Business/Investment Income
Investment income refers to any gains realized from financial assets that increase in value over time, including savings accounts, mutual funds and stock portfolios as well as annuities, property (such as real estate and intellectual property), gold coins and other valuable items. Long-term investments like corporate and government bonds generally receive preferential tax treatment than earned income.
Business owners should carefully consider the tax implications of passive investments. Taxable income from investments includes rentals and royalties as well as interest, capital gains, non-qualified dividends and disregarded entity earnings. Investors should keep in mind that their investment activities could taint qualified business income; investors have sought relief by creating “grouping” regimes which allow them to combine passive activity income with qualified business income for federal purposes.
Rental Income
Rental income refers to the income received from renting property to tenants. It can come from residential homes, commercial properties or vacation rentals and offers landlords many tax benefits when compared with other forms of passive income such as depreciation allowance, capital gains tax deferral and the potential exemption from FICA taxes.
As part of their rental income, tenants may receive other payments beyond what is specified in their lease contract, such as providing services in lieu of rent (such as painting the interior of a house) in exchange for credit towards rent payments. When this occurs, it must be included as part of overall rental income.
Taxing rental activities is dependent upon your level of participation in them, such as whether or not you meet criteria of being considered a real estate professional and actively participate in management of them. In that instance, nonpassive activity treatment could apply and allow losses from this rental activity to offset other income without being subject to a 3.8% net investment tax.
Interest Income
Investing in the stock market can be one way of creating passive income; however, this does require initial time and money investments.
Interest dividends (known as interest dividends from funds) and returns on investments are considered passive income by the IRS and taxed at standard income rates just like active income.
People typically pursue passive income opportunities to either retire earlier or create financial independence at a younger age, yet there can be significant obstacles along the way. Many experts we consulted warned us that passive income streams take considerable effort and time before their returns start showing. It’s best to avoid quick fixes found when searching for “passive income.” Instead, focus on strategies that leverage your natural strengths; such as starting an automated car wash or opening a laundromat.
Dividend Income
Dividend income refers to the portion of profits distributed by companies to their shareholders as dividends. Payments may be made daily, monthly, quarterly, half-yearly or annually depending on their business model and payment schedules. Dividends can be taxed either as capital gains taxes or ordinary income taxes according to how long you’ve owned shares and your tax bracket.
Dividend-paying stocks typically pay out dividends in cash form; however, they can also come through stock options, debt payments, property ownership or services. When considering investing in dividend-paying stocks, consult a Citizens Bank Wealth Management Advisor in order to diversify your portfolio appropriately and minimize risk while increasing return.
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