How Passive Income Can Keep You Out of Trouble

passive income tax rate

Most folks understand that in order to have passive income offered to them, they would need to have other incomes offered to them as well. That does not always work out that way though. That is why this particular article looks at the passive income tax rate and passive income tax strategies.

As it turns out, the term passive activity refers to any number of different things. The most common of these is probably rental activity. In order to qualify for this type of activity, you need to lease or rent your property to others on a regular basis. A good example of this type of investment is renting out a piece of property you own in order to make money.

Invested In Order To Save On Taxes

A man holding a video game

However, there are also other types of passive activity that can be invested in order to save on taxes. Some examples of these include stock market investments, estate investments, commercial real estate investments, and real estate and land properties that you can buy and hold for many years before giving it up and selling it to generate an income. In order to determine the best strategies for making these types of investments, it helps to look at what the passive income tax rate is in your state or county.

One of the best strategies to use to lower your income taxes when you are not working is to make investments in non-domestic corporations. For example, a corporation that pays no federal tax could be structured in such a way as to make dividend payments to individuals or entities in which it invests. Another good example of this is a well investment, which can be structured similarly to a corporation so that it pays dividends to investors. Again, by making these types of non-domestic investments, you are able to qualify for deductions on your federal income taxes as an individual.

Minimize Your Taxable Income And Maximize Your Savings


In order to optimize the use of non-domestic investments in order to minimize your taxable income and maximize your savings, it helps to first understand what they are. A passive income is simply an investment that is not considered to be taxable until some period of time has passed since its last sale. Therefore, this type of investment does not need to be reported on your personal financial statements as income, and in the case of a corporation, it can be re-invested without being taxable. In the case of retirement annuities, these investments are typically not taxed until you withdraw them, but they do need to be reported on your personal financial statement for the purpose of Social Security taxation.

Many taxpayers mistakenly believe that passive income is only made when a taxpayer receives distributions from a qualified retirement account. This is incorrect, because any time that a person receives a distribution from a qualified retirement account, they are making passive activities. Therefore, any such activity is qualified as a passive activity. This includes any interest that the account holder receives from a credit facility, dividends received from a non-domestic mutual fund or stock ownership (whether by the account holder themselves or through a mutual fund).

Apply To Dividends That Are Paid On Stock Purchase And Sales

There are various exceptions to this rule that apply to dividends that are paid on stock purchase and sales. For example, if the dividends are paid within three years of the purchase date, they are treated as paid on the date of purchase instead of the date of sale, and are thus not taxable. The IRS has also recently clarified that interest paid on an Internal Revenue Code section referred to as the second mortgage is not taxable income under the second mortgage exception.

The second mortgage exception is applicable only if the interest on the second mortgage is used solely as a qualifying interest. Qualifying interest may include any interest that a person would receive under a master mortgage, an interest that a person would receive under a mortgage refinancing program, or any interest that a person would receive under a qualified loan or lease.

Final Words

Because capital gains taxes and dividends are both complex, it is advisable for people who are interested in these types of tax schemes to consult a certified public accountant or business adviser. Such individuals can explain in layman’s terms, the mechanics of the different schemes, and recommend the best kinds of planning for single taxpayers or small businesses. Another good reason for consulting an adviser is because the complexity of tax rates can get complicated with just a few simple principles. A mistake could end up costing the investor dearly. There are also forums and articles that allow knowledgeable individuals to exchange information regarding taxation and investment issues.

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