What is Active vs Passive Income and Why is it Important for Tax Purposes?

Do you know the difference between active and passive income? Most people don’t, but understanding the difference can make a huge impact on your taxes. It’s important to understand what active and passive income are and how they are viewed by the IRS to ensure that you pay the correct amount of taxes each year. Let’s take a closer look at what active and passive income mean for tax purposes.

What Is Passive Income?

Passive income includes money earned from interest, dividends, or rental property. Generally speaking, this type of income is not subject to ordinary tax rates as long as it falls within certain limits set by the IRS. However, passive income may be subject to other types of taxes such as capital gains taxes or self-employment taxes.


What Is Active Income?

Active income includes wages, salaries, commissions, tips, bonuses, and any other payment you receive for services performed in exchange for money or something else of value. This type of income must be reported on your tax return and is generally subject to standard tax rates. It may also be subject to additional taxes such as self-employment taxes or health insurance premiums if applicable.


Why Does It Matter?

It’s important to understand the difference between active and passive income because each type of income has different rules when it comes to filing your taxes. Knowing these rules will ensure that you pay the correct amount of taxes each year so that you don’t end up owing more than you should when filing your return. Additionally, knowing which type of income you have will help you determine which deductions are available to you so that you can maximize your deductions and minimize your tax liability. Understanding the difference between active and passive income is key when it comes time to file your taxes with the IRS. By understanding what type of income, you have—whether it’s active or passive—you can ensure that you’re filing correctly and paying only what’s due according to IRS regulations. Doing so will not only help minimize your tax burden but also help put more money back in your pocket come April 15th!

We understand how stressful tax preparation can be, which is why we strive to provide personalized attention and understanding while taking care of every detail during processing. Our team of experts work hard to ensure that everything is filed properly on time every time – no surprises or messes here! Contact us today!