Active Versus Passive Income Tax

The rules that determine passive income vs active income are set by the internal revenue service irs.

Active versus passive income tax. Often the irs will tax passive income at a lower rate than that of active income. Passive income is taxed with the same rates as capital gains which are much lower than ordinary income. More expenses can be deducted for active incomes than passive incomes and losses from active incomes can be used to off set gains from other active incomes. This could be investment income residual payments from a previous job royalties you earn on something you created and so on.

If you do not have material participation in an income stream you can report it as passive income. For example john doe makes 50 000 a year at a bank managing accounts for clients. Passive income is different in that you are earning money from something that you have little day to day involvement in. An easy way to look at it is if you have to call in sick you re probably making active income.

Passive the key tax differences between these two holding periods are the tax rates at which gains and income are taxed and. How the irs classifies your activity determines the rate at which your income is taxed.