Ac 550 Essay

1212 WordsDec 27, 20115 Pages
Questions: 7-7 Differentiate between active income, passive income and portfolio income Active Income: This is the income an individual earns through participating in some activity with the goal of earning income. This is why the terms active income and earned income are often used interchangeably. For this to be active involvement the activity must be heavily used with the explicit purpose of gaining income. For Example. Wages earned during regular employment, tips that go along with any employment wages, or bonuses achieved during regular employment would all be active income. Passive Income: This is income earned through a trade or investment in which the individual does not spend much time or effort. If this is the regular employment of the individual for which he or she is directly compensated it would be active income. This type of income comes from activities in which you do not actively participate. Such activities include income from real estate and certain business arrangements, such as limited partnerships. Special rules regarding passive activity losses were enacted in 1986 to limit the amount you could reduce your tax liability from passive income. For Example. If an individual owns rental property, but hires an individual for the daily management of the property, any income derived would be passive income. This is true because the individual isn't constantly involved in daily operations of the rental investment. Often, income gained as a silent minority partner in an investment would also qualify as this passive income. Portfolio Income: This type of income is derived directly from investments such as stock earnings, mutual fund investments, or interest income. Portfolio income is derived from investments and includes capital gains, interest, dividends, and royalties. Various types of portfolio income are taxed differently.

More about Ac 550 Essay

Open Document