The Three Types of Income

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

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

The Three Types of Income 1

Earned is probably the easiest income to understand and the most common. Almost 90% of people with 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 to have multiple sources of revenue. This income includes wages, salaries, tips, benefits, or retirement. In the end, people who rely solely on earned income trade their time for dollars Plan Trussler.

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.”

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

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Portfolio

The second type is Portfolio. This category comprises personal investments such as stocks, bonds, options, mutual funds, etc. These investments collectively create your Portfolio. Through your Portfolio, there are several ways in 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 interest from owning a bond or CD. These add up to your total Portfolio, thus determining your income.

The IRS Tax Portfolio is 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. Many investors combine a portfolio income and earned income from a position to produce a rich lifestyle.

Passive

Passive is what I believe in, producing the most revenue with the least amount of work while paying the least taxes. This type of income can range from money earned from owning a business that works for you, incoming rental payments from properties you own, or royalties from a book or song 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 as just owning more real estate or writing a new book. Once these assets are established, you can continue without working for a long time while 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. And they also don’t understand how tax laws benefit those in the two categories. Why work hard and put yourself out there to fund the government and its 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; the poor work hard for an earned income so that the rich can become richer with their businesses and portfolios.

Warren Buffett, the 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 to receive?