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Discover how passive income, the secret weapon of savvy tax strategists, enables you to accumulate tax-free wealth. Learn why this income type outperforms earned income in reducing tax liabilities and how it can be leveraged to maximize your wealth growth.
Passive income, our friend that often is misunderstood and frankly picked on!
Income, broadly categorized into earned, passive, and portfolio types, holds the key to wealth management and tax strategy. Having too much of your eggs in the "earned" bucket may erode your wealth over time but that is where tax strategy comes in!
Earned income comes from regular employment or business operations, passive income stems from investments like rental real estate or royalties. You can also earn passive income from limited partner business interests (although less common).
A common misconception occurs when people confuse passive income and portfolio income. Portfolio income arises from dividends, interest, and capital gains.
Passive income and portfolio income DO NOT net together (screaming from the rooftops)!
Earned income, despite being a crucial source of day to day revenue for many, is frequently subjected to exorbitant taxes. Tax strategists should be working on a long term plan for reducing your tax burden by shifting towards passive income streams (think real estate).
Even with a tax strategist on your side, earned income is far more difficult to offset. Notice how the 1% of the 1% like Elon Musk or Jeff Bezos do not have any earned income? As Certified Tax Strategists at Anomaly, we put plans into place to ensure our clients start thinking more like the 1% from a tax strategy perspective.
Passive income, especially from rental real estate, stands in stark contrast to earned income, thanks to its lower effective tax rates. This income is safeguarded by depreciation and amortization, leading to a significantly reduced tax liability.
For instance, consider a rental property that brings in a net income of $12,000 before factoring in depreciation.
If you have $15,000 of depreciation (with any other tax strategies), you are already in pretty good shape. If this is a passive activity, you likely cannot deduct this "loss" but it becomes a powerful tax asset in your pocket (talk to your tax strategist on how to utilize this).
But what if that $12,000 was from W2 or Self Employment? You'd pay somewhere between 20-37% in taxes on this.
Passive income on its own is very powerful! If we can use tax strategies to utilize our depreciation even further, that is just the cherry on top. Check our our Short Term Rental Loophole blog if you want to learn how your tax strategist at Anomaly can help you offset W2 income with depreciation!
If you are completely in the earned income bucket while reading this, that is OK! Everyone starts somewhere but remember, to shift out of the tax disadvantaged bucket, you need to start investing.
Financial liberation lies in the strategic transition from earned income to a robust passive income strategy. The inherent tax benefits of rental real estate present a golden opportunity for this. To learn how to fully harness these benefits and build tax-free wealth, stay connected with our insights and wealth-building strategies.
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