The Three Types of Income

December 23, 2011 by  Filed under: Taxes 

There are THREE different types of income and all three types are taxed on different levels. The three types are:

1. Earned – produced by working a job, or providing labor and services. This type of income is taxed the highest
2. Portfolio – gained from capital gains and paper assets. This type of income is taxed the second highest
3. Passive – generated from a business. This type of income is taxed the lowest

1. Earned

Earned is probably the easiest form of income to understand and is the most common. Almost 90% of people who have income, earn it by working for an employer or business. This type of income is produced when a person trades in a skill or service and earns income. This income is very linear, that is to say, the more you work, the higher your income. Most people who want higher income sometimes go out and find a second job so that they have multiple sources of income. This income can consist of wages, salaries, tips, benefits, or retirement. In the end, people who rely solely on earned income trade their time for dollars.

The IRS taxes this income the highest. Tax brackets on this type of income can range from 20% to even 30%. Putting your hard earned income into retirement accounts and IRA accounts will not make it safe from taxation as when you withdraw the money, that withdrawal is considered “earned income”.

The most difficult way to become rich is through earned income. The more your work, the more income you receive, but the more taxes you pay.

2. Portfolio

The second type is Portfolio. This category consists of personal investments such as stocks, bonds, options, mutual funds, etc. These investments collectively create your personal portfolio. Through your portfolio, there are a number of ways which you can generate money whether it’s capital gains (buying a stock low and selling it high), dividends from owning shares in a company, or through interest from owning a bond or CD. All of these add up to your total portfolio and thus determines your income.

The IRS taxes portfolio the second highest, however it is a huge step down from the tax amount on your earned income. Taxes on these can range between o% up to 15%. And the best part is, portfolio income will generate whether or not you are out working a job. A significant number of investors out there combine both a portfolio income and earned income from a job to produce a rich lifestyle.

3. Passive

Passive is what I believe to produce the most revenue with the least amount of work while paying the least amount of taxes. This type of income can range from money earned from owning a business that works for you, incoming rental payments from properties that you own, or royalties from a book or song that you wrote. Like portfolio income, passive income works even while you are asleep. You can not work to increase your passive income however you can work to generate assets that produce more passive income such just owning more real estate or writing a new book. Once these assets are established, you can go on without doing work for a very long time while still generating passive income.

And there you have it, the three types of income. Most people congregate towards working hard for earned income because they don’t know about the other two that exist. And they also don’t know how tax laws benefit those in the other two categories. Why work hard and put yourself out there to fund the government and it’s tax system? Why not start learning about how to generate portfolio and passive income? The rich become richer because of these two types of income, it’s the poor that work hard for an earned income so that the rich can become richer with their businesses and portfolios.

Warren Buffett, third richest man in the world, an investor and entrepreneur, stated how he pays less tax than his secretary in this article.

So now, what type of income would you like that receive?

Nero Nguyen
Engineer of Success
Financial Freedom, Leadership, Education, Success

Article Source:
http://EzineArticles.com/?expert=Nero_N

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