Knowing The Three Kinds Of Income Tax Can Help Save Thousands

Описание: Income tax makes up 88% of all the US Tax Revenue and is your largest expense, learning to cut this expense has the potential to save you hundreds if not thousands of dollars.

Income falls into one of two categories: passive and active income. While most people have heard about passive and active income, many are unsure of the difference between the two or how to earn passive income.

How Passive and Active Incomes are Taxed
Another big benefit of earning passive income from real estate is the preferential tax treatment that passive income receives.

Active income earned from working a job or fixing and flipping real estate is treated by the IRS as earned income. Earned income is subject to FICA taxes of Social Security and Medicare taxes totaling 15.3%, up to a certain level of income.

Short-term capital gains made from wholesaling real estate or flipping homes are also taxed at the investor’s normal income tax rate when property is held for one year or less. In general, people earning active income also have limited opportunities for using tax deductions to reduce the amount of income tax paid.

Passive income isn’t subject to FICA taxes, and there are a number of ways an investor can potentially shelter passive income from higher effective tax rates. For example, common rental property deductions a passive real estate investor can claim include depreciation, repairs and maintenance, property management fees, mortgage interest payments, and property taxes.

Long-term capital gains tax paid when an investment property is sold is either 0%, 15%, or 20% based on the investor’s taxable income level and filing status. So, even if an investor is in the 32% federal income tax bracket or higher, the maximum capital gains tax paid would be capped at 20%.



Final Thoughts on This Topic
For any real estate investors, passive income can be better than active income. There are numerous tax benefits to earning passive income by investing in real estate. Many investors hold a full-time job to generate active income, then save as much as possible to reinvest in rental property to earn passive income. Passive income also may offer investors the opportunity to take advantage of favorable tax treatment and lowered tax liability.

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